A year after Taproot, the Bitcoin community is working to unleash its DeFi potential

Taproot support across the industry is still crawling one year after the Bitcoin soft fork, indicating strong potential for innovation and wider adoption of Web3 solutions that can be unlocked through the world’s largest cryptocurrency, sources told Cointelegraph.

“Since early on, Satoshi predicted that layers built on top of the Bitcoin blockchain would enable Bitcoin to move beyond just being sound money by adding programmability, making Bitcoin the optimal framework for building out the Web3 features,” noted Alex Miller, CEO of Web3 developer platform Hiro.

The Taproot upgrade took place in November 2021 and laid the foundation for accelerating decentralized financial services through the Bitcoin (BTC) network. It enables more efficient validation of multi-signature scripts, which addresses privacy concerns, and improves block storage by reducing the size of complex transactions occurring on the network.

The changes were long-awaited in the industry, as many Bitcoin holders do not spend their coins on decentralized finance (DeFi) applications “because it involves the cumbersome task of wrapping it using a bridge so that it can be processed by smart contracts on another blockchain that Ethereum,” commented Dominic Williams, founder and chief scientist at DFINITY, the foundation behind the Internet Computer blockchain, which is one of the companies working to unlock Bitcoin’s potential for DeFi.

On December 5, Internet Computer announced its mainnet integration with the Bitcoin network, acting as a Layer-2 where smart contracts can hold, send and receive BTC natively without the need for third parties or blockchain bridges, which was one of the targets of hackers in 2022 when billions of dollars were drained. According to the company, almost all DeFi applications that build on Internet Computer’s blockchain plan to incorporate Bitcoin because of the liquidity it provides.

Related: The future of smart contract adoption for enterprises

Through Bitcoin smart contract features, users willing to participate in DeFi can send their coins to Bitcoin’s smart contract address, and withdraw the coins directly from their wallet. “Soon you’ll be able to send a simple chat message, such as “Happy birthday! Here’s 100,000 satoshis!” using a fully on-chain Web3 service like Open Chat,” Williams noted.

Enabling Web3 on the Bitcoin blockchain also means more trust in cryptocurrencies and DeFi applications, Alex Miller stated:

“The recent implosions in centralized entities like FTX will only serve to continue to push forward interest in truly decentralized finance – where transactions are algorithmically secured at the consensus level and users don’t have to rely on third-party custodians to ‘do the right things’ with the coins theirs. And given its history of pioneering decentralized trust, Bitcoin is the most logical place for people to conduct DeFi transactions.”

Decentralized autonomous organizations (DAOs) can also benefit from Bitcoin’s smart contract functionality, according to Miller, but DeFi will likely account for most of the growth. “People want to know that the blockchain they’re investing time and money into will be around in a couple of years, Bitcoin has a proven track record here. In bear markets, developers and investors alike look for safer assets to concentrate on, and Bitcoin will always have a unique distinction here . Looking ahead to 2023, I think DeFi will be the biggest growth point in our ecosystem.”

Bitcoin has been around for almost 14 years, and has experienced several hard and soft forks driven by the crypto community. Upcoming upgrades may include Covenants, which are described in Bitcoin Improvement Proposal (BIP) 119 and will limit the address where a user can send their money in a list.