Taproot Assets Protocol (ex-Taro): the key to Bitcoin's evolution?

Taproot Assets Protocol represents a major opportunity to enhance Bitcoin (BTC) through decentralized features and compatibility with the Lightning Network. Discover how this protocol opens up new perspectives for the Bitcoin blockchain.

25th June 2023
5 minutes to read
This article is a translation of an article from Cryptoast.fr, which you can find here.

What is the Taproot Assets Protocol? How does it work?

Although it has been overshadowed by BRC-20 and the Ordinals protocol, the Taproot Assets Protocol (formerly known as Taro) could be one of the best development options for the Bitcoin network.

The creator of BRC-20, DomoData on Twitter, himself describes the Taproot Assets protocol as the "best solution" for issuing assets on the Bitcoin blockchain.

Developed by Lightning Labs, this protocol pushes the boundaries of what is possible on the Bitcoin chain and opens up numerous new use cases that could compete with many other infrastructure blockchains.

Could Bitcoin finally be the true Ethereum killer? The Taproot Assets Protocol allows for the issuance and transfer of assets on the Bitcoin blockchain while leveraging the improvements offered by the Taproot update, with the goal of minimizing its on-chain footprint.

This latest update enables the integration of data directly into a transaction. The optimization provided by Taproot allows for more confidential and scalable issuance and exchange of assets on Bitcoin.

Indeed, Taproot asset transactions are conducted off-chain, compressed into a Merkle tree, and can then be published on-chain.

The protocol enables its assets to be transferred via the Lightning Network, Bitcoin's scalability solution. Thus, in a single Taproot transaction, it is possible to create an asset, trade it, and also open Lightning channels.

The protocol allows for the opening of two Lightning channels: one in BTC and one in a Taproot asset, enabling atomic swaps, which means instantaneous exchange between the two assets.

Note that a Taproot Assets protocol asset can also be a unique and non-fungible asset, commonly known as an NFT.

Furthermore, the protocol introduces a feature called "Universes." They allow users to download and verify issuance and transaction data of Taproot assets, increasing protocol decentralization and improving the user experience, particularly for mobile users or those with unstable internet connections.

Thus, creating an asset on Bitcoin with Taproot Assets would be as easy as on Ethereum, and their exchanges would be even faster than on any other blockchain, thanks to Atomic Swaps. In addition to using applications and participating in their governance, opening Lightning channels with these new assets would offer a new way to actively engage in a project.
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Possibilities and advantages offered by the Taproot Assets Protocol

With the Taproot Assets Protocol, Bitcoin users will no longer be limited to holding only BTC in their wallets. This protocol opens up a world of possibilities, where many projects could emerge and even migrate to Bitcoin. NFTs, stablecoins, metaverses, decentralized finance (DeFi) - the only limit is developers' imagination.

In the future, it could even be envisioned that these Taproot Assets are integrated with other second-layer solutions of Bitcoin, such as RGB, creating an ecosystem similar to Ethereum but benefiting from the robustness of Bitcoin.

Taproot Assets could become a key piece in Bitcoin adoption, allowing users to easily hold Bitcoin and their local currency in their wallets, benefiting from the technical features of the network without being exposed to BTC volatility.

Indeed, Taproot Assets could revolutionize the micro-payments industry, enabling the near-instantaneous and extremely low-cost exchange of US dollars, euros, and other fiat currencies.
Illustration of an L-USD / L-EUR exchange on Bitcoin between 2 users of the Taproot Assets Protocol
One could imagine the Salvadoran government creating a dollar-pegged stablecoin backed by its reserves and implementing it in the Chivo wallet, thereby enabling its citizens to exchange their satoshis and dollars via the Lightning Network.

If Taproot Assets were to be more widely used, it would increase the usage of the Lightning Network and make routing more profitable. As a reminder, the Lightning Network works by opening a channel between two individuals who can exchange satoshis (or other currencies through Taproot Assets). If you want to exchange with someone who is not directly connected to you, then your transaction will go through other channels, taking the most optimized path. The more your channels are used, the more fees they collect, and the more profitable they become.

The Lightning Network is renowned for its speed in executing transactions and low cost. Scalability in this Bitcoin second layer does not depend on block confirmation speed (there are no blocks), but rather, as mentioned earlier, on the availability of its channels. Transfers are nearly instant on the Lightning Network, defying other blockchains. The number of transactions per second is not important here. The more Lightning Network nodes and channels there are, the more scalable and decentralized Bitcoin becomes, questioning beliefs about the blockchain trilemma.

The decentralization of the Lightning Network primarily depends on the decentralization of Bitcoin itself since channel opening and closing happen directly on-chain. Furthermore, its decentralization depends on the distribution of its nodes: the more nodes there are, the more performant and decentralized the network becomes, challenging beliefs about the blockchain trilemma.

By relying on the Lightning Network, Taproot Assets would be the most decentralized and scalable assets in the market.

The creation of such infrastructure takes a lot of time, especially on Bitcoin, between security audits and adding necessary features for optimal functionality from the start. Lightning Labs has a lot of work ahead in developing the Taproot Assets protocol.

The development of the Taproot Assets Protocol is progressing rapidly, and you can already play with the protocol on the testnet using the Tiramisu Wallet. Lightning Labs is even reportedly working on integrating zero-knowledge proofs into the protocol to further enhance its privacy.

Conclusion on the Bitcoin Taproot Assets Protocol

So, is the Taproot Assets Protocol the best option for enhancing Bitcoin? In many ways, it seems so.

The protocol opens up a world of possibilities for Bitcoin that were previously reserved for other blockchains. It can energize activity on the Lightning Network, increase routing profitability, and make Bitcoin even more versatile and useful.

Ultimately, there is still a long way to go before Taproot Assets can rival Ethereum's ability to host assets.

One thing is certain: the Taproot Assets protocol can certainly mark a significant milestone in the democratization of Bitcoin and in the evolution of blockchain and cryptocurrencies more broadly.
Source : Lightning Labs