Will Taproot Assets Be the Next BTC L2?

2023-10-26, 03:24

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## [TL；DR]: 
The Taproot Assets protocol is a native asset layer built on <a href="/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a>, providing core functionality for developers to issue, send, receive, and discover assets on the Bitcoin blockchain without causing Bitcoin network expansion.

Taproot Assets do not use Bitcoin as a complete data availability layer, and users need to index or configure data storage outside the chain.

Presently, Taproot Assets are more suitable for high-frequency trading scenarios, such as fungible tokens (stablecoins, etc).

## Introduction
Bitcoin Layer2 infrastructure company Lightning Labs recently released the alpha version of the Taproot Assets main network, which officially stated that the protocol will provide a fully functional development experience for the issuance, management, and exploration of stablecoins or other assets on the Bitcoin blockchain.

In fact, there are already many projects aimed at expanding the performance of Bitcoin networks, such as the BRC20 we mentioned on our blog and the recent BitVM. However, the lightning network developed by Lighting Labs still holds the main advantage in terms of system completeness and application service range. What are the highlights of their current Taproot Assets, whether they can become a leading project in BTC L2, and how they will affect the market situation, the article will come together.

## Technical Conception of Taprot Assets
According to the Taproot Assets protocol BIP, the Taproot Assets protocol is a Taproot native asset layer built on Bitcoin.

This protocol provides core functionality for developers to issue, send, receive, and discover assets on the Bitcoin blockchain by attempting to achieve higher privacy and scalability, without causing the Bitcoin network to expand.
 ![](https://gimg2.gateimg.com/image/article/169829046012011698290368_.pic.jpg)
Figure 1: Example of receipt and payment for Taproot Assets
 
We know that Bitcoin can achieve limited programming by writing "simple code" in a _script_ at the Taproot address, and then executing it as a UTXO spending condition instruction.

In the asset issuance scenario of Taproot Assets, the system can specify this simple operation code as the basic rules of the total issuance amount, issuance time, issuance object, etc. of the token. By connecting to a set of multiple signed addresses, the operation code can be jointly triggered, thus achieving a point-to-point batch trading function.

One interesting aspect of the technical implementation process of the protocol is that the relay nodes of the lightning network serve as accounting management functions for asset management and distribution, enabling low-cost, high-frequency, and efficient distribution interactions.

In this process, the original new tree structure of Taproot supports developers to embed arbitrary asset metadata, while the participants in the transfer of Taproot Assets bear the costs of verification and storage. As a result, a decentralized accounting system for the issuance, management, and distribution of multiple assets has begun to take shape.

In summary, Taproot Assets have the following technical characteristics:

Low UTXO occupancy (similar to Runes/IPE), as users can create or transfer multiple tokens in a single transaction;

Users can store most of their transaction data outside the chain themselves or in the universe, which means that the on chain occupation of large transactions is very small;

It is completely based on UTXO, so it can be well integrated with Bitcoin's Lightning, DLCs, RGB, etc;

It is directly integrated with Lightning, so after transferring to Lightning (all tokens+BTC in a single transaction), users can conduct fast and cheap transactions.
 
## The Application Prospects of Taproot Assets
Compared to the low threshold, simple and slightly rough BRC20 this summer, Taproot Assets' multi asset protocol design is more comprehensive and rigorous, and can integrate native technology solutions such as RGB, DLC, and Lightning Network. Currently, it is more suitable for high-frequency trading scenarios, such as fungible  tokens (stablecoins, etc).
 ![](https://gimg2.gateimg.com/image/article/169829050912021698290384_.pic.jpg)
Figure 2: Lightning Labs explanation of Taproot Assets
 
Because Taproot Assets do not use Bitcoin as the complete data availability layer, users need to index or configure data storage outside the chain, so the application scenarios of the protocol will be limited. The following are some potential adaptation scenarios:

-Introducing stablecoins on Taproot assets (the main focus of the lighting lab)

-Issuance and transfer of other tokens on Taproot assets

-Asynchronous reception function and one-to-many token transmission and transfer in a single transaction

-Implementation of Taproot Assets+Lightning Network for Some Bitcoin DeFi Use Cases

-Combination with BRC20, Atomicals proof-of-work mining and other forms of mining, etc

-Creation and transfer of ERC-721 and ERC-1155 assets

According to official sources, since the launch of the Taproot Assets mainnet on October 18, the agreement has cast over 15,000 different assets.

Overall, Taproot Assets have its own trade-offs in terms of direction compared to existing Bitcoin interchangeable token protocols. It is not the ultimate solution for Bitcoin L2, but it proposes a practical and feasible multi asset development direction that can play a good role in established scenarios.

## The Impact of Taproot Assets on Market Conditions
The Taproot Asset protocol launched by Lightning Labs is committed to achieving one-stop functions such as issuance and management of multiple assets on the Bitcoin network. Although there are still many technical barriers and bugs, the prosperity of the Bitcoin ecosystem has come to an end.

In the future, as the protocol supports lightning networks and completes payment channel functions, supporting projects such as decentralized wallets and offline consumption payment channels will emerge. At the same time, users will be able to efficiently and cost-effectively receive, send, and manage custom tokens through lightning networks, which will help further improve the actual adoption rate of Bitcoin.

It can be foreseen that with the launch and development of Bitcoin meta protocols such as Taproot Asset, BRC20, Runes, and BitVM, the ecosystem of Bitcoin will also become increasingly prosperous, which will to some extent compensate for the shortcomings of <a href="/how-to-buy/moonbeam-glmr" target="_blank" class="blog_inner_link">where to buy glmr</a>'s dominant ecosystem and even become a new narrative for the next bull market of Bitcoin.
 ![](https://gimg2.gateimg.com/image/article/169829063112031698290408_.pic.jpg)
Figure 3: ORDI/USDT trading pairs on Gate.io
 
Finally, it should be noted that as a leading crypto asset trading platform in the industry, Gate.io has always been following practitioners who contribute to technological progress and product innovation in the crypto industry. For Example, in this year's Ordinals Summer, we were the first to launch the flagship token $ORDI, leading the "popular" craze for Bitcoin in_script_ions. In the future, we will continue to pay attention to more innovative developments in the Bitcoin ecosystem, providing investors with more value observations and investment products.

<div class="blog-details-info">
<div>Author:**Carl Y.**, Gate.io Researcher
<div>Translator: Joy Z.
<div class="info-tips">\*This article represents only the views of the researcher and does not constitute any investment suggestions.
<div>\*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.
</div>

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