While El Salvador steals the spotlight, Bitcoin has quietly been finalising its first proper upgrade in four years.
Yeah, yeah. I get it. The President of El Salvador declaring that not only is bitcoin now legal tender in his country but that people should move there to mine crypto in one of their active volcanoes is the kind of event that tends to dominate the news cycle.
Prior to this, the primary function of a volcano was to offer Bond villains a nifty location for their secret lair. Now, apparently, it’s also where eco-conscious bitcoin miners can go to ensure they’re satisfying Crypto Lord Elon’s latest whims. Which is not exactly a sentence I envisaged writing at the start of the year.
But while this undeniably cool and very important thing was happening, the world’s Bitcoin miners were slowly coming to agreement over the most significant upgrade to Bitcoin’s code since the last Halving: Taproot. Here’s why it’s a big deal.
If you’ve been around crypto for a while, you might remember the positively tectonic battles that led up to Bitcoin’s last major upgrade AKA the Block-Size Wars. Essentially, the bitcoin community tore itself apart over the question of whether the blocks being added to the blockchain should stay 1MB in size or grow to 8MB or more. (Tl;dr: bigger blocks = faster, cheaper transactions; smaller blocks = less risk, more decentralization, similar outcomes could be achieved with other innovations i.e. the Lightning Network).
The debate grew in ferocity until the big block faction used the occasion of the 2017 SegWit update to hard fork the Bitcoin chain and create Bitcoin Cash. And, you know, good on them for having a go with their cute little coin.
I’m telling this story to underline two things. One, developers don’t like changing the Bitcoin code because Bitcoin works pretty damn well as is – and its unchanging nature is part of its power. And two, things move slowly in Bitcoin world because trying to get consensus from a supermajority of both developers and miners is a hellishly tricky proposition.
At the root of it all
Which brings us to Taproot itself. Last week, 99% of Bitcoin’s hashing power signalled in favour of the Taproot upgrade, meaning that it will take effect in November. Given that Taproot was first proposed in early 2018, it’s safe to say this has been a long and complex process. Yet here we are and no-one is threatening to kill anyone else, which is a definite improvement on last time.
Taproot essentially does three things. It improves privacy by making it more difficult to work out which private keys are attached to any given transaction. It increases efficiency by reducing the amount of data each transaction needs to contain (also enabling better integration with the Lightning Network). And, most importantly, it allows for smart contract functionality AKA the thing that made Ethereum such a conceptual advance over Bitcoin itself.
None of this will make Bitcoin the best currency alternative, or dApp development platform, or privacy coin. But it will make it faster, stronger and more productive – and prove yet again that Bitcoin is more than simply a store of value, inflationary hedge or new form of money. It’s an entirely different and unique way of thinking about value. And it’s only getting better.
Like many investments, cryptoassets carry risk. Given the potential price volatility which can be extreme, the value of your cryptoassets may fall rapidly or over time. Cryptoassets are also currently unregulated by the FCA and you are unable to access the Financial Services Compensation Scheme or the Financial Ombudsman Service.