This is an op-ed by Evan Price, a 15-year-old software engineer and privacy rights advocate.
Taro is a new protocol being developed at Lightning Labs that promises to enable the creation and transfer of digital assets on the Bitcoin blockchain and specifically on the Lightning Network. It is being hailed as a revolutionary step forward in cryptocurrency tokenization. I’m skeptical of any proposal to transfer non-bitcoin tokens to the bitcoin network, but bitcoin is a permissionless network and if Taro fans intend to build and deploy it, no one can stop them . This is the magic of Bitcoin: it is a true neutral arbiter. Bitcoin only enforces protocol rules; it does not pass judgment on how these rules are used.
Taro’s design is very clever. It hides a data structure called a sparse Merkle sum tree inside the Taproot script path, which itself is a Merkle tree that lives inside every Taproot address. It’s Merkle trees down there! However, I believe this design places a fundamental limit on the scale that can be achieved with any asset issued using the Taro protocol. The crux of the matter is that each time a Taro asset is issued or transferred, it must occur in a Bitcoin transaction that will ultimately be committed to the blockchain. Bitcoin’s block space is intentionally limited to minimize the resources needed to run a Bitcoin node. This keeps the network decentralized and is a fundamental pillar of the bitcoin security model. Block space must be scarce for bitcoin to remain secure.
I believe that any protocol that requires a bitcoin transaction to move another asset will be inherently limited by the block space market. We are currently in a period of consistently low fees, so these protocols should work well for now. But if the use of bitcoin expands to most of humanity, as I believe it will, this period of low cost will be over for good. As the fee market develops, the cost of bitcoin transactions will become higher and higher. When this happens, all other assets will be priced out of the Bitcoin blockchain. In the long run, performing monetary assets will be best served on a single-use blockchain, or even better, a non-blockchain database where fees will be lower and transactions will be more affordable.
Much of the hype around Taro centers around its use in Lightning Channels. I have many concerns about the complexity of this design, but let’s assume everything works as expected. This will scale the protocol beyond what is possible exclusively with on-chain transactions, but I don’t think it will reduce the total on-chain transactions for two reasons. First, Lightning is optimized for low value transactions. This is because the value of a Lightning transaction is limited by the amount of liquidity committed to the Lightning channels. On-chain bitcoin transactions have an unlimited maximum value and are generally a better choice for large wealth transfers. Second, moving small value transactions to Lightning will not reduce long-term congestion due to induced demand. People will consume the extra capacity until a new equilibrium is reached. This balance is determined by how much congestion people are willing to tolerate. On a blockchain, congestion equals fees. This phenomenon is not exclusive to Bitcoin, it applies to any blockchain that integrates with the Lightning Network like Litecoin or Blockstream’s Liquid sidechain.
If Taro is deployed and used, it will increase bitcoin fees. Paradoxically, this diminishes the usefulness of taro. This negative feedback loop will limit the scale that Taro’s assets can reach in the short term. In the long term, as people flee weak currencies for the safe haven of the strongest currency, bitcoin, the fee market will grow organically from the native use of bitcoin. At this point, the writing is on the wall for monetary assets issued on Taro.
NFTs are another use case for Taro. Additional note: Lightning Labs carefully avoids the term NFT in its official communications, but I’m having trouble finding another meaning for the phrase “unique and non-unique assets as well as collections”. I have my issues with NFTs, like many Bitcoiners, but their existence and use is undeniable; they are here to stay. NFTs may see some traction on Taro, but I’m not convinced Bitcoin is good for existing NFT use cases. Do you really need unstoppable, censorship-resistant conspicuous consumer displays? Either way, I think some NFTs may find a niche on Bitcoin using the Taro protocol. NFTs are designed to benefit from artificial scarcity, so I don’t think they will be susceptible to high prices caused by the growth of the fee market. It is likely that once they gain a foothold on the Bitcoin blockchain, they will become very difficult to dislodge, to the detriment of users of the Bitcoin asset.
I don’t want to give the impression that Taro is worthless. In fact, I think it could end up being a tool that supercharges Bitcoin and Lightning usage around the world, but not in the way that most maximalists dream of. The name is a subtle allusion to the purpose of the protocol: taro is a popular root vegetable and staple food in large swaths of Africa, Asia and the Pacific Islands. Stablecoins are the most widely used cryptocurrencies in the world. Stablecoins combine the speed and borderless nature of cryptocurrencies with the world’s most popular unit of account, the dollar. Many stablecoins are designed to work on a multitude of blockchains, and Taro seems poised to open the doors to using stablecoin on bitcoin. The increased reliability and security of bitcoin will only improve the value proposition of these coins. I think this will be a start-up phase in the transition from the old world currency, the dollar, to the new world currency: bitcoin. What’s not at all clear to me is how transporting stablecoins on bitcoin rails will inspire more of the world’s population to use the most reliable, decentralized, secure, and climate-resistant money. inflation ever invented.
Thanks to Ruben Somsen for introducing me to these ideas and helping me refine my argument.
This is a guest post by Evan Price. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
Comment here