Bitcoin prices stabilised on Friday after three consecutive days of gains with the legacy coin coming within striking distance of $70,000. But some analysts believe the pullback is temporary and the original blockchain network's next big upgrade called the Taproot upgrade that begins this weekend could help spark another rally.
“This is a revolutionary moment for Bitcoin,” Don Guo, CEO of Broctagon Fintech Group told Coindesk.
So what exactly is the taproot update and why is it so important?
Taproot is the biggest upgrade in Bitcoin's network after the Segregated Witness, or “SegWit,” upgrade in July 2017 that addressed scalability issues. Taproot holds the promise to improve many things for the network including privacy features and smart contract functions. These changes will lead to improved wallet functionality and reduced fees for complex transactions.
“Taproot is an upgrade that will improve Bitcoin’s capacity for scripting, bringing it in line with competing blockchains like Ethereum that already have programmable smart contracts,” said Cryptobriefing in a report
Compared to new blockchain networks, Bitcoin has been exceptionally slow in implementing upgrades. For example, the latest upgrade Taproot was first proposed in 2018 and could garner the required 90 percent miner approval in June 2021. Now that it’s finally here, the Taproot upgrade has sparked excitement among bitcoin investors for the kind of impact it will have on the network.
“Taproot will also introduce MAST (Merkelized Abstract Syntax Tree), which will make it more difficult to trace and analyze Bitcoin transactions,” the Cryptobrief report said.
One key benefit of Taproot is it will equip the bitcoin network with an easier smart contract protocol. Smart contracts are programs that have been stored on a blockchain that run when certain specified conditions are met. Right now, smart contract functionality on the bitcoin network is an expensive and time-consuming process. To bring the transaction fee down, Taproot will move to Schnorr Signature Algorithm (SSA) from the current Elliptic Curve Digital Signature Algorithm (ECDSA), which according to a Cryptobrief report "will create smaller transaction sizes through data aggregation.”
The Coindesk report pointed out that SegWit was approved on July 23, 2017, and a month later when the upgrade went live, the price of the legacy coin had climbed 50 percent to a then-high of $4,247 on August 23.
While some analysts expect a similar price momentum this time around, there are others who believe the spike after Taproot may not be significant given the cryptocurrency has already shot up and developers have been working on the upgrade for a long time now.
“There might be a limit to how much more upside you can really get from bitcoin,” according to Daniel Cawrey, COO at digital asset investment firm Cypherpunk Holdings Inc., and a former CoinDesk reporter.
While it remains to be seen if the Taproot upgrade will trigger another spike in bitcoin prices, there is general optimism given continued interest from large holders and miners to build their long-term position. As per Glassnode data, within two hours of Bitcoin hitting its all-time high around $69,000, long BTC positions worth $64 million were liquidated and the bitcoin whales are now using this profit-booking to augment their positions.
(Edited by : Abhishek Jha)