There is a huge event coming in November 2021 and that is going to be the release of Bitcoin’s Taproot update.
What are the changes?
Mainly Taproot aims to upgrade Bitcoin’s network privacy, where multi-signatures will have a stronger privacy and be able to hide transactions. Currently, the network uses a signature mechanism called the Elliptic Curve Digital Signature Algorithm, which upon this update will be switched to Schnorr signature, making transactions unreadable.
Such signatures will help to enhance the smart-contract technology of the network. Deployed smart contracts will reduce the transaction fees while simultaneously increasing the transaction speed. These smart contracts on Bitcoin’s network will ensure a greater scalability of the network and help to compete with Ethereum in this regard. As for now, smart contracts can be created both at the level of the main Bitcoin protocol and in the Lightning Network - a payment platform built on Bitcoin which enables instant transactions.
Why is it important?
The Taproot update will help Bitcoin to gather developer’s resources to build DeFi applications and smart-contracts on it’s network. This is crucial for Bitcoin and might allow it to compete with Ethereum DeFi capabilities.
Bitcoin miners who backed the upgrade are looking for a greater usage of Bitcoin. Smaller transaction fees and smart-contract deployment will improve the transactions frequency within the network, for authentication of which miners are rewarded.
Bitcoin’s greater scalability feature will also have a positive impact on its price. We shall see how the price will change in November and a month after the deployment of this upgrade. 4-years ago a similar upgrade was introduced, named SegWit which split the transaction into two segments, removing the unlocking signature ("witness" data) from the original portion and appending it as a separate structure at the end. The original section would continue to hold the sender and receiver data, and the new "witness" structure would contain scripts and signatures. The original data segment would be counted normally, but the "witness" segment would, in effect, be counted as a quarter of its real size.
After the deployment of SegWit in August 2017, Bitcoin’s price went up 560% by the end of the year, hitting it’s all time high of the period of launch until the end of 2017. Let’s see if such events happen again. We are recording the price of Bitcoin at $46,063 on 10th of August 2021, and will update this document after the deployment of the Taproot.