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Lightning Speed: Taro Is Here! Lightning Labs Releases The Code’s Alpha Version

The controversial Taro protocol is ready for testing. The initial version of the code is available on GitHub, and it enables “developers to mint, send, and receive assets on the bitcoin blockchain.” Notice that the company isn’t talking about the Lightning Network yet. In a blog post announcing the Taro launch, Lightning Labs promised, “once the on-chain functionality is complete, we’ll work towards integrating the Taro protocol into lnd, bringing Taro assets to the Lightning Network.”

This is the first step of many and it’s mainly aimed at developers. According to Lightning Labs, “this initial release is only designed for testnet usage as a way for developers to start using the code.” That means, no real value is flowing through Taro at the moment. But… what is Taro anyway? The blog post defines it as a “Taproot-powered protocol for issuing assets that can be transferred over bitcoin and in the future, the Lightning Network for instant, high volume, low fee transactions.”

Taro Will Enable Stablecoins To Travel Through Lightning

This is a multifaceted protocol that allows many things, but the feature everyone is excited about is the fusion of stablecoins with the Lightning Network. It’s controversial because you have to trust the issuer of stablecoins, which means they come with counterparty risk. Bitcoin doesn’t have that problem. In any case, in the subsection titled “The First Step Towards Bitcoinizing the Dollar,” Lightning Labs tries to convince us that stablecoins over Lightning are a good idea:

“With Taro and the incredible developer community, we can build a world where users have USD-denominated balances and BTC-denominated balances (or other assets) in the same wallet, trivially sending value across the Lightning Network just as they do today. This leap forward will accelerate the path to bringing bitcoin to billions.”

If that sounds too much like Galoy’s stablesats, it’s because both implementations are trying to solve the same problem. They use vastly different methods, though. And place the counterparty risk in different places.

BTC price chart for 09/29/2022 on Fx | Source: BTC/USD on TradingView.com
How Does Taro Work And What Else Does It Do?

Don’t worry, these brand-new protocols are hard to master, or even understand. Luckily for us, Lightning Labs gave us a technical-but-easy-to-follow explanation as a refresher:

“Taro assets are embedded within existing bitcoin outputs, or UTXOs. Think of these assets as “UTXOs within a UTXO.” A developer mints a new Taro asset by making an on-chain transaction that commits to special metadata in a Tapoot output. When minting a new asset, the Taro daemon will generate the relevant witness data, assign the asset to a private key held by the minter, and broadcast the newly created bitcoin UTXO to the bitcoin network. This new outpoint becomes the genesis point of the newly minted asset, acting as its unique identifier.” 

When Lightning Speed first tackled the Taro subject, we explained what a Taro asset can be:

“What is a “Taro asset”? Whatever you want, your BTC can be “converted into different assets such as USD to EUR or USD to BTC.” Or, as Bitrefil’s Sergej Kotliar puts it, “Pay in currency of sender’s choice, receive in currency of recipient’s choice. This means that every wallet can now have native Strike-type “USD balance” functionality for example. With no need to trust the wallet, the only trust lies in the issuer of the token.”

How To Get Started With The Novel Protocol

As previously stated, this Alpha release is mainly for developers. If you’re one or know of one, here are the protocol’s coordinates: 

“To get started exploring Taro, download the daemon, check out the API documentation, and read the getting started guide. And for a more extensive explanation on how Taro works, take a deep dive into the Taro BIPs and our documentation.”

Have a blast, developers. And please report back to us with your findings.

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Light Speed: Kraken, Another Giant Exchange Integrates The Lightning Network

This is huge! Kraken now supports Lightning Network deposits and withdrawals. The suddenly popular second Layer protocol keeps growing and gaining importance. “Finally, traders have an instant and inexpensive way to move bitcoin on and off the platform,” Kraken said in their official announcement. The Lightning Network is much more than that, though. 

What will happen once Kraken’s extensive clientele tries out Lightning transactions? Will the phenomenal experience change the way they see bitcoin? The second layer solution can perform millions of operations per second and all transactions cost pennies and offer final settlement. In using it, there are also privacy gains. The huge innovation, though, is the cash-like experience. 

The Kraken integration comes with a Lightning node of their own. To implement it, the company used LND by Lightning Labs. The reason is that “they have the largest user base and we have a lot of people on the network that have lots of experience with LND. So it has proven to be easy to use and very reliable as well.” That’s according to Kraken’s bitcoin product manager, Pierre Rochard, who also said to Bitcoin Magazine: 

“Adoption is going to come from people who have fiat in their bank account, and they need to get it into Bitcoin. Kraken is providing an excellent venue for them to do that, and then they can top up their mobile Lightning wallet and use it as a medium of exchange. That’s clearly the next step in terms of Bitcoin’s evolution.”

Designed with this and the cash-like experience in mind, Kraken limits Lightning deposits and withdrawals to 0.1 BTC.

BTC price chart for 04/02/2022 on Binance | Source: BTC/USD on TradingView.com
Kraken Announced Lightning Network Integration In 2020

Even though this looks like it magically happened, the integration had been in the works for a while. In 2020, Kraken stated its intentions:

“In 2021, we are committed to hiring a team to focus specifically on the Lightning Network, as part of our continuing effort to deliver the best possible experience for traders and investors.

We expect to allow clients to withdraw and deposit Bitcoin on Lightning in the first half of 2021, which will allow clients to move their Bitcoin instantly and with the lowest fees.” 

It took a while, but it’s finally here. Market-wise, will this move the needle in favor of bitcoin? Will the world even notice? According to this list, Kraken became the 23rd exchange to support the Lightning Network. Among the giant ones already on board are Bitfinex, OKEx, OKcoin, BitMex, and Bitstamp. Among the up-and-coming ones, BullBitcoin, Buda, CoinCorner, Kollider, and Boltz.

