Bitcoin’s biggest upgrade in four years just happened – here’s what changes

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  • The first bitcoin upgrade in four years is called Taproot, and it just got activated.
  • The Taproot update means greater transaction privacy and efficiency – and importantly, it will unlock the potential of smart contracts, which can be used to eliminate middlemen from transactions.

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The first bitcoin upgrade in four years has just gone live. This is a rare moment of consensus among stakeholders, and it is a big deal for the world’s most popular cryptocurrency.

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The Taproot update means greater transaction privacy and efficiency – and importantly, it will unlock the potential of smart contracts, which can be used to eliminate middlemen from transactions.

“Taproot matters, as it opens up a breadth of opportunity for entrepreneurs interested in expanding the usefulness of bitcoin,” said Alice Killeen, founder and managing partner of bitcoin-focused venture firm Stillmark.

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Unlike bitcoin’s 2017 upgrade — known as the “final civil war” due to the controversial ideological divide separating adherents — Taproot has universal support, as these changes include fairly incremental improvements to the code.

what’s changing

A large part of bitcoin’s change has to do with digital signatures, which are like the fingerprints left by a person on every transaction.

Right now, the cryptocurrency uses something called the “elliptic curve digital signature algorithm,” which creates a signature from a private key that controls a bitcoin wallet, and ensures that bitcoins are only spent by the rightful owner. could.

According to bitcoin miner Alejandro de la Torre, Taproot will add something known as a Schnorr signature, which essentially makes multi-signature transactions unreadable.

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This will not translate into greater anonymity for your personal bitcoin address on a public blockchain, but it will separate simple transactions from those that are more complex and involve multiple signatures.

In practice, this means more privacy, as your keys won’t have as much risk on the chain. “You can hide who you are, which is a little better, which is good,” said bitcoin mining engineer Brandon Aravanaghi.

smart contract

These souped-up signatures are also a game changer for smart contracts, which are self-executing agreements that reside on the blockchain. Smart contracts can theoretically be used for practically any kind of transaction, from paying your rent every month to registering your vehicle.

Taproot makes smart contracts cheaper and smaller in terms of the space they take up on the blockchain. Killen says this increased functionality and efficiency presents “mind-blowing potential.”

Currently, smart contracts can be built on both bitcoin’s core protocol layer and the Lightning Network, a payment platform built on bitcoin, which enables instant transactions. Smart contracts executed on the Lightning Network typically lead to faster and less expensive transactions.

“Lightning transactions can be fractions of a penny… whereas a bitcoin transaction at the core protocol layer can be much more expensive than that,” explained Killeen.

Developers started building on Lightning in anticipation of the upgrade, which would allow for highly specialized contracts.

“The most important thing to Taproot is smart contracts,” said Fred Thiel, CEO of cryptocurrency mining specialist Marathon Digital Holdings. “It is already the primary driver of innovation on the Ethereum network. Smart contracts essentially give you the opportunity to actually build applications and businesses on the blockchain.”

As more programmers build smart contracts on top of bitcoin’s blockchain, bitcoin may become a player in the world of DeFi, or decentralized finance, a term used to describe financial applications designed to cut out middlemen. is done.

Today, Ethereum dominates as the blockchain of choice for these apps, also known as “dApps”.

why wait

Although the bitcoin community agreed to lock down the upgrade in June, the rollout didn’t happen until November itself. The delay of a few months was designed to give enough time for testing and to reduce the chance of something going wrong during the upgrade.

“The upgrade allows for the extremely remote – possibility of a bug entering the system, which would destroy trust in the entire cryptocurrency system, effectively wiping it out – a ‘self inflicted wound’ if you wish,” Jason Dean, an analyst at Quantum Economics.

Dean says this is why upgrade processes are so carefully tested, retested, and vetted over a very long period of time.

Many users in the community also recall the disastrous migration of 2013, when an upgrade went wrong that resulted in bitcoin being temporarily split in half.

“You don’t want individual clients or miners in the protocol out of sync. Horrible things like this happen,” Nick Carter, founding partner at Castle Island Ventures, told Businesshala. “Since we don’t want to repeat 2013, we have that very long time.”

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