Introduction
A new development on Bitcoin, known as Taro, allows for issuing of digital assets on the blockchain that can be transferred over the Lightning Network for instant, high volume, low fee transactions. These assets can be stablecoins, fiat currencies and non-fungible tokens.
This is a major milestone and a game changer, as this gives users an ability to use any type of asset on the Bitcoin blockchain, transfer them inexpensively and censorship-free 24/7, all while the network assures total decentralization and user-controlled privacy to the highest degree of security.
Bitcoin's blockchain has an easily auditable supply and a global network that is available to anybody at any time and has had 100% uptime since 2013.
Below we look into what technologies the Taro protocol uses to address these desired properties.
What is Taro?
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Early in April 2022, Lightning Labs unveiled Taro, a new protocol proposal for Bitcoin and the Lightning Network that sought to expand the network's use cases. The company has released a set of draft Bitcoin Improvement Proposals (BIP) and was seeking community comments and feedback on the proposed design.
Taro (Taproot Asset Representation Overlay) is a protocol that allows users to issue digital assets on the Bitcoin's blockchain. These digital assets can be fungible currencies like stablecoins or non-fungible, one-of-a-kind tokens like NFTs or collectibles. Currently, such assets are generally stored on other blockchains due to minimal transaction fees, speed, and scalability, but Taro has the potential to change that.
How Does Taro Work?
Taro seeks to enable the issuance of assets and collectibles, which are the protocol’s form of non-fungible assets, on Bitcoin as well as their transfer on Lightning Network (Bitcoin's scaling solution).
Taro leverages Taproot, Bitcoin’s latest major upgrade that went live in 2021, to enable the issuance of assets in a private and secure manner without bloating the Bitcoin blockchain. Taro does not require a separate blockchain nor does it rely on adding data directly on the main chain.
Taro makes use of the new Taproot scripting behavior to allow developers to embed arbitrary asset metadata within an existing output.
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Taro adds assets to Bitcoin via the Taproot script tree's "leaves," since each leaf in the tree is independent and can be selectively revealed, allowing for structured commitment. The proposed protocol can function as a layer built on top of Bitcoin by including information about those assets (known as metadata) in the Taproot script tree, allowing Taro asset transactions to look like regular Bitcoin transactions (as only the Taproot output is revealed on chain), while still enabling proofs of asset movement across the transaction graph.
An on-chain Bitcoin transaction that includes the hash of (commits to) certain metadata in a Taproot output creates a Taro asset. Assigning the asset to the issuer's private key, Taro then publishes the transaction to the network. The freshly generated unspent transaction output (UTXO) then serves as the asset's genesis point and unique identity.
One transaction on the blockchain can represent millions of transactions since a hash can represent an unlimited amount of data. The same is true for the transfer of Taro assets. Like any other Bitcoin transaction, a Taro asset may be transferred through the Bitcoin network in a transaction and with the Lightning integration, the technology will enjoy the second-layer network’s instant transfers for sending and receiving assets cheaply and effectively.
What Makes Taro Special?
Payment networks have historically struggled with a bootstrapping issue. When a new asset is established, a whole new payment network must be built to meet the payment demand for that asset. Taro allows a payment-routing paradigm in which the Lightning Network can manage channels with any asset while also finding routes between assets.
Taro, in essence, makes Bitcoin and Bitcoin's Lightning Network multi-asset networks, allowing users to enjoy instant, global, and final settlement for low fees while maintaining the stability of their preferred currency. Users will be able to open up Taro channels that plug in at the edges and interoperate with the existing Bitcoin channels that make up the Lightning Network today.
It has to be noted that Taro is not the first project to attempt to enable creation of different assets on top of Bitcoin, but it's the first to leverage Bitcoin's Taproot upgrade in order to make the implementation more efficient and scalable. RGB protocol is another project attempting to achieve similar objectives.
Stablecoins on Taro
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Taro's recently released alpha version will enable the creation of peer-to-peer Bitcoin and Lightning-native stablecoins. It will enable wallet developers to essentially add stablecoin assets to the Lightning Network by allowing users to have a fiat-denominated balance as well as a BTC-denominated balance in the same wallet. This will give users the ability to be provided with stablecoin or fiat exposure on a Bitcoin lightning native way.
