Over the last week, bitcoin prices have fallen from an all-time high above $68,000 to $60,000. This selling has come as many were betting on a breakout with the recent Taproot upgrade.
It's bitcoin's first major upgrade since 2017, and it will have numerous impacts in terms of increasing commercial applications of bitcoin and how the blockchain will work.
Taproot will result in bitcoin transactions become more private, efficient, and less expensive. It will also allow smart contracts to be executed on the blockchain. The availability and ease of smart contracts is one reason that ethereum has been gaining prominence in recent years.
Going into the upgrade, there was widespread disagreement on whether it would lead to a breakout or whether it wouldn't have a meaningful impact. However, taproot will clearly have a major impact in terms of increasing bitcoin's demand and utility for commercial functions.
The taproot upgrade is composed of 3 major components - smart contracts, increased privacy, and more transaction processing ability.
Smart contracts are contracts that are written and executed with the blockchain's public ledger taking the place and role of institutions or agents in the traditional financial sphere. Smart contracts are the basis of decentralized finance (defi) applications and non-fungible tokens (NFT). Of course, the latter two are the probably the parts of the crypto-economy seeing the most growth and interest from institutions and the public.
Until Taproot, bitcoin was more limited in its ability to accommodate smart contracts, while ethereum was created with this purpose in mind. In theory, this should lead to more developers building on top of the bitcoin blockchain like they are doing with ethereum.
Taproot also will increase privacy as it will allow multi-signature transactions. This means that transactions with multiple addresses will appear as a single address making them indistinguishable form simple transactions, leading to greater anonymity.
The upgrade also decreases the amount of data used to process transactions. This means that transactions will be more energy and time efficient.
Overall, the Taproot upgrade takes bitcoin from being a simple "store of value" to something that is closer to a "world computer" like ethereum.