In Bitcoin’s near 13 years of existence, the Bitcoin network has undergone numerous community-driven hard and soft forks. The recent Taproot upgrade aimed to allow exploring off-chain capabilities, as to not put too much burden on the Bitcoin nodes of the network. Taproot soft fork introduces the concept of the so-called Merkelized Abstract Syntax Tree (MAST) to improve the scripting capabilities and privacy of the Bitcoin network. The Bitcoin (BTC) network successfully activated the Taproot soft fork following a 90% lock-in consensus from miners and mining pools between blocks 709,488 and 709,632. Although the milestone signified the first major upgrade for Bitcoin since August 2017, which saw the launch of Bitcoin’s leading layer-two solution, the Lightning Network and Segregated Witness (SegWit), the market reaction was rather perversive, with Bitcoin exchange rate to USD reversing its gains and briefly plunging below $60K mark. Although we have no doubt these two events are interlinked, the main question remains what causes such a counterintuitive reaction for at least the second time in Bitcoin history.
As we mentioned, the Taproot upgrade aimed to improve the scripting capabilities and privacy of the Bitcoin network. To do this, the soft fork introduces the concept of “Merkelized” Abstract Syntax Tree (MAST). MAST can help make smart contracts more efficient and private by only revealing the relevant parts of the contract when spending. As of Nov. 11, Bitcoin’s network capacity prior to Taproot soft fork was at an all-time high of 3,220 BTC, nearly worth $210 million.
While the Taproot upgrade is yet to prove its worth in time to come, the Lightning Network continues to attain new heights. On Sept. 28, the Lightning Network witnessed a 160% increase in the number of nodes in the span of 12 months in addition to seeing a jump of 170% in the number of channels since January 2021.
This year to date, the liquidity of BTC available on the Lightning Network has grown by 42%. In addition, there are currently over 12,000 nodes serving 45,000 payment channels. These upbeat numbers are expected to only rise with the adoption of cryptocurrency as any day-to-day form of payment.
Back in July 21, 2017, Bitcoin miners locked in a software upgrade referred to as Bitcoin Improvement Proposal (BIP) 91, meaning that the Segregated Witness upgrade activated at block 477,120. SegWit is the process by which the block size limit on a blockchain is increased by removing signature data from bitcoin transactions (when certain parts of a transaction are removed, this frees up space or capacity to add more transactions to the chain).
In the first week of October, the proportion of network transactions using SegWit rose from 7% to 10%, indicating an increase in the use rate. As of February 2018, SegWit transactions exceeded 30%. However, a relatively small group of mostly China-based Bitcoin miners back then were unhappy with Bitcoin’s proposed SegWit improvement plans, pushed forward alternative plans for a split which created Bitcoin Cash.
The price of Bitcoin back then declined as well. So do these two episodes represent just a coincidence, and why do soft forks – specifically, in distinction to hard forks – tend to result in temporary Bitcoin price corrections? Bitcoin forks are new forms of Bitcoin that result from different perspectives on transaction history. Soft forks do not result in a new currency, while hard forks are deeper changes within the blockchain and lead to new types of blockchain currency.
It makes sense to compare Bitcoin fork actions with some of the most acclaimed stock splits. Thus, the Tesla 5-for-1 stock split back in August 2020 was initially viewed as controversial by some shareholders, but ultimately benefited both the company and wider investor circles. The electric car manufacturer split both its share price and ownership in five, having brought its previously sky-high share price of $2,230 down to a more accessible $446 on Aug. 31 that year. Indeed, the company has enjoyed increasing sales, increasing profitability, and increased attention for its forward-looking products, and there were little signs that demand could weaken soon, so making its shares more friendly to ordinary individuals was a smart decision.
Just like Bitcoin forks, Tesla share splits and SPOs (secondary public offering), first and foremost, greatly improved the company shares liquidity, whereas any ownership dilution impact was rather limited and secondary. Although initial market reaction happened to be muted at best, in the medium and long run, by creating higher liquidity, the assets greatly benefited from the actions. That ultimately boosted their per-unit prices and occupancies in various size investment portfolios.
Similarly here, various Bitcoin forks may create certain network ramifications thereby ostensibly interfering with the current holders’ interests. But what is most important is that the improving algorithm attracts more users over time thereby lifting demand for the coin and, hence, its price.
