In today’s Exponential Investor

  • Now: patience please
  • 2017: war
  • 2021: peace

I got an interesting reader email passed on to me from our customer services team last Friday.

Part of it simply said, “why was Sam so wrong about Taproot?”

I found this to be interesting because I was somewhat confounded by the question.

Taproot: understanding (and patience) required

If you are unaware, Taproot is the name of the most recent and significant upgrade to bitcoin’s code that we’ve seen since 2017.

What a lot of people don’t understand is that bitcoin can actually be upgraded. The code that enables bitcoin to function can be added to, improved upon. But it can only achieve this when the majority of the network agrees and approves it.

That means a significant upgrade is a big deal when it’s universally approved.

We don’t see big upgrades often, and historically when we do, it can be contentious and cause a “hard fork” in bitcoin.

Understanding all this is quite important because it helps people to then not ask silly questions about being “wrong” about Taproot.

So, please let me explain…

2017’s “Civil War”

The last major upgrade to bitcoin was known as SegWit (short for segregated witness).

Its proposal was to improve the transactions capacity and speed of bitcoin’s blockchain. This was what the 2017 upgrade was all about, no more and no less.

The problem with this upgrade was a lack of consensus. A group of  node operators and miners on the network wanted to make this upgrade with a change (increase) in block size: meanwhile, others believed that it should be done via a reoganisation of transaction data.

This resulted in a “Civil War” and ultimately a split in bitcoin’s blockchain.

Thereby those who advocated for a bigger block size, forked to Bitcoin Cash, those who advocated for the SegWit implementation continued to run with the current bitcoin chain as we know it today.

There’s still conjecture as to which is truly the “original” intention of Satoshi Nakamoto (the creator of bitcoin). But we know these two versions simply as bitcoin (SegWit implementation) and Bitcoin Cash (block size implementation).

Now some might consider this kind of debate to be a negative of bitcoin and cryptocurrency, but it’s actually a positive feature.

Anyone is free to fork bitcoin: this is because it’s open-source software. But then the tricky part is getting network growth, and miners and node operators to continue that blockchain.

If you’ve got a grand idea as to how bitcoin could be better, you can propose it, and the network can accept it or reject it. If the latter, you can run with the idea yourself.

This feature of being upgradable means that as a means of exchange, a store-of-value, or whatever you consider bitcoin to be, it can constantly get better.

The implementation of SegWit meant that layer-2 solutions could be built on top of bitcoin, which has led to innovation like the Lightning Network – which is a core part of expanding bitcoin infrastructure for potential use as a global reserve currency.

What really matters about the upgrade of 2017 is this: what was considered a negative at the time, actually was a long-term positive for bitcoin, its scale, growth and adoption.

And over the subsequent years, bitcoin has gone from strength to strength.

Some people, people with typically superficial understanding of all this, believe that the strength of bitcoin is tied to its fiat-converted price. They consider that the more value it has in fiat currency terms, the stronger it is.

That is not really so.

The true reason why bitcoin is stronger, more robust, more user-friendly today than it was four years ago (let alone a decade ago) is because it has been improved upon. It has been made more accessible and easier to incorporate into things like wallets, payment rails, and games – as well as global finance generally.

That only comes as the network improves.

As the network gets bigger and better, then the price seems to inevitably follow higher.

Which leads us to the most recent significant upgrade of bitcoin, Taproot.

2021’s change without conflict

On Sunday 14 November, the Taproot upgrade to bitcoin went live. That means that Taproot has successfully been implemented.

This upgrade boils down to two key things: privacy and DeFi (decentralised finance – the conduct of financial transactions on a large scale but without traditional financial institutions). Just as SegWit opened the door for improvements, innovation, development and infrastructure in speed and size, I expect Taproot will do the same for privacy and DeFi.

However, the growth in bitcoin between SegWit and Taproot didn’t happen in five days.

It happened over a period of years as developers got to work in building out the infrastructure around bitcoin integrating it into our society and world.

A country like El Salvador wouldn’t have adopted bitcoin as legal tender had that period of “buidl” over the last few year not taken place.

And arguably, without the improvements of SegWit, we might not be having this conversation at all.

What I expect is this: in another few years’ time, we’ll look back on the immense opportunity that Taproot unlocks, much in the same way we look back on bitcoin since 2017 and marvel at how much further it – and its wider community – have come.

That’s the real deal around bitcoin and Taproot which I’ve been trying to explain. That the upgrade is massive. It has the potential to unlock the entire crypto market particularly as it strengthens privacy and facilitates DeFi.

But the realisation of the opportunity is not going to happen in five days.

It will likely take time to get to the full potential we are looking at.

But for investors, you don’t wait a few years to get ahead a major shift like this. You get in early, stake your claim, and ride those potential rewards, while recognising the risks that exist too.

It is possible that, in four years’ time, bitcoin’s network is smaller, with less people using it, with infrastructure that has seen no further development. This implies no innovation, no new use cases, no improvements in privacy and a lack of expansion of DeFi that is based on bitcoin. If that happens, then I’ll be very wrong about Taproot.

In the alternative scenario, I will be so right that it will be unbearable for anyone that decided to ignore me.

Until next time,

Sam Volkering
Editor, Exponential Investor