Step One: Transparent Bank Deposits As Taro Assets Taro has the potential to significantly reduce the technological and logistical barrier for such community banks to operate, while enabling their community to instantly connect with suppliers, clients and financial services from all over the world. In some cases, these community banks are attractive because they give access to dollars, while in others they allow people to transact online without friction. Inspired by the success of Bitcoin Beach in El Salvador, community banks are beginning to spring up around the world in an attempt to connect remote and underbanked communities to the world of digital finance via the Lightning Network. These mechanisms allow anyone to use the assets in their wallet to pay any Lightning invoice, or anyone to receive the asset of their choice by issuing a generic Lightning invoice. He releases the preimage and the payment is final. Yana will receive BTC and forward L-USD to Zane. Bob will receive L-USD and forward BTC with the same HTLC. Once Alice confirms the payment, she will construct a route through Bob to the payment’s final destination. If Alice also has BTC in her wallet, she may opt to pay the invoice with satoshis. Alice can now scan any Lightning Network invoice with her wallet. In the example above, Alice has L-USD in a channel with Bob, who is connected to the wider Lightning Network and willing to swap L-USD to BTC on demand, and for a fee. We are only willing to accept something as payment that we can easily spend, and so it is no surprise that cryptocurrency exchanges primarily offer only two stablecoins: tether and USDC. Today, we observe strong network effects in payment and settlement systems. This happens instantly and without anyone taking on counterparty risk or custody at any point. They will agree on their reference rates for such swaps with their peers and might be willing to lock in rates for short invoice expiration windows. These edge notes, like any other routing node in the Lightning Network, charge a routing fee covering capital costs, routing costs and expected volatility. This works through edge nodes which “swap” an incoming Bitcoin HTLC (hash time-lock contract) for an outgoing Taro HTLC, or the other way around. The payer also at no point knows what asset the payee ultimately opts to hold in their wallet. The payer is not required to hold the same Taro asset, or any Taro asset at all. This allows the owner of a Lightning wallet to choose whether to receive payments in BTC or a Taro asset, while issuing a regular Lightning invoice. It may appear attractive to issue bonds, vouchers, debt instruments or claims to commodities like oil and gold.
This results in two or more parallel channels, one with BTC and the others with Taro assets, anchored in the same UTXO.Īlongside bitcoindollars in the form of bank deposits or stablecoins, we may also see other types of assets issued on Taro, local fiat currencies foremost. With the Taro protocol, so-called bitcoindollars can be introduced into a Lightning Network payment channel without additional blockchain footprint.
In some contexts, they act as savings and payments vehicles.
While the first widely used stablecoin was anchored to the Bitcoin blockchain, stablecoins today often reside on alternative blockchains and are used to enter and exit trading positions in bitcoin or cryptocurrencies, or for settlement in arbitrage trades. Such bitcoindollars are currently issued by large, often opaque institutions, some of them associated with cryptocurrency exchanges. The company explained a mechanism through which anybody can mint arbitrary assets on the Bitcoin blockchain and shared their vision for a stablecoin use-case that can be instantly transacted over the Lightning Network and held non-custodially in Lightning nodes and wallets.Īnalogous to eurodollars or offshore dollars, we may refer to dollars held on the Bitcoin blockchain as bitcoindollars. Taro is a new protocol for assets on Bitcoin and Lightning proposed in April 2022 by Olaoluwa Osuntokun, CTO of Lightning Labs.