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The first bitcoin upgrade in four years has gone live, called the Taproot upgrade. This update means greater transaction privacy and efficiency – and crucially, it will unlock the potential for smart contracts, which can be used to eliminate middlemen from transactions

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A big part of bitcoin’s makeover has to do with digital signatures, which are like the fingerprint an individual leaves on every transaction.

At the meantime, the cryptocurrency uses something called the “Elliptic Curve Digital Signature Algorithm,” which creates a signature from the private key that controls a bitcoin wallet, and ensures that bitcoin can only be spent by the rightful owner.

Taproot will add something known as Schnorr signatures, which essentially makes multi-signature transactions unreadable, according to bitcoin miner Alejandro De La Torre.

In practice, that means greater privacy, because your keys won’t have as much exposure on the chain. “You can kind of hide who you are a little bit better, which is good,” said bitcoin mining engineer Brandon Arvanaghi, who now runs Meow, a company that enables corporate treasury participation in crypto markets.

“The most important thing for Taproot is…smart contracts,” said Fred Thiel, CEO of cryptocurrency mining specialist Marathon Digital Holdings. “It’s already the primary driver of innovation on the ethereum network. Smart contracts essentially give you the opportunity to really build applications and businesses on the blockchain.”

As more programmers build smart contracts on top of bitcoin’s blockchain, bitcoin could become more of a player in the world of DeFi, or decentralized finance, a term used to describe financial applications designed to cut out the middleman.

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