Bitcoin's Taproot Upgrade Will Unlock Security and DeFi

The Bitcoin Taproot update is coming in November, 2021. Taproot is the first major upgrade to the Bitcoin software since SegWit in 2017. Taproot will improve encryption on Bitcoin, which will immediately increase security on the network while unlocking the potential for smart contracts and future DeFi applications.

Bitcoin has a reputation for its early use in illicit transactions, but the current Bitcoin blockchain makes it fairly easy to track money and users. The Taproot upgrade increases data privacy on Bitcoin by adopting a new approach to recording transactions: during a transaction, the two parties combine their public keys to create a new public key and combine their signatures to create a new signature; the process relies on the Schnorr Signature Algorithm (SSA). It's unclear how blockchain security firms like CipherTrace will respond to the Taproot upgrade.

The Taproot upgrade also allows for "bundling" of transaction data on Bitcoin, which greatly increases network storage capacity while decreasing cost of use. As storage capacity increases, smart contracts become viable on Bitcoin. This means that the Bitcoin network is on its way to becoming a possible platform for decentralized finance (DeFi) projects. Taproot may not unlock enough transaction bandwidth and space savings for a full DeFi ecosystem, but it's an important step toward Bitcoin truly entering the exploding DeFi space.