The bitcoin adoption is exceeding the pace of internet adoption. Where we are today in terms of bitcoin adoption looks like 1997 for internet adoption and where we will be in four years which is trending towards a billion users that’s akin to internet adoption in 2005.What’s next for bitcoin, Bitcoin DeFi, Bitcoin NFT, Atomic Loans…? Let’s explore the next wave of bitcoin stellar gains.

Bitcoin since gained acceptance of being a digital gold. But that doesn’t mean it needs to act as a shiny rock. From DLC’s (Discrete Log Contracts are basically Bitcoin oracle contracts. They enable users to enter into an agreement that is enforced by “real life” events and settled in BTC.) to tokenized BTC, more and more infrastructure is being built to allow Bitcoin hodlers to use their BTC for new financial applications.

As of now majority of bitcoin financial use cases are built on Ethereum using cross-chain bridges, on sidechains like Liquid, or on Lightning Network. Come November, Bitcoin will become compatible with basic smart contract functionality. The nearing Taproot upgrade will improve Bitcoin’s capabilities and efficiency due to two overarching changes in its back-end code – namely, a change in the network’s method of cryptography combined with new support for Merkelized Alternative Syntax Tree (MAST) script execution. Due to the complexity of these improvements, it is likely that the upgrade is not yet accounted for in Bitcoin’s price. For the average investor, what is most crucial to understand is what the Bitcoin Network will be able to do after Taproot.

The Much Awaited Taproot Upgrade

Most of the crypto industry’s technological advancements are underpinned by smart contract functionality that we really only see in the altcoin projects that are often referred to as Layer 1 protocols. Ethereum, Solana, Tezos, Avalanche, and Cardano are all popular Layer 1s.

Currently, users cannot do much on the Bitcoin Network besides direct peer-to-peer payments and (maybe) use a Lightning Network. Applications cannot feasibly be built on Bitcoin due to functionality and scalability issues. The Taproot upgrade scgeduled on 15th November of 2021 brings smart contracts to Bitcoin, giving the opportunity to build applications and businesses on the Bitcoin blockchain. This means that DeFi applications, NFTs, and more will be able to run on Bitcoin. But there is more to it…

But there’s a bit more nuance to the upgrade that includes increased privacy, lower fees, more flexibility, and a boost to the Lightning network.

With the new ability to build apps on Bitcoin, along with scalability, privacy, transparency, and fungibility improvements, this should drastically increase Bitcoin’s global adoption and, understandably, increase its price.

First, the Increased Privacy with Schnorr Signatures

Taproot will make single-signature and multi-signature transactions look the same on-chain. Basically, no longer will multi-signature Bitcoin transactions reveal all the individual signers of the transaction, but rather a new single public key will be generated and used that is owned by all singers. It is a significant upgrade for the general privacy of any institution who wants to use the network without giving away too much detail.

It’s not only privacy, the new signature scheme make transactions now use a lot less data. This translates to lower fees and faster transactions.

Satoshi implemented the Elliptic Curve Digital Signature Algorithm (ECDSA) to sign transactions of Bitcoin when launched in 2008. ECDSA signatures can be vulnerable to exploits and, most importantly, cannot be compressed. Now Taproot upgrade will upgrade that to Schnorr signatures (the technology was protected under patent until 2018). The cryptographic Schnorr signatures can make those multi-signature transactions simplified into a single validation. This is the piece of the puzzle which will enhance the smart contract functionality and programmability of Bitcoin. By allowing more complicated transaction conditions to be simplified into a single validation, software will be able to run much simpler.

This is huge, because Schnorr signatures can be compressed and aggregate multiple signatures into one signature. With Schnorr signature cryptography, on-chain transaction size is reduced, transactions are validated faster, and privacy is improved for complex transactions. All this will work to improve Bitcoin’s scalability, fungibility, and privacy.

The reduction of data that is stored in each block means that the Bitcoin network will have increased privacy, allowing for further pseudo-anonymity. To some degree, this is not a huge deal to most users, but will be very important to those that do value the privacy aspect of crypto transactions and it may even inject some new life into the privacy-coin sector that has largely not seen the same interest as most of the other sectors in the industry over the last couple years.

Bitcoin Utility Outside of Being a Storage of Value

A second new way to execute Bitcoin transactions after the Taproot upgrade will be through MAST scripts. These scripts serve a similar function to Schnorr signatures, being that they limit on-chain data transfer. MAST scripts compress transactional conditions into their simplest form, called a Merkle root. Through MAST, complex Bitcoin transactions (such as what would occur in Bitcoin DeFi apps) are compressed into a single hash, thus minimizing memory usage and improving scalability. Simply put, MAST will allow Bitcoin developers to write more complex scripts for less gas fees.

The significance of Schnorr signatures and Merklized Alternative Script Trees cannot be understated. After Taproot is implemented, Bitcoin will finally maintain utility outside of being a storage of value. In the coming years, it is likely that the Bitcoin Network will develop an ecosystem of applications similar to what is built on Ethereum today. As Ethereum grows to accommodate increasingly complex apps, Bitcoin will develop into its analog, decentralized and bulletproof alternative.

Taproot Advantage to BitcoinLightning Network

Ultimately, Taproot upgrade allow the Lightning network, Bitcoin’s scaling solution for faster transactions, to be more efficient due to lower data requirements while retaining the speed and scalability that Lightning brought to Bitcoin.

