Taro: A protocol for stablecoins and NFTs on Bitcoin and Lightning

Lightning Labs published a number of proposals for Taro, a new protocol for Bitcoin and Lightning that enables tokens such as stablecoins and NFTs. Taro uses Taproot’s rooted smart contracts for this.

These are several proposals that have been submitted to the community, but have not yet been submitted as Bitcoin Improvement Proposals (BIPs).

Taro, or Taproot Asset Representation Overlay, should become a protocol for digital assets – tokens – on the Bitcoin blockchain, which can also be sent via Lightning. This makes it possible to issue ‘normal’ tokens that are interchangeable ( fungible ), but also so-called ‘ non-fungible tokens ‘ (NFTs) that are unique.

Tap root

To make that possible, Taro uses the rooted smart contracts from Taproot, the upgrade that was activated on the Bitcoin network at the end of last year. Taproot offers the ability to add scripts to a UTXO in a way that doesn’t take up extra space and where the transaction looks like any other, but where the validity of the script’s spending terms and signatures are easy to verify.

Taproot uses a tree structure ( Merkelized Abstract Syntax Tree ) to assemble data, adding it up in a certain way so that only some kind of sum of the whole – the ‘root’ of the tree – needs to be verified. Details about the content of the tree structure are therefore unnecessary, which saves space, and are also not transparent.

Taro

In addition, Taro introduces a new data structure called Merkle Sum Sparse Merkle Tree (MS-SMT), which enables the creation, ownership and transfer of tokens. That is also a (slightly different) tree structure, which is hidden and maintained in the aforementioned Taproot tree structure. A kind of Taproot-in-Taproot, as Chief Technical Officer of Lightning Labs Olaoluwa Osuntokun described it to Bitcoinmagazine.com.

Since only the ‘root’ of the whole is verified, an infinite number of tokens can theoretically be linked to a UTXO, without putting an extra burden on the Bitcoin blockchain.

A new script layer is created, as it were. “It’s quite elegant because it allows these asset commitments to be separated from the actual script ,” Osuntokun explained. “Taproot, in this case, gives us the ability to logically differentiate between Bitcoin’s main scripting language and that of the asset layer.”

Stablecoins and NFTs

Lightning Labs seems particularly excited about Taro’s ability to issue stablecoins on the Bitcoin blockchain. These are tokens whose value is linked to, for example, the euro, the dollar or gold. Stablecoins play an important role in the online economy and are regularly used in bitcoin trading. Usually it concerns stablecoins on other blockchains, but with Taro Lightning Labs hopes to change that.

Opportunities for NFTs are also emerging. These are tokens that are unique and not interchangeable. Lightning Labs cites collectibles such as the old-fashioned baseball cards as an example, but the applications can also be broader: title deeds, diplomas, digital art, skins or other objects from games, digital identities, entrance tickets, and so on.

“Taro enables the transfer of assets such as stablecoins over the Bitcoin network, with Lightning’s instant, high volume, and low fees and fees that are dramatically lower than Visa ,” said Lightning Labs.

Development

To develop Taro and continue overall operations, Lightning Labs recently completed a funding round, raising $70 million.

It will probably be some time before we can use Taro. After feedback from the community about the proposals, an official BIP will first have to be submitted. This is followed by a period of careful analysis and an approval process. That will probably not take days or weeks, but rather months or years.

Incidentally, Taro is not the first project to enable token issuance on Bitcoin & Lightning. The RGB protocol, which has been in development for several years, offers similar possibilities.

Last year, the most recent upgrade of the Bitcoin protocol was activated: Taproot. You can read more about it in our previous articles. A deeper and more technical explanation of Taro can be found on Bitcoinmagazine.com.

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