For the past couple of years, the crypto industry has gone through an unrivaled period of innovation. Be it decentralized finance (DeFi), NFTs and digital culture, and, more recently, the success of the much anticipated Ethereum Merge, it’s remarkable how much progress this emerging industry has made in so little time. Alongside all of this, perhaps unnoticed, has been the progress of bitcoin’s well-known store of value thesis, which has been steadily amended to incorporate additional capabilities for the leading blockchain by market capitalization.

Two of these developments are (i) Taproot, the latest major protocol upgrade activated in late 2021, aimed to improve smart contract functionalities on the base layer and bring more privacy to users, and (ii) the Lightning Network, a second layer built atop Bitcoin that takes advantage of the security and decentralization of the base layer while bringing much cheaper and faster transactions than what the core blockchain is capable to provide. In view of both of these advancements, Lightning Labs, one of the major companies financing and developing the current implementations of Lightning, made available on September 28 the alpha release of Taro, a protocol that leverages Bitcoin to create new tokens on top of its infrastructure, similar to ERC-20 tokens built on top of Ethereum, significantly aiding the functionalities of the Bitcoin network as a global, secure, and decentralized settlement layer. 

 

^{Figure 1: Lightning Engineering Blog, Announcing Taro, accessed September 29, 2022.}

 

According to Lightning Labs, this is “the first step towards bitcoinizing the dollar.” Taro was initially announced in April this year, promising a new protocol for multi-asset Bitcoin and Lightning, which uses the new tree structure introduced in Bitcoin by Taproot to embed arbitrary asset metadata in the output of a transaction stored on the ledger. The alpha version of the first Taro implementation is now available for experimentation in Bitcoin testnets. Once the base layer functionality is fully deployed, Taro assets will be made available on the Lightning Network.

We believe this is a significant move for Bitcoin and for the realm of possibilities of the network. Even though its community of developers and users is quite conservative with regards to major upgrades on the base layer protocol, every now and again, significant improvements are activated, opening up a plethora of new applications which can bring new eras of adoption for the most valuable blockchain currently in the market. 

Stablecoins, in particular, have now clearly established themselves as one of the killer apps for crypto, being a very important catalyst for the DeFi boom we’ve seen over the past couple of years, and a key monetary protection for the people in countries experiencing consistently high levels of inflation. If stablecoins finally become available on Bitcoin, and leverage all the assurances provided by the most battle-tested blockchain in the crypto space—such as trustlessness and censorship-resistance—they can see an even bigger level of adoption in the coming years.

This announcement strengthens our belief that Bitcoin should be a protagonist in the investment case for crypto, with its simple design leading to a network furnishing one of the most robust technology stacks for a plethora of additional solutions to exist on upper layers. As these developments increasingly come into realization, bitcoin increases its potential to be an asset with at least three core utilities: (i) a store of value—a thesis that surely still needs probation—, (ii) the monetary asset powering a global settlement layer, and (iii) an unrivaled collateral for various kinds of assets to be tokenized and gain speed and utility on the railroads of blockchain technology. 

As these developments take place, we’ll be here every step of the way, striving to provide best-in-class products for investors to participate and leverage the continued growth of the Bitcoin ecosystem.

For an in-depth introduction to Bitcoin, consider reading our Bitcoin Primer. Also, make sure to access our Research Center to understand bitcoin’s relationship with inflation and many other related topics.

 

 

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