You might have noticed some green squares floating around Twitter. Like the laser eyes, they are part of the insider signaling that creates a sense of cause and belonging. Unlike the laser eyes, they are not directly about the price – they signal support for the proposed Taproot upgrade for the Bitcoin network.
Why is this important? It’s not just the benefits the upgrade brings, which are significant. Taproot is important because it reminds us of what Bitcoin is.
The good stuff
Before we dive into why this matters, let’s look at some of the main benefits of the proposed upgrade:
- Increased privacy. This does not refer to Bitcoin addresses or enhanced anonymity; it refers to types of transactions. Taproot will make complex transactions, such as those requiring multiple signatures or those with delayed release, indistinguishable from simple transactions in terms of on-chain footprint.
- Lower fees. The data size of complex Bitcoin transactions will be reduced, which will lead to lower transaction costs.
- More flexibility. A new type of signature will enhance smart contract functionality in Bitcoin, making it easier and cheaper for users to set more complicated conditions for a transaction.
- Lightning boost. Taproot will make transactions on the lightning network cheaper, more flexible and more private. The lightning network is a layer 2 solution that enables faster and more scalable payments that periodically anchor in aggregate form to the Bitcoin blockchain, offering eventual Bitcoin security while amplifying speed and potential throughput.
A meaningful step
With all of the above, Taproot is the most significant upgrade to the Bitcoin network since the block size increase of 2017. The relative infrequency of Bitcoin upgrades highlights one of its main features: it is robust.
Making any amendments to Bitcoin is hard. There is no one in “charge” who can decide what changes get pushed through. And achieving consensus among such a diverse and dispersed group of participants is a challenge, to say the least. That Taproot is more or less unanimously supported highlights what a big deal this upgrade is.
What has turned out to be contentious, however, is the method of the upgrade. In March, a compromise was reached in the form of a “Speedy Trial,” which gives miners a series of two-week blocks in which to signal support for Taproot.
This kicked off last Saturday, with the most recent difficulty adjustment. From that moment, Bitcoin miners had until the next difficulty adjustment (two weeks later) to signal support for the Taproot upgrade in their mined blocks. If 90% of processed blocks signaled support, the upgrade would get “locked in” for activation in November.
On Tuesday, however, it became apparent that this signaling round wasn’t going to be successful. With almost 25% of the window’s blocks processed by around mid-day, 20% had not signaled support, so the 90% threshold was out of reach.
This is not a big deal – rather than rejection of the idea, it’s more likely that miners hadn’t yet gotten their heads or their software tweaks around the necessary steps. The next two-week window of signaling opportunity is coming up, and if that is also unsuccessful, the network tries again, and so on until Aug. 11. If by that date 90% signaling has not been achieved, Taproot goes back to the drawing board.
The real benefit
So, the Taproot upgrade will boost Bitcoin’s functionality and potentially broaden its market. That’s good for its prospects and its valuation.
But here’s the most important impact for the investing market overall: it reminds us that Bitcoin is a technology.
Many investors see bitcoin as a store of value. Others are drawn in by the volatility. Most tend to overlook one of its most defining features – it is a relatively new technology, with all the upside that implies.
When you buy gold, you don’t wonder how it will evolve while in the vault. Bitcoin, on the other hand, does evolve. It did so in 2017, and it will most likely do so again this year.
“Technology” implies risk, though – things can go wrong, code has bugs and/or unintended consequences. That’s why it is key that Bitcoin’s upgrades are few and far between, because they need to be carefully vetted and tested. Also, since there is no central body to decide on Bitcoin upgrades, they need to be agreed on by all the key stakeholders, and consensus is always extremely difficult to achieve.
This is a good thing. There’s over $1 trillion of market value riding on the Bitcoin network now, not to mention the valuation of all of the businesses built to support the network, so the risk needs to be minimized to an almost negligible level.
Taproot drives home that bitcoin may be an excellent store of value, and it may provide good returns for speculators – but the cryptocurrency also represents the opportunity to get in early on a transformative technology investment. It’s like being able to take an early stake in a hot startup, but with much more liquidity and less paperwork.
So Taproot will not only improve Bitcoin’s usability, which could have the effect of broadening its market and therefore potentially its value as well. It also reminds us of one of Bitcoin’s core characteristics, which seems to have gotten drowned out in the prevailing market-driven narratives of late. Bitcoin is still a new technology, and its potential upside comes from more than its supply schedule, its inflation resistance and its decentralization.
Dogecoin is getting people worried
You may be sick of hearing about it, but we can’t not talk about dogecoin this week. It does feel like the sentiment has morphed from “Hee hee this is fun!” to “Oh no, we’re going to get into trouble.” It’s like having a party at your parents’ house when they’re away for the weekend, only to have it spin totally out of control.
The concern is not unfounded: a price increase of over 15,000% so far this year, on objectively poor fundamentals (concentration of ownership, relatively weak security and narrow fully synced node distribution for starters) is fine until someone gets hurt.
When (if?) that happens, will the out-of-pocket investors cry foul and demand intervention? If so, will the intervention materialize?
What could the regulators do? Insist that investors only invest in things with solid fundamentals? Such as?
Could they insist that even more warnings be sprinkled about? What would these warnings say, and would they just be on dogecoin? If so, why? If not, would people even listen?
I suppose the authorities could publicly speak out against such speculation. Oh wait – they did that.
This is the regulators’ dilemma: They have to protect the investor, but they also have to encourage markets and innovation. How can they do both in a market fueled by sentiment? Do they restrict the sentiment, or the market? How would they go about doing either effectively?
Part of the intensification of the attention frenzy is the appearance of Elon Musk on “Saturday Night Live” (which has not yet aired when I am typing this, but will have aired by the time this newsletter lands in your inbox), which he teased along with the epithet “The Dogefather.” So we’re expecting some Shiba Inu references, which, given Elon’s power among the meme crowd, could move the price even more.
Should the regulators go after Elon for talking about dogecoin? Public figures often talk about their investments – should that be banned? When does that morph from protecting the public to restricting speech? At the risk of sounding ingenuous, Elon is not out there touting dogecoin’s fundamentals; should he be banned from talking about things he finds fun?
When the economic value of an investable asset is driven entirely by collective enthusiasm as well as meme amplification on social media, then what, really, can regulators do? How do you dampen said enthusiasm without trampling on fundamental human liberties, which will ignite the crypto crowd even more?
What’s more, it seems like both access to the asset and its potential use case are broadening. Crypto exchange Gemini and multi-asset brokerage platform eToro now offer dogecoin trading. The Oakland Athletics have become the first Major League Baseball team to sell tickets for dogecoin. And the American Cancer Society now allows dogecoin donations.
If all these questions are giving you a headache, imagine how those of us that need to explain this feel. It’s enthralling but also disconcerting, and reconciling the two is a struggle.
Personally, I believe that the fears that the regulators will come down hard on the crypto industry are overblown. Yes, people will lose money when the dogecoin market corrects, and that’s a huge pity. But that happens outside of cryptocurrencies, too. And U.S. regulators are no doubt aware that interfering with personal choice and financial freedom generally doesn’t end well.
As SEC Commissioner Hester Peirce said in a recent appearance on CoinDesk TV, “If [investors] are just having fun, they can do that as well, but don’t come complaining to the government if you lose your money.”
A mainstream marriage
Read More: Why Bitcoin’s Taproot Upgrade Matters