Will Bitcoin’s Taproot upgrade cause a “DeFi rain”? |

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The Taproot update has introduced a new, more secure way of moving funds into Bitcoin. It also alleviates some concerns about scaling and the possibility of 2018’s hard fork being undone by hacks or bugs in old software versions.

“What is one bitcoin worth” is a question that has been asked for a long time. The answer to this question, however, will not be found in the Bitcoin whitepaper. Instead, the answer can be found in the Taproot upgrade. Read more in detail here: what is one bitcoin worth.

Will Bitcoin’s Taproot upgrade cause a “DeFi rain”? |

Will Bitcoin’s Taproot upgrade cause a “DeFi rain”? |

The much-anticipated Bitcoin update Taproot was activated on block 709,632 on Nov. 14, with the goal of igniting a DeFi and dApp ecosystem around the decentralized currency and providing it more Ethereum-like features.

However, unlike the controversial 2017 SegWit update, Taproot got virtually unanimous approval from the Bitcoin community and has not resulted in any substantial price or trade volume adjustments.

While some may be startled because they expected a bigger effect, they shouldn’t be.

Despite the fact that the Taproot update is propelling Bitcoin forward with a series of privacy and efficiency enhancements, the currency will remain a rather conservative force in crypto in the short term, serving mostly as a store of wealth.

Will Bitcoin’s Taproot upgrade cause a “DeFi rain”? |After the London upgrade on August 6, 2021, the ETH coin price breaks 30K from 2.8K. (Source: Footprint Analytics)

What does a Taproot Update entail?

Soft forks, in which new features are mostly provided through Bitcoin Improvement Proposals, are performed every four years by the Bitcoin community (BIPs).

Unlike prior upgrades, Taproot is a significant update that includes three improvement ideas rather than a single feature addition to the Bitcoin network (BIP340, BIP341, and BIP342).

In 2018, Greg Maxwell recommended this update. Pieter Wuille, Tim Ruffing, AJ Townes, and Jonas Nick wrote the three BIPs, which were combined into Taproot and incorporated into Bitcoin Core in October 2020.

The Taproot update attempts to increase transaction privacy and the Bitcoin network’s performance.

The following is the substance of the proposal:

  • BIP340 introduces a Schnorr multi-signature technique that is backwards compatible with elliptic curve digital signatures.
  • BIP341 proposes “Pay-to-Taproot” (P2TR), a novel network payment technique based on the MAST (Merkle Tree) data structure and aggregated signature attributes.
  • BIP342 improves the Bitcoin network by introducing Tapescript, a new scripting language that can be used to verify Schnorr aggregated signatures and Pay-to-Taproot payment paths, increasing the inclusiveness and flexibility of P2TR while also allowing for future smart contract upgrades to the Bitcoin network.

Bitcoin’s Impact

Cost-cutting

  • Schnorr signatures have the capacity to capture numerous keys and create unique signatures in complicated bitcoin transactions, which is one of its primary advantages. This implies that multiple-party signatures may be “aggregated” into a single Schnorr signature.
  • It has been dubbed the most important technical change since Bitcoin Segwit.
  • For multi-signature transactions, Schnorr signatures will minimize the amount of data required. As a consequence, transaction processing costs will be lower, and transaction fees will be lower.

Improved privacy

  • Complex transaction information may be stored in the MAST data structure, which is based on the Schnorr multi-signature technique. Multi-signature transactions and transactions involving multiple addresses will be treated as a single regular transaction.
  • Multi-signature transactions will be indistinguishable from simple transactions, implying that multi-signature addresses will have a better degree of anonymity and privacy.

Support for Smart Contracts

  • Because the Taproot update decreases transaction output on the network, it allows for the deployment of more complicated smart contracts.
  • At the same time, Taproot offers a more comprehensive toolbox for developers who want to continue working with Bitcoin.

In summary, the Schnorr signature lies at the core of the Taproot update. It gives Bitcoin a whole new set of speed, privacy, and even smart-contract capabilities.

Can Taproot help BTC gain a competitive advantage?

While both Bitcoin and the Ethereum network are built on distributed ledgers and cryptography, their technical specifications are vastly different.

Bitcoin, for example, is a digital counterpart of gold that is used to hold value. Ether is a cryptocurrency that enables apps and generates revenue by supporting the network.

One of the most significant distinctions between Bitcoin and Ether is that Ether supports and interacts with smart contracts, allowing developers to design new apps.

Ether is currently the most popular blockchain for these applications, which are also known as dApps or decentralized applications.

Will Bitcoin’s Taproot upgrade cause a “DeFi rain”? |Every month, the number of DeFi protocols on Ether grows (Source: Footprint Analytics)

The Ethernet network is used to build the majority of decentralized financial and NFT apps. Ether has established itself as a first-mover in the use of encryption as its usage in DeFi and NFT has grown increasingly ubiquitous.

Will Bitcoin’s Taproot upgrade cause a “DeFi rain”? |DeFi and NFT are among the top ten projects burning ETH on Ether (Source: Footprint Analytics)

While Ethereum has higher transaction volumes, Bitcoin’s cryptocurrency features and improved network security may attract long-term liquidity.

Bitcoin, like gold, is stable and restricted to a total of 21 million coins, and its worth as a digital gold investment is gaining traction.

Taproot makes the Bitcoin network more appealing for developing DeFi protocols in order to attract additional users. Many Bitcoin supporters consider this improvement to be a blessing in disguise for DeFi in the Bitcoin network.

Many experts, like Zoni from Footprint Analytics, are skeptical about Taproot’s ability to transform Bitcoin into a smart contract ecosystem.

Bitcoin, which bills itself as a peer-to-peer electronic payment system, lacks a sophisticated ‘virtual machine’ EVM (smart contract runtime environment) for smart contract storage, execution, and verification.

As a result, attracting additional dApp or DeFi projects to develop and construct applications on its chain is tough. Bitcoin still has a long way to go before it can be turned into a programmable platform with its own DeFi ecosystem.

It’s fair to argue that Bitcoin’s growth has been gradual.

One reason for this is its PoW consensus method, which needs the agreement of up to 50% of Bitcoin nodes in order to make any changes. Even with Taproot, it’s unclear that it’ll be able to keep up with DeFi’s quick growth.

Furthermore, just half of the known Bitcoin nodes have stated that they will support the update, with the other nodes still running outdated software. That indicates they haven’t yet put Taproot’s new regulations into effect.

Taproot’s real activations, including Schorr’s, will not begin until next year.

Footprint Analytics is the source of this report.

Footprint Analytics is a one-stop shop for analyzing blockchain data and uncovering insights. It cleans and combines on-chain data so that users of any skill level may begin exploring tokens, projects, and protocols right away. Anyone may create their own personalized charts in minutes using over a thousand dashboard templates and a drag-and-drop interface. With Footprint, you can discover blockchain data and invest more wisely.  

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Will Bitcoin’s Taproot upgrade cause a “DeFi rain”? |

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Emilia James
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