On block 709632 (that is, Saturday November 13 at 9.15pm UTC), Taproot was made active on the Bitcoin blockchain. It is Bitcoin’s first major upgrade since Segwit in 2017. 90% of the miners approved of this upgrade which will bring better efficiency and security to the Bitcoin network.
Taproot has these three features:
- Taproot improves privacy with what are called Schnorr signatures. Schnorr signatures consolidate all the public keys that signed the multi-signature transaction into a single public key. That way, many addresses are obfuscated into one address;
- The number of signatures required for a transaction has a direct impact on the size of the fee. So, with Schnorr consolidating the signatures, the transaction fees become less expensive;
- Taproot will make Bitcoin-based smart contracts less complicated and more affordable to execute. It means that, for the first time, on-chain Bitcoin transactions will become programmable. This way, investors can finally use Bitcoin-ready smart contracts to carry out services such as lending out BTC at interest, administering commissions and providing trading liquidity.
So, how is this good for Bitcoin? The viability of Bitcoin as a public good hinges on its affordability, privacy and usefulness. Taproot meets those challenges to its viability. Taproot’s smart contracts capability will bring DeFi to Bitcoin.
Meanwhile, what does the Taproot implementation mean for Lightning? Taproot executes smart contracts on-chain, whereas Lightning’s smart contracts are off-chain. But the area where Taproot helps Lightning is through the Schnorr signatures. The Schnorr signatures make it possible for Lightning to upgrade its own smart contracts. Most importantly, these signatures will provide improved privacy for the opening of Lightning channels.
This is a major boost for Bitcoin the network. However, Taproot is not a silver bullet and this upgrade is only the start of a new round of projects for Bitcoin that will build on the Taproot implementation. Investors should see Taproot as the opening of a new chapter for Bitcoin that will create a virtuous circle for Lightning and LQwD FinTech.