The world's first peer-to-peer electronic cash payment network, Bitcoin (BTC 1.08%), has ballooned to a market cap of $803.8 billion, but its returns have stalled as of late. Nowadays, the rise of novel cryptocurrencies that help with borrowing and lending, provide trading liquidity, secure agreements between users without intermediaries (aka smart contracts), and more has overshadowed Bitcoin. The last major upgrade to Bitcoin happened in 2017, and right now, there's not much use to it other than to transfer money from A to B.
Luckily, a technological overhaul has finally come. Over 90% of Bitcoin miners have approved an upgrade for this upcoming November. The upgrade, known as Taproot, will improve the efficiency and privacy of the network and could catalyze a major boost in Bitcoin's price.
Image source: Getty Images.
A major advancement
Two changes to the Bitcoin network's underlying code (or protocol) will take place with the Taproot upgrade. The first is replacing the cryptocurrency's Elliptic Curve Digital Signature Algorithm (abbreviated as ECDSA) cryptography with that of the Schnorr Signature Algorithm (shorted to SSA). Sounds complicated, but here's what it means for users. If 10 different users sent BTC to a single wallet address (public key) under the current setup, it would appear on Bitcoin's ledger as 10 separate transactions. But using SSA, Bitcoin's network will be able to bundle these 10 transactions into one transaction with a unique key.
Secondly, the Taproot upgrade will be able to compress complex conditions required for transactions into one single line of data under what's called the Merklized Alternative Script Trees (MAST) to the blockchain's code, making it a more streamlined process.
How can this deepen investors' wallets?
These changes are revolutionary as both transactions and conditions for their execution take up storage on the blockchain. And Bitcoin's transaction fees increase when more space is used up. Lower fees would incentivize far more transactions on the network, as well as merchant adoption. But that's just the first perk.
The second perk is that users will have much more privacy when it comes to using bitcoins. Indeed, its digital record of transactions (otherwise known as a public ledger) unintentionally made Bitcoin less private than cash. As a result, nosey blockchain analytic firms can monitor users' transactions and uncover their personal information based on their public key. But when transactions are bundled together with just one unique key, it's much harder to deduce who sent the BTC. This will make BTC compete better with coins designed to obfuscate wallet addresses and shield observers from tracing transactions (privacy coins).
The final perk is that smart contracts would become more affordable on Bitcoin's network. The technology behind Bitcoin is pretty old, and until Taproot goes live, it can only handle about four transactions per second. Each basic transaction (sending money from A to B) costs about $5 to $75, and with smart contracts, users would need to pay astronomically more in fees as they take up more space on the blockchain.
With the introduction of the Taproot upgrade, transaction fees will be lower, though still require improvement via future upgrades. In the distant future, I could see investors taking advantage of services like lending BTC out for interest and receiving a commission for providing trading liquidity with their BTC, and more. There is so much potential when the world's largest cryptocurrency begins getting a share of the pie. For these reasons, I'd consider buying BTC before Taproot goes live and holding for the long term.