This also means, that you're able to instantly move the lightning payment you received to @krakenfx to exchange it for fiat, basically reducing the currency exchange risk to zero.This completely changes the dynamic for fiat brick and mortar stores.https://t.co/bpNzKC7ZDL

— zero fee routing ⚡ (@zerofeerouting) March 31, 2022

And, since we’re on lists, in their announcement Kraken provided Lightning wallet recommendations: 

“For example, BTCPay Server enables Lightning payments for merchants, greatly improving the bitcoin checkout flow. For consumers, Breez, Phoenix and Muun bring Lightning to mobile with a modern user experience.”

As to the importance of the move for markets and business, a pseudonymous Lightning node operator that goes by “zero fee routing” puts everything in perspective. “This also means, that you’re able to instantly move the lightning payment you received to Kraken to exchange it for fiat, basically reducing the currency exchange risk to zero. This completely changes the dynamic for fiat brick and mortar stores.”

Attacking The ESG FUD Head On

The increase in Lightning Network adoption also brings a great opportunity with it. The community could clean up the disgusting ESG-based narrative enemies of bitcoin have been planting in mainstream media. Regarding this, in the already quoted interview Kraken’s Pierre Rochard said: 

“With Lightning, you can send a payment off-chain that is much more energy efficient, not only because you’re not adding the miner fees, and thus the amount of electricity consumption by miners, but also because that payment only has to be stored and shared by the two parties in that channel.”

Do Greenpeace and Ripple not know that most bitcoin transactions are going to be off-chain in a few years? Do they not know that the Lightning Network alone will take bitcoin out of the conversation its enemies have been carefully manufacturing? Kraken certainly knows. And took action. 

Speaking about Kraken, its CEO Jess Powell has been present on the news lately. He recommended buying bitcoin below $40K. During the Canadian crisis, he hinted that bitcoiners should take their funds out of centralized exchanges. And he refused to voluntarily ban Russian users, providing a convincing rationale to justify Kraken’s actions.

And now, his company integrated the Lightning Network.

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Lightning Speed: Open-Source Bitcoin Banks’ Fee Structures For Inbound Liquidity

In the Lightning Network, inbound liquidity is a precious resource. The Galoy Research team detected an irregularity, and, trying to fix it stumbled into a whole business model. Their elegant solution transforms a problem into dollars, which is remarkable. This case reads like a detective novel. Let’s dive in.

Related Reading | Lightning Speed: Podcasting 2.0 And Its Relationship With The Lightning Network

Liquidity Leechers And Inbound Liquidity

In the article “Galoy Research: Self-Balancing Fee Structures for Inbound Liquidity,” the company describes the problem to then lay on us the solution. Galoy are the creators of the Bitcoin Beach Wallet that Bitcoinist described here. The irregularity that the team detected was this one:

“Galoy CEO Nicolas Burtey noticed that the onchain hot wallet was being depleted by a subset of users. These users consistently sent offchain bitcoin to the Bitcoin Beach Wallet only to withdraw it again onchain.” 

The company had to “use submarine swaps to replenish our onchain wallet and regain some inbound liquidity.” The thing is, “inbound liquidity is a valuable resource on the Lightning Network. The “liquidity leechers” were using Bitcoin Beach Wallet as a less expensive alternative to a service like Loop from Lightning Labs.”

How Does Loop Manage Outbound And Inbound Liquidity?

The service’s official website describes Loops as “the easiest way to manage inbound and outbound liquidity on the Lightning Network”. The service has two sides. On the one hand, “Loop In enables typical users to “refill” their Lightning wallets when funds are depleted”. On the other, Loop Out is for:

“Merchants, services, and users who primarily receive funds via Lightning, Loop Out serves as a bridge, allowing funds to be sent out of the Lightning Network to “on-chain” destinations like exchange accounts or cold storage systems.”

Instead of trying to catch the people who were “using Bitcoin Beach Wallet as a less expensive alternative to a service like Loop,” Galoy developed a product for them.

BTC price chart for 03/16/2022 on Binance | Source: BTC/USD on TradingView.com
A Dynamic Fee

Back to the article, the adventure begins. “Nicolas and Galoy data scientist José Rojas Echenique set out to diagnose the issue and try to find an appropriate solution”. The duo “first looked at historical data to get a better sense of the problem”. Surprisingly, they found out that “the price of inbound liquidity is roughly similar, no matter how you get it.”

Here’s where the product appears:

“They then looked for a solution that would charge this roughly similar market rate across the full range of use cases – including those using Bitcoin Beach Wallet as a loop out service. The result is a dynamic fee structure (as described in the report) that charges each user a fair amount based on how they are using the service.”

Instead of excluding “those using Bitcoin Beach Wallet as a loop out service,” the company included them. They put a price tag on the service and kept it pushing. How does the actual report describe this “dynamic fee structure”?   

“From the perspective of user experience, this approach trades high fees for simplicity. It does not account for the balancing effects of a user’s previous or future transactions, and therefore over-charges users.”

“A smoother dynamic fee formula would take into account a user’s previous transactions, and charge users less if their current transaction balanced their previous transactions.”

Continues Business Operations As Usual

From a problem to a product in three easy steps. Back to the article, Galoy states their approach’s value proposition: 

“By solving the issue with fees, Bitcoin banks and other Lightning services can continue business operations as usual vs. attempting to detect and regulate actors who use their liquidity for looping.”

Related Reading | Lightning Speed: What’s The Lightning Development Initiative?

And, to close it off, the company summarizes the product’s advantages. “The result? An automated solution for Bitcoin banks, a good user experience for end users, and the right fees for all.”

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