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A whole year after Taproot, the Bitcoin community is now working to unlock DeFi's potential

In November 2021, the Taproot update was implemented, and it is the building block of the Bitcoin (BTC) network's decentralized financial services acceleration.

Photo by Michael Förtsch / Unsplash

Smart contracts on the Bitcoin network can potentially increase adoption and provide DeFi more liquidity.

Taproot's current status

One year after the Bitcoin soft fork, industry support for Taproot (1) is still at a crawl. This suggests that the world's largest cryptocurrency holds great promise for innovation and wider adoption of Web3 solutions. According to Alex Miller, CEO of Web3 developer platform Hiro,

"Satoshi anticipated that layers built on top of the Bitcoin blockchain would enable Bitcoin to transcend beyond just being sound money by adding programmability. This makes Bitcoin the optimum foundation to build out Web3 features."

In November 2021, the Taproot update was implemented, and it is the building block of the Bitcoin (BTC) network's decentralized financial services acceleration. It allows for more effective multi-signature script validation, which solves privacy concerns, and enhances block storage by minimizing the size of complicated network transactions.

What would these changes affect?

Dominic Williams, founder and chief scientist at DFINITY (2), the foundation behind the Internet Computer blockchain, one of the businesses working to unlock Bitcoin, said the changes were long overdue for the industry. Many Bitcoin holders do not use their coins on decentralized finance (DeFi) applications because it involves the cumbersome task of wrapping it using a bridge so that smart contracts on another blockchain, such as Ethereum, can process it.

On December 5, Internet Computer announced a mainnet integration (3). With the Bitcoin network acting as a Layer-2 where smart contracts may retain, transfer, and receive BTC natively without the need for intermediaries or blockchain bridges, one of the goals of hackers in 2022 when billions of dollars were siphoned off—this was one of the aims of hackers. The business claims that almost all DeFi applications built on the Internet Computer blockchain want to use Bitcoin because of its liquidity. Users who want to participate in DeFi can deposit their coins to the Bitcoin smart contract address and then easily withdraw them from their wallets thanks to the smart contract functionality for Bitcoin. According to Alex Miller, enabling Web3 on the Bitcoin blockchain will increase confidence in cryptocurrencies and DeFi applications.

The lessons which were learned

The recent failures of centralized entities like FTX will only increase interest in truly decentralized finance, where transactions are secured algorithmically at the consensus level, and users don't have to trust third-party custodians to "do the right things" with their coins. Given its history of establishing decentralized trust, Bitcoin is the most obvious platform for people to conduct DeFi transactions. Miller argues that decentralized autonomous organizations (DAOs) might also profit from Bitcoin's smart contract capabilities, but DeFi will likely be responsible for most of the growth.

People want to know if the blockchain they spend time and money on is secure. Into won't exist for a few years; Bitcoin has a successful track record in this area. Developers and investors seek safer assets to focus on during weak markets, and Bitcoin will always retain a special distinction in this regard. Believe DeFi will have the most growth in our ecosystem until 2023. The Covenants, outlined in Bitcoin Improvement Proposal (BIP) 119 (4) and would restrict in a list the address where a user may transmit their assets, may be one of the upcoming enhancements to the almost 14-year-old cryptocurrency.