The 2o23 bull market has led to a sharp spike in network activity on Bitcoins [BTC] chain. The number of daily transactions and unique active addresses has grown steadily over the past four months, with May recording record-breaking traffic.
While the trend started hitting NFTs that had come out on top 10 million inscriptions during the press, the recent frenzy has been driven by the massive minting and trading of BRC-20 tokens. Interestingly, the technology powering the minting of both fungible and non-fungible tokens was Ordinals powered by the Taproot protocol launched in November 2021.
Let’s get to the heart of the matter
The Taproot Upgrade, which has been heralded as the long-awaited solution to many of Bitcoin’s conventional problems, is finally starting to pay off. Taproot, one of the major upgrades made in recent years, aims to improve the privacy, scalability, and usability of the first-generation blockchain network.
First and foremost, the Taproot upgrade batches and validates multiple signatures and transactions together, rather than individually. Before Taproot, transaction verification was slow because each digital signature was validated against a public key. However, under the new system, for transactions requiring signatures from multiple parties, signatures would be clubbed together when one signature is entered and then sent to the recipient. This would result in less demand for block space and speed up operations.
Aside from scaling up the network, this process also resolves Bitcoin’s privacy issues to a great extent. Under the conventional system, it is easier to differentiate between the different types of transactions supported on the network. For example, complex transactions involving multi-signature transactions would look different than a simple transaction where one BTC is sent from one wallet to another, due to minor technicalities embedded in each transaction.
Because of Taproot’s cryptography, all these different transactions look exactly the same, giving users more control over their transaction history.
In addition, the Taproot upgrade is driving the deployment of smart contracts on the Bitcoin network, a space historically dominated by networks like Ethereum. [ETH]Cardano [ADA] and Solana [SOL]. Smart contracts help unlock one of the most powerful use cases for blockchain technology: Decentralized Finance (DeFi).
While Bitcoin has always had smart contract capabilities, limitations of scale limited its wider adoption. With the concerns largely addressed by Taproot, the vision is beginning to materialize.
Taproot is driving demand for Bitcoin
Until 2023, Bitcoin’s reputation was limited to a peer-to-peer (P2P) payment network with not much practical use beyond handling on-chain transactions. However, with the Taproot upgrade, it has begun to position itself like other conventional layer-1 blockchains, allowing for on-chain smart contract deployment and minting of NFTs and other fungible tokens.
A look at Glassnode’s adoption and usage stats revealed that 60% of all transactions on Bitcoin used Taproot on May 1, the day the total number of transactions reached its all-time high (ATH). Acceptance surged further on May 7, accounting for a massive 75% share of all transactions.
Source: Glassnode
Private investors are jumping in
A major criticism of Bitcoin since its inception has been its lack of usability, which has discouraged individual investors from actively participating in the network. While features such as ‘store of value’ and ‘hedging against uncertainty’ have attracted institutional investors, a technology only really becomes mainstream when it is widely adopted. However, Taproot has brought a glimmer of hope.
Since the start of 2023, the percentage of retail investors holding less than 10 BTC has grown significantly, in stark contrast to the stagnation during the bear market phase of 2022. This is a strong indicator of Bitcoin’s growing mainstream adoption. .
Source: Glassnode
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Bitcoin for NFTs
A year ago, no one would have imagined that Bitcoin could become a preferred network for facilitating NFT transactions. However, the changes made by Taproot have catapulted it to become the second largest blockchain for facilitating NFT transactions, eclipsing biggies like Solana and Polygon and trailing only Ethereum.
In the past month, transactions worth $191 million were handled on-chain, representing a whopping 438% growth, according to CryptoSlam.
Source: CryptoSlam
Despite widespread support, Taproot adoption is expected to grow slowly over time. However, if it continues to open new use cases for Bitcoin, the cryptocurrency environment could undergo a revolutionary transformation.