The most important impact for the investing market overall: It's a reminder that Bitcoin is a technology. Plus: What's next for dogecoin？
You might have noticed some green squares floating around Twitter. Like the laser eyes, they are part of the insider signaling that creates a sense of cause and belonging. Unlike the laser eyes, they are not directly about the price – they signal support for the proposed Taproot upgrade for the Bitcoin network.
Why is this important？ Its not just the benefits the upgrade brings, which are significant. Taproot is important because it reminds us of what Bitcoin is.
The good stuff
Before we dive into why this matters, lets look at some of the main benefits of the proposed upgrade:
1.Increased privacy. This does not refer to Bitcoin addresses or enhanced anonymity; it refers to types of transactions. Taproot will make complex transactions, such as those requiring multiple signatures or those with delayed release, indistinguishable from simple transactions in terms of on-chain footprint.
2.Lower fees. The data size of complex Bitcoin transactions will be reduced, which will lead to lower transaction costs.
3.More flexibility. A new type of signature will enhance smart contract functionality in Bitcoin, making it easier and cheaper for users to set more complicated conditions for a transaction.
4.Lightning boost. Taproot will make transactions on the lightning network cheaper, more flexible and more private. The lightning network is a layer 2 solution that enables faster and more scalable payments that periodically anchor in aggregate form to the Bitcoin blockchain, offering eventual Bitcoin security while amplifying speed and potential throughput.
A meaningful step
With all of the above, Taproot is the most significant upgrade to the Bitcoin network since the block size increase of 2017. The relative infrequency of Bitcoin upgrades highlights one of its main features: it is robust.
Making any amendments to Bitcoin is hard. There is no one in “charge” who can decide what changes get pushed through. And achieving consensus among such a diverse and dispersed group of participants is a challenge, to say the least. That Taproot is more or less unanimously supported highlights what a big deal this upgrade is.
What has turned out to be contentious, however, is the method of the upgrade. In March, a compromise was reached in the form of a “Speedy Trial,” which gives miners a series of two-week blocks in which to signal support for Taproot.
This kicked off last Saturday, with the most recent difficulty adjustment. From that moment, Bitcoin miners had until the next difficulty adjustment (two weeks later) to signal support for the Taproot upgrade in their mined blocks. If 90% of processed blocks signaled support, the upgrade would get “locked in” for activation in November.
On Tuesday, however, it became apparent that this signaling round wasn‘t going to be successful. With almost 25% of the window’s blocks processed by around mid-day, 20% had not signaled support, so the 90% threshold was out of reach.
This is not a big deal – rather than rejection of the idea, it‘s more likely that miners hadn’t yet gotten their heads or their software tweaks around the necessary steps. The next two-week window of signaling opportunity is coming up, and if that is also unsuccessful, the network tries again, and so on until Aug. 11. If by that date 90% signaling has not been achieved, Taproot goes back to the drawing board.
The real benefit
So, the Taproot upgrade will boost Bitcoin‘s functionality and potentially broaden its market. That’s good for its prospects and its valuation.
But heres the most important impact for the investing market overall: it reminds us that Bitcoin is a technology.
Many investors see bitcoin (BTC, +0.91%) as a store of value. Others are drawn in by the volatility. Most tend to overlook one of its most defining features – it is a relatively new technology, with all the upside that implies.
When you buy gold, you dont wonder how it will evolve while in the vault. Bitcoin, on the other hand, does evolve. It did so in 2017, and it will most likely do so again this year.
“Technology” implies risk, though – things can go wrong, code has bugs and/or unintended consequences. That‘s why it is key that Bitcoin’s upgrades are few and far between, because they need to be carefully vetted and tested. Also, since there is no central body to decide on Bitcoin upgrades, they need to be agreed on by all the key stakeholders, and consensus is always extremely difficult to achieve.
This is a good thing. Theres over $1 trillion of market value riding on the Bitcoin network now, not to mention the valuation of all of the businesses built to support the network, so the risk needs to be minimized to an almost negligible level.
Taproot drives home that bitcoin may be an excellent store of value, and it may provide good returns for speculators – but the cryptocurrency also represents the opportunity to get in early on a transformative technology investment. Its like being able to take an early stake in a hot startup, but with much more liquidity and less paperwork.
So Taproot will not only improve Bitcoin‘s usability, which could have the effect of broadening its market and therefore potentially its value as well. It also reminds us of one of Bitcoin’s core characteristics, which seems to have gotten drowned out in the prevailing market-driven narratives of late. Bitcoin is still a new technology, and its potential upside comes from more than its supply schedule, its inflation resistance and its decentralization.