Why is the Bitcoin Taproot Upgrade Important?

Why is the Bitcoin Taproot Upgrade Important?

You may have noticed green squares all over Twitter. Like laser eyes, they are part of an internal signal that creates a sense of cause and belonging. Unlike laser eyes, they have no direct correlation to price, but they signal support for the Bitcoin network’s proposed Taproot upgrade.

Why does this matter? It’s not just the obvious benefits of the upgrade. Taproot is important because it reminds us of where Bitcoin is headed.

Benefits of Upgrading

Before we dive into why this is important, let’s look at some of the key benefits of this upgrade:

1. Increased privacy: This does not refer to Bitcoin addresses or enhanced anonymity; rather, it refers to the type of transactions. Taproot will make complex transactions, such as those that require multi-signatures or delayed triggers, indistinguishable from simple transactions in terms of their on-chain footprint.

2. Lower fees: The amount of data required for complex Bitcoin transactions will be reduced, thereby reducing transaction costs.
3. Greater flexibility: A new type of signature will enhance Bitcoin's smart contract capabilities, allowing users to set more complex transaction conditions more easily and cheaply.
4. Good news for the Lightning Network: Taproot will make transactions on the Lightning Network cheaper, more flexible, and more private. The Lightning Network is a second-layer solution that enables faster and more scalable payments, regularly anchored to the Bitcoin network in an aggregated form, providing ultimate Bitcoin security while increasing speed and potential throughput.

A meaningful step

In summary, Taproot is the most important upgrade to the Bitcoin network since the block size increase in 2017. The relative infrequency of Bitcoin upgrades highlights one of its main characteristics: it is robust.
Making any changes to Bitcoin is difficult. There is no single “person in charge” who decides what changes to push through. Reaching consensus among such a diverse and dispersed group of participants is challenging, to say the least. The fact that Taproot has more or less unanimous support underscores the significance of this upgrade.
What is controversial, however, is the method of the upgrade. In March, the community reached a compromise in the form of a “fast track trial” that gave miners a series of two-week blocks to show support for Taproot.
This began last Saturday with the recent difficulty adjustment. From that moment on, Bitcoin miners have until the next difficulty adjustment (in two weeks) to signal support for the Taproot upgrade in the blocks they mine. If 90% of processed blocks show support, the upgrade will be “locked in” and activated in November.
However, on Tuesday, it became clear that the signaling round would not succeed. By midday, the 90% threshold could not be reached as approximately 25% of blocks processed during this time period had not signaled support, while 20% had not.

This is not a big deal, and it is more of a rejection of the proposal than a sign that miners have not yet figured it out or their software has not yet adjusted to the necessary steps. The next two-week signaling window is coming, and if it still fails, the Bitcoin network will try again until August 11. If 90% of the signals are not achieved by then, the Taproot upgrade proposal will have to go back to the revision stage.

The real benefits

Therefore, Taproot’s upgrade will improve Bitcoin’s functionality and potentially expand its market. This is good for its prospects and valuation.
But the most important impact for the entire investment market is this: it reminds us that Bitcoin is a technology.
Many investors view Bitcoin as a store of value. Others are attracted to its volatility. Most tend to overlook one of its most defining characteristics: it is a relatively new technology.
When you buy gold, you don’t wonder how it will evolve in a vault, but Bitcoin will evolve. It did so in 2017 and will likely do so again this year.
However, “technology” means risk, there is a chance that something could go wrong, the code could have vulnerabilities or unintended consequences. This is why Bitcoin upgrades are rare and long in between, because they require careful review and testing. Additionally, since there is no central authority to decide on Bitcoin upgrades, they require the agreement of all key stakeholders, and reaching consensus is always extremely difficult.
This is a good thing. With the Bitcoin network now valued at over $1 trillion, not to mention the valuations of all the businesses that support it, risk needs to be reduced to almost negligible levels.
Taproot drives home the point that Bitcoin may be a great store of value, and it may provide good returns for speculators, but cryptocurrencies also represent an opportunity to get in early on and invest in transformative technologies. It’s like being able to get an early stake in a hot startup, but with more liquidity and less paperwork.
Taproot will therefore not only improve Bitcoin’s usability, which could expand its market and thus potentially its value. It also reminds us of a core feature of Bitcoin that seems to have been drowned out by the market-driven narrative that has prevailed recently. Bitcoin is still a new technology, and its potential benefits extend beyond its supply schedule, inflation resistance, and decentralization.

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