Scaling problem for Lightning Labs Taro – Bitcoin Magazine
This is an opinion editorial by Evan Price, a software engineer of 15 years and advocate for privacy rights.
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 advance in cryptocurrency tokenization. I am skeptical of any proposal aimed at transferring non-Bitcoin tokens on the Bitcoin network, but Bitcoin is a permissionless network, and if Taro fans are set on building and deploying it, no one can stop them. This is the magic of Bitcoin: it is a truly neutral arbiter. Bitcoin only enforces the protocol rules; it does not judge how these rules are applied.
Taro’s design is very clever. It hides a data structure called a sparse Merkle sum tree inside the Taproot script path, which is itself a Merkle tree that lives inside each Taproot address. There are Merkle trees all the way down! However, I believe that this design places a fundamental limitation on the scale that can be achieved with any asset issued using the Taro protocol. The crux of the problem is that every time a Taro asset is issued or transferred, it must happen in a Bitcoin transaction that will eventually be committed to the blockchain. Bitcoin’s block space is intentionally limited to minimize the resources required to run a Bitcoin node. This keeps the network decentralized and is a fundamental pillar of the bitcoin security model. Blockspace 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 blockchain market. We are currently in a period of persistently low fees, so these protocols should work well for now. But if the use of bitcoin spreads to most of humanity, as I believe it will, this low-fee period will definitely be over. As the fee market grows, the cost of bitcoin transactions will become increasingly higher. When this happens all other assets will be priced out of the Bitcoin blockchain. In the long run, successful monetary assets will be better served by a single purpose blockchain, or even better, a non-blockchain database where fees will be lower and transactions will be less expensive.
Much of the hype surrounding Taro is focused on its use in Lightning channels. I have many concerns about the complexity involved in this design, but let’s assume everything works as intended. This will scale the protocol beyond what is possible with on-chain transactions alone, but I don’t think this will reduce total on-chain transactions for two reasons. First, Lightning is optimized for small value transactions. This is because the value of a Lightning transaction is limited by the amount of liquidity committed to Lightning channels. On-chain bitcoin transactions have an unlimited maximum value and are usually a better choice for large transfers of wealth. Second, moving small value transactions to Lightning will not reduce congestion in the long term due to induced demand. People will consume the additional capacity until a new equilibrium is reached. That equilibrium 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 such as Litecoin or Blockstream’s Liquid sidechain.
If Taro is distributed and used, it will increase bitcoin fees. Paradoxically, this reduces the usefulness of Taro. This negative feedback loop will limit the range that Taro assets can achieve in the short term. In the long term as people flee from weak safe haven currencies to the strongest currency, bitcoin, the fee market will grow organically from the natural use of bitcoin. At this point, the writing is on the wall for monetary assets issued on the Taro.
Another use for Taro is NFTs. Side note: Lightning Labs carefully avoids the term NFT in their official communications, but I’m struggling to find an alternative meaning for the phrase “unique and non-unique assets as well as collections.” I have my issues with NFTs, as do 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 that Bitcoin is good for existing NFT uses. Do you really need unstoppable censorship-resistant displays of conspicuous consumption? In any case, I think some NFTs can find a niche on Bitcoin using the Taro protocol. NFTs are designed to take advantage of artificial scarcity, so I don’t think they will be sensitive 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 be very difficult to remove, to the detriment of users of the Bitcoin asset.
I don’t mean 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 worldwide, just not in the way most maximalists dream of. The name is a subtle hint at the goal of the protocol: taro is a popular root vegetable and staple food across much of Africa, Asia and the Pacific Islands. Stablecoins are the most popularly used cryptocurrencies worldwide. Stablecoins combine the speed and limitless nature of cryptocurrencies with the most popular unit of account in the world, the dollar. Many stablecoins are designed to operate on a variety of blockchains, and Taro looks set to open the gates for stablecoin use on bitcoin. The increased reliability and security of bitcoin will only improve the value of these coins. I believe this will be a start-up phase in the transition from the old global currency, the dollar, to the new global currency: bitcoin. What is not clear to me is how carrying stablecoins over bitcoin rails will motivate more of the world’s population to use the most trustless, decentralized, secure and inflation-proof money 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. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.