Bitcoinizing The Dollar
The release is the first step toward Bitcoinizing the dollar, the world's reserve currency, by issuing a stablecoin dollar asset on the Bitcoin blockchain, allowing users to transact digital dollars globally, instantly settled, low-fee, peer-to-peer on the Lightning Network without financial intermediaries.
Taro will let payment apps and Neobanks all around the world, like Strike, Paxful, Bitnob, Bottlepay, and Ibex, to provide their users with Lightning-native USD stablecoins. This will address the demands of developing market customers worldwide who want access to safe, censorship-free digital dollars. This is especially beneficial to users from Latin America and West Africa, as it would expand financial access for their communities.
Users Set Exchange Rates
docs.lightning.engineering
By integrating with Taro, Bob and Yana have turned their Lightning nodes into “edge nodes” which will now process an instantaneous conversion from L-USD or L-EUR into BTC or vice versa, for a small fee. Prior to this, only centralized exchanges could offer this experience to users.
The Taro protocol itself gives integrators optionality with regard to how to handle exchange rates. Each peer in a channel performing swaps is responsible for determining their own exchange rate. They might use reference rates from liquid exchanges, or determine their own. It is important to note that when receiving a payment the recipient generates the invoice themselves, thus ensuring that the recipient receives the proper amount denominated in their desired asset.
The Taro protocol does not regulate or set rates, but only provides for the mechanisms of a functional market with low technical barriers to entry and the tools that allow for automated, atomic and instant forwards.
NFTs on Taro
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Before Taro, it was impossible to create non-fungible tokens (NFTs) on Bitcoin. NFTs are one-of-a-kind digital assets that are recorded in a blockchain and are used to validate authenticity and ownership, and can be transferred or sold by the owner. They can be created by anybody and require no coding skills.
Although most common use case for NFTs has been digital art, NFTs can be any digital file, including audio, video, and other types of files. For example, a tokenized identity in the form of an NFT with on-chain data could be a digital version of your driver's license, degree, or passport that is registered on a blockchain and configured to be non-tradable.
A collectible, or any other type of a non-fungible asset of value or importance, will have a unique identifier that establishes a claim on that asset at the Bitcoin chain level making it impossible to counterfeit ownership.
When Will Taro Be Fully Implemented?
The first version of the Taro open-source software, which enables creating, sending, and receiving assets on the Bitcoin network, was published by Lightning Labs on September 28th.
With the alpha release of Taro daemon, developers can now issue tokens on testnet, an alternative Bitcoin blockchain designed for open testing. It allows developers to test applications with testnet coins instead of actual BTC. Only after thorough testing and bug fixes can the projects go live on the mainnet.
Lightning Labs stated that Lightning Network integration, a key feature of Taro for transferring and receiving assets instantaneously, will be enabled in a future development phase. Taproot channels must first be merged into the company's Lighting implementation (LND), which is currently under development.
The company stated that in the coming months, more enhanced features will be added to the Taro daemon including "universe functionality", which will allow users and asset issuers to provide proofs about asset provenance, supply issuance, and more easily interact with Taro asset data.
Summary
Taro intends to leverage Bitcoin's most recent soft fork upgrade to integrate assets with real-world applications, such as US dollar stablecoins, onto the peer-to-peer digital currency stack. If successful and widely adopted by the users around the world, Taro will decentralize the global FX market, and Bitcoin will render “cross-border” payments obsolete.
Furthermore, by utilizing Bitcoin and Lightning as its rails, Taro could establish an interoperable ecosystem of assets that can combine distinct use cases without impacting the parties who may not care about such assets. If Taro protocol becomes widely adopted it will strengthen Bitcoin's network effect by raising the fee payment to miners and ramp up BTC liquidity on the Lightning Network.
The ultimate objective is for Bitcoin to serve as the underlying global monetary network, supported by open protocols and Taro is just the beginning.
DISCLAIMER: The information contained in this article is for educational purposes only and does not constitute any form of advice or recommendation by Wheatstones, and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.