The main effect of Taproot will be to allow Bitcoin to more efficiently process smart contracts and permit more privacy in multi-signature blockchain transactions.
Up until now, Ethereum (CCC:ETH-USD) had reigned king in this area. Now Bitcoin can have another use for its holders, beyond its current purpose as just as a store of value.
This will add to Bitcoin’s performance, which has already been impressive so far this year. It traded at $60,785 late on Nov. 1 with a market cap of $1.147 trillion according to CoinMarketCap.
What Taproot Will Do for Bitcoin
As Cryptoslate explains, Taproot actually involves 3 new Bitcoin Improvement Proposals (BIPs). The first is numbered BIP-340 and allows the use of Schnorr signatures, which enable key aggregations. This is an important way to fix some privacy and space issues.
The second is BIP-341, which introduces Merklized abstract syntax trees (MASTs) to make smart contracts on Bitcoin more secure. MASTs allow for smaller transaction sizes, more privacy and larger smart contracts. David Harding, a Bitcoin expert, explained more details about the MASTs proposal in a recent article.
Lastly, BIP-342 will introduce a new scripting language to Bitcoin. Tapscript will make soft forks easier to do so that updates are less reliant on hard forks, or sudden changes. It will also allow Bitcoin to add new opcodes to improve Bitcoin’s smart contract capability and change some limits for resource requirements.
With Taproot, Decrypt reports, “all parties in a transaction can cooperate to make these complex transactions look like standard, person-to-person transactions.”
For hardcore programmers, Bitcoin’s main programming site, Bitcoin Core, provides more specific information on the Taproot upgrades.
Taproot’s Expected Effect on Bitcoin
These changes will effectively make Bitcoin much more competitive with Ethereum. By Nov. 16, all Bitcoin nodes will have upgraded with the Taproot protocols, as more than 90% of all nodes have agreed to these changes.
This will give developers of smart contracts, non-fungible tokens (NFTs) and decentralized finance (DeFi) apps much more confidence. They will be able to integrate their dApps (decentralized apps) into the Bitcoin network.
Moreover, Ethereum’s high fees have made its smart contract and DeFi apps less popular with new developers. Many are now turning to Solana (CCC:SOL-USD) and other “Ethereum killers.” Now, however, Bitcoin can join in the competitive smart contract race.
This could lead to a mushrooming number of dApps using Bitcoin in smart contracts and related applications.
According to Decrypt, this upgrade will also lower transaction costs at Bitcoin, making it more competitive with Ethereum.
What Investors in BTC Should Do
No longer just a store of value, Bitcoin can now be a useful transaction currency. As a result, BTC could potentially have a second upward push through the end of the year. This will happen once investors realize the extent of the Taproot upgrades.
So far this year, Bitcoin is up 106.9%. It ended last year at $29,374 per BTC crypto token, and reached $60,785 as of Nov. 1.
Therefore, even if BTC moves up 20%, or $12,157, from here to $72,942, that would bring its year-to-date performance to a gain of 148.3%.
In other words, a 20% gain will lead to a 41.4% percentage point improvement in performance compared to the beginning of the year. Now might not be a bad time to invest in Bitcoin, despite its meteoric rise so far this year. Taproot is likely to lead to another round of appreciation by the general market for this large cryptocurrency.
On the date of publication, Mark R. Hake held a long position in Ethereum but did not own any other security mentioned in this article either directly or indirectly. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.