Can the Taro protocol alleviate congestion on the Bitcoin chain and enjoy low gas fees?

Author: veDAO Research Institute

Recently, due to the wealth effect of the ORDI token and the craze of BRC-20, there has been severe congestion on the Bitcoin chain, leading to a significant increase in Gas fees. As a result, the community's attention has focused on the Lightning Network, which aims to reduce Bitcoin transaction costs, hoping that related protocols can quickly resolve Bitcoin's current predicament.

Taro is a protocol that can bring assets to the Bitcoin blockchain and open up new scenarios. It is considered scalable and has the potential to make Bitcoin a network that accommodates multiple assets, allowing users to leverage Bitcoin's reliability and enjoy low-fee instant global final settlement. So what exactly is Taro? How does it work? Does it solve Bitcoin's current challenges?

What is the Taro Protocol?

Taro is a new Taproot-supported protocol developed by Lightning Labs that allows users to create assets on the Bitcoin blockchain and send them via the Lightning Network for fast, high-volume transactions at minimal cost. It can be used to issue fungible assets (such as stablecoins) as well as non-fungible, unique tokens (such as NFTs or collectibles).

At its core, Taro leverages the security and stability of the Bitcoin network combined with the speed, scalability, and lower costs of Lightning. It aims to change the current situation where most digital assets are stored on other blockchains.

Technically, to enable fast and efficient retrieval and modification of private information or transaction data, and to prove legitimate protection/non-inflation, Taro relies on Bitcoin's latest upgrade, Taproot, to build a new tree structure (Merkle Trees), allowing developers to embed arbitrary asset metadata within existing outputs.

Merkle Trees, to be precise, are a combination of "Merkle Sum Trees" and "Sparse Merkle Trees." They are a data structure that can store a large amount of data while making it easy to prove that a certain piece of data exists within a tree, quickly verifying that the total quantity of assets remains unchanged and is still located in the same position as before. They have the following properties:

• Can accommodate a large number of assets.
• Allows users to prove that a certain asset is stored in a Merkle tree, and that the root of this Merkle tree is metadata of a Bitcoin transaction.
• Tamper-proof; once tampered with, the Merkle root value will change.
• Easy to verify the total amount without disclosing all information.
• Merging and splitting fungible Taro assets becomes possible as long as they do not affect the total supply.
• Users can prove that a certain asset is no longer stored in a Merkle tree and has been transferred. This is also known as "proof of non-membership."

Advantages of Taro

1. Fast Transactions, Low Fees

Taro uses the Lightning Network to achieve higher transaction speeds, better scalability, and lower fees for fungible Taro assets (such as stablecoins). The Lightning Network is also known as Bitcoin's Layer 2 solution, and its core idea is to use off-chain scaling, conducting user transactions off-chain, with only the final transaction results confirmed on the Bitcoin main chain, thereby improving the transaction efficiency of the Bitcoin network and allowing users to complete payments at lower costs and faster speeds. To route a payment priced in a certain Taro asset, only the first and last channels of the entire payment path need to recognize the Taro asset; the Lightning Network itself does not need to change.

2. High Privacy Standards

Taproot specifies the encoding strategy for Schnorr public keys and signatures. Schnorr signatures and key aggregation make multi-signature contracts appear the same as single-signature contracts, providing privacy for all Taproot users. Taproot makes it difficult to determine which transactions have Lightning channels because the Lightning Network relies on 2-of-2 multi-signatures. By merging MAST, Taproot also brings significant privacy advantages; when spending Bitcoin from a Taproot output, only the script used needs to be disclosed, without needing to reveal other potential scripts that may have unlocked the Bitcoin.

3. Storage Space Savings

Most Taproot (P2TR) outputs occupy less blockchain space than P2PKH outputs but slightly more than P2WPKH outputs. This is mainly because P2TR locks Bitcoin directly to the public key rather than the hash of the public key. Since public keys require more storage space than public key hashes, the cost of transferring to Taproot outputs is slightly higher. The public key in scriptPubKey does not need to be included in the Script Witness, significantly reducing the cost of spending Taproot outputs.

Team and Funding Situation

The core team of TARO consists of experienced technical experts who have participated in projects such as Bitshares and Ethereum, and they place great emphasis on user experience and design, which also allows them to use open-source software on the platform. Since its establishment in 2016, Lightning Labs has been dedicated to developing software to support Bitcoin's second-layer Lightning Network.

In March 2023, the project faced a temporary restraining order, as blockchain startup Tari Labs filed a lawsuit against Lightning Labs last year, accusing it of copyright infringement. It claimed that its Taro protocol and platform were similar to its trademark name and provided similar services. Subsequently, the California judiciary ruled that Tari Labs won a temporary restraining order against Bitcoin developer Lighting Labs regarding the Taro protocol. This order restricts Lightning Labs from making external updates to its Taro protocol and announcing the next phase of the protocol. The restraining order will remain in effect until a hearing is held regarding any dissolution of the temporary restraining order.

Before being constrained by the restraining order, the last major update was in September 2022, when the Taro protocol launched an open-source Alpha version based on the Taproot protocol, which could be used to issue assets that can be transferred via Bitcoin. However, the Lightning Network component—used for instant, high-capacity, low-fee transactions—had not yet been launched, and the Taro protocol was still in the early development stage.

Opportunities and Risks

First of all, Taro is a very attractive Bitcoin proposal, especially in the current context of severe congestion on the Bitcoin network, with great potential to promote the activity of the Lightning Network and the development speed of off-chain payment network infrastructure.

However, it requires initiating on-chain transactions to transfer ownership of non-fungible and fungible assets. Technically, it is possible to establish a Lightning Network using a fungible token (such as a stablecoin) on Taro. But for many users, the scenarios they envision for NFTs cannot be realized; for example, popular games involving NFTs may execute thousands or even millions of transactions every second. If every transaction requires initiating an on-chain Bitcoin transaction, it would be impossible to scale, leading to only a few users being able to play the game while paying very high fees. Additionally, the Taro project team being constrained by the restraining order raises concerns about whether the protocol can overcome these limitations and enter the next update version to alleviate congestion on the Bitcoin network.

Overall, Taro, while enjoying the rock-solid security of the Bitcoin main blockchain and the privacy and efficiency brought by the latest Taproot upgrade, will enable stablecoins, NFTs, and other Bitcoin-based assets to be issued on layered protocols, avoiding unnecessary data transmission burdens on the network. By transferring Taro tools to the Lightning Network, users can benefit from enhanced speed and scalability of second-layer payment solutions.

Given the current strong market demand, Lightning Labs is also working hard to address the current issues with the Taro protocol. We do not know for certain whether and when it will truly be implemented. However, if it can be successfully realized, it has great potential and strength to promote the activity and adoption of the Lightning Network, helping users transact quickly and smoothly on the Bitcoin network. Please stay tuned. If you are interested in the in-depth technology behind the Taro protocol or other aspects, the following links can quickly take you there:
Official Twitter: https://twitter.com/lightning
White Paper: https://docs.lightning.engineering/the-lightning-network/taro
Github: https://github.com/lightninglabs/taro