Lightning Networks consist of nodes that efficiently and quickly transmit Bitcoin transactions through payment channels. Lightning Networks minimize the memory usage and gas fees associated with Bitcoin payments by computing the transactions off-chain. The Taproot upgrade will result in drastic scalability and privacy improvements to Bitcoin’s Lightning Networks for a number of technical reasons (mainly, the switch to use point-time locked contracts and batched validation, both made possible through Schnorr signatures). After Taproot, Bitcoin Lightning Networks should become more intuitive and cost-effective for users.

Bitcoin Defi “The Game Chnager”

By adding smart contract capability to the network, users will be able to utilize a number of decentralized applications (dApps) that were initially pioneered by Ethereum and have since spread out to the various “ETH Killer” projects like Solana, Cardano, Polkadot, Avalanche, etc. We’re going to see the introduction of Decentralized Finance (DeFi) to the Bitcoin network.

At present, Bitcoin Lightning Networks are a ‘layer 2’ scaling solution for Bitcoin. This means that Lightning Networks transmit the bulk of Bitcoin’s computational load off-chain, and only present the base layer blockchain with compressed and fundamental transaction data. Since the Taproot upgrade will increase the Lightning Network’s efficiency, it will also allow for the development of other applications on Lightning.

Currently, few people outside of developers are aware of the impending functional improvements coming to Bitcoin. To understand the bulk of Bitcoin’s potential applications, you have to think of the Bitcoin blockchain in terms of layers. The base layer is the proof-of-work blockchain, layer-2 consists of primarily Lightning Networks, and layer-3 consists of applications built on top of Lightning Networks. The most important takeaway to understand from the Taproot upgrade, is that through the implementation of Schnorr signatures and MAST scripts, all of Bitcoin’s layers will become more efficient, private, and functional. Subsequently, this will boost Bitcoin’s utility, adoption, and price.

This most immediately important applications that will be built on Bitcoin’s Lightning Networks will be decentralized finance apps. DeFi apps are specifically advantageous when built on Bitcoin because they require minimal code and because Bitcoin is the most decentralized network in existence. Due to these factors, Bitcoin DeFi applications have the potential to be more censorship-resistant than their Ethereum counterparts. Going forward, it is likely that Bitcoin’s adoption will grow synergistically with its layer-2 developments — which only become developmentally possible after the Taproot upgrade.

Will Bitcoin Become Ethereum Killer?

Bitcoin is by far the most recognized and trusted digital asset for the general public and institutional investors. This alone could bring a large volume of users to DeFi that may not be willing to stray away from the safety of the robust Bitcoin network, especially for institutional capital that is often quite a bit more discerning when it comes to resource allocation. These institutions will likely see Bitcoin smart contracts as the “gold standard” and will begin to experiment with the applications under the implication that they are safer to interact with relative to the often-exploited dApps that are built on Ethereum and its competitors. Furthermore, this dive into DeFi by institutions that are some of the largest Bitcoin holders means that the Bitcoin supply will be even more constrained as circulating tokens are locked in smart contracts for DEX and AMM liquidity, lending, minting of synthetic assets, etc.

With Taproot upgrade, any application built on Ethereum and the various Layer 1 platforms will likely see a competitor built on the Bitcoin network. This means we’ll see decentralized exchanges, DeFi hubs for lending and borrowing, liquidity farms, automated market makers, oracles, etc. that will be built for (or existing dApps tailored to) the new Bitcoin smart contract functionality. At this point, we’re still roughly two months away from this upgrade, so it’s hard to pick any winners for now because hardly any are being built yet. But, it’s certainly worth paying attention to established projects for announcements of future integrations of this upgrade to their existing platforms, as well as keeping tabs on any new projects that are Bitcoin DeFi focused. There could be some serious alpha there.

Taproot Upgrade Risks

With any blockchain upgrade, there is always risk involved. Since Bitcoin is the most valuable decentralized network on the globe, it certainly has a lot of eyes on it. While this attention assembles hackers, it also assembles some of the greatest minds in computer science. Although Taproot aims to make Bitcoin more secure, unforeseen errors are still possible during or after its implementation. The amount you invest should mirror your confidence in the upgrade.

Closing Thoughts

Bitcoin has been money since its creation in 2009, however, since then, it has not served to be much else. Come November, the Bitcoin Network will become significantly more usable. This will increase adoption and global awareness, and Bitcoin’s price should follow accordingly.

I would recommend further readings on discrete log contracts, scriptless scripts, Bitcoin ring signature functionality, or how Taproot will increase Bitcoin’s overall privacy. The most important takeaway of this blog post is that development is coming to Bitcoin. Due to this, Bitcoin will become a ‘double point’ asset, both used as a storage of value and as gas for applications outside of peer-to-peer payments. While Taproot will open the door to a multitude of applications, it is most likely that Bitcoin DeFi apps will receive the most immediate growth.

Taproot upgrade will bring new development to the BTC network as people rush to build competitors to existing ETH network dApps. We’re going to see an explosion of BTC scaling solutions like Polygon for Ethereum; BTC DeFi projects like Aave, Maker, and Compound; BTC platforms for NFTs like OpenSea; and a number of other sub sectors that exist on Ethereum to sustain industry dominance. Alongside, the forks of Bitcoin, namely Litecoin, Bitcoin Cash, Bitcoin SV, and even DOGE, have an opportunity to replicate Taproot functionalities.

Get ready for the next-wave of stellar gains with Bitcoin DeFi!

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Disclaimer: The information provided on this page does not constitute investment advice, financial advice, trading advice, or any other sort of advice and it should not be treated as such. This content is the opinion of a third party and this site does not recommend that any specific cryptocurrency should be bought, sold, or held, or that any crypto investment should be made. The Crypto market is high risk, with high-risk and unproven projects. Readers should do their own research and consult a professional financial advisor before making any investment decisions.

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