Lightning Labs introduces Taproot Assets, a protocol to map tokens on the Bitcoin blockchain and Lightning Network. The concept is elegant and sophisticated. But is that enough to become a game changer?
Recently, the developers at Lightning Labs released the “Taproot Assets”. This software allows tokens to be added to the Bitcoin blockchain via a Taproot transaction.
This, writes Ryan Gentry of Lightning Labs, is “the dawn of a new era for Bitcoin.” With the software, developers have all the tools to “make Bitcoin a multi-asset network,” realizing tokens in a way “that scales and stays true to Bitcoin’s core values.”
Therefore, the Lightning Labs team “believes that this new era of Bitcoin will see a myriad of global currencies as Taproot assets, and the entire world’s currencies exchanged in real time via Lightning.”
Although Lightning is the best payment system there is for Bitcoiners, it has a catch that many users repeatedly complain to the developers at Lightning Labs: You can only send Bitcoins with it, but not dollars, euros or other fiat currencies. “The demand for stablecoins is simply overwhelming,” explains Ryan, because they “are simply a better product than the local currencies in emerging and developing countries.”
People seeking protection from inflation in their own currency are fleeing not to Bitcoin, but to the dollar. By bringing the dollar to Bitcoin wallets, Taproot Assets hopes Lightning Labs will “accelerate the process of bringing Bitcoin to billions of people.” To “Bitoinize the dollar and global assets,” one must apparently first dollarize Bitcoin .
With the launch of Taproot Assets, Lightning Labs has brought the protocol to the Bitcoin blockchain. This allows the team to focus its energy on the second step: bringing Taproot assets to the Lightning Network. This is not yet possible, but the foundations have been laid and the plan and direction are clear.
Overall, there are some pretty big statements in Taproot Assets’ announcement. Are they justified? In order to form an opinion on this, we will first take a closer look at the technology of Taproot assets. The documentation is a good start.
New trees for the tokens
As with everything about Taproot and Lightning, the technology is brilliant and magically well-rounded, but a little… complex. You should at least have a basic understanding of what a hash tree is and how Taproot uses it.
The very short version is this: A hash tree is a special data structure that stores hashes of information as “leaves” and draws the “root” from them, the essence, so to speak. A Bitcoin block represents all the transactions it contains through a hash tree, and the root proves this.
Taproot now puts a hash tree into an address. More precisely: not the hash tree itself, but its root. This makes it possible to connect almost any operations and information with an address, such as images with the ordinals inscriptions or arithmetic operations with BitVM. Taproot Assets now claims to also include “assets”, i.e. tokens of all kinds, in the hash trees.
The hash tree becomes a kind of external, off-chain database in which the leaves display the data on the assets: both the entire amount of tokens and their names, as well as their owners. Only the root ends up on the blockchain, but this and some external information exchanged offchain is enough to prove that you are the owner of an asset.
However, Taproot Assets introduces two other technologies that are closely related to the hash tree. The “Sparse Merkle Tree” makes it possible to prove that certain data does not exist in a hash tree, and the “Merkle Sum Tree” makes it possible to efficiently check whether a quantity in the leaves of a hash tree – such as the entire number of tokens – has remained unchanged. Taproot Assets combines these two concepts into a “Sparse Merkle Sum Tree” and weaves its root into the Taproot address. This way you can prove that 1. someone deleted a credit, and 2. the entire amount of assets remained unchangeable.
Only through this “Sparse Merkle Sum Tree” do the transactions that send tokens via the actual hash tree become reliable.
The comparison with the ERC20 token standard
A comparison with Ethereum’s token system, the ERC20 standard, may help: With Ethereum, a smart contract on the blockchain maintains a completely transparent database with all owners and transfers of tokens. All information is onchain, you just have to access the smart contract to see if you own tokens.
With Taproot Assets, however, this database is managed offchain as a hash tree and “Sparse Merkle Sum Tree”. Only the roots of these trees end up on the blockchain itself, through which the correctness of specific database entries (“leaves”) can be proven and checked.
The concept is impressive. When you exchange tokens, for example dollars, the sender forms an onchain transaction that looks like a normal transaction. At the same time, it gives the sender some data through which it recognizes that it has received something and which it can verify onchain. Together with Lightning and BitVM, a vision of a wide and diverse offchain network that enjoys the security of Bitcoin via onchain anchors emerges.
Taproot Assets should actually scale better than ERC20 tokens and be more private. Ultimately, much less data ends up on the blockchain. One disadvantage, however, is that the implementation is considerably more complex.
Not a small challenge for wallets and users
While an Ethereum token is visible and usable on the blockchain from the moment it is minted, issuing a Taproot asset initially leaves only a Bitcoin address that looks like any other (Taproot) address. Only when the publisher shares the information about the asset can others do something with it.
This is no small challenge for wallets. You must first learn to handle the assets: you must generate a second, special Taproot asset key, be able to obtain, store, secure the data about the assets and use Spare Merkle Sum Trees technology to verify.
To receive Taproot assets, users must create a special Taproot asset address. In order to then transfer them further, you have to change the leaves in the hash tree accordingly with a transaction and then send them offchain to the recipient so that he can check them onchain. The wallets still have to learn all of this.
The data exchange that is necessary for all of this can be done either P2P, which has the well-known disadvantage that the sender and receiver have to be online at the same time. Lightning Labs also provides so-called “universe” servers that store and pass on the data relevant to Taproot assets. The Universe servers also allow Taproot assets to be sent asynchronously. They can also help recover assets if you have lost the hash trees but still have the key to the address.
The protocol wars have already been decided
Is your head spinning? If so, you are not alone. Taproot assets are both technically and practically complex. The concept itself is very elegant, and the lack of transparency and off-chain processing of data may be beneficial for privacy and scalability. But they place an enormous burden on wallets and users. Integration with Lightning – the stated goal of Taproot Assets – is likely to increase this complexity even further.
This architecture alone raises doubts as to whether it will really happen as Lightning Labs describes it, namely a kind of blitzkrieg-like tokenization of stablecoins and fiat currencies on Bitcoin. This would be conceivable if Taproot Assets were the first protocol for tokens.
But with Colored Coins and Masterparty, there are already old methods of putting tokens on Bitcoin, and with the BRC-20 tokens, a relatively current protocol uses Taproot to map assets on the Bitcoin blockchain. The standard for tokenization has long been the ERC20 protocol on Ethereum, which has also spread to the many other EVM-capable blockchains via compatible protocols.
The protocol wars of tokenization have already been decided. Scalability is not a problem thanks to various EVM blockchains and rollups. With developers, investors, startups, DAOs, decentralized finance and more, the ERC20 tokens have accumulated such a massive network effect that you have to have massive advantages in play to even think about having a chance at ERC20 dominance break.
Do Taproot Assets Have These Benefits? A strong point is likely to be the higher level of privacy. This could be enough to make Bitcoin the new home of a sub-segment of the token economy in the long term. However, the major challenges in the user experience and the extreme conceptual differences make it more than unlikely that Taproot Assets will be able to account for a significant portion of the token activity. The protocol war is long over, and Taproot Assets will not reignite it.