Exploring the Multi-Asset Issuance Mechanism of Taproot Assets

Nov 07, 2023

Author: Haotian

Editior: WuBlockchain

On Octorber 19th, Lightning Labs, the Lightning Network developer, released the mainnet alpha version of Taproot Assets, signifying that it is now possible to create stablecoins and other assets on the Bitcoin network. These assets are entirely controlled by Bitcoin’s Script scripting feature, decentralized, and ultimately applied through the Lightning Network. At first glance, it seems like Bitcoin is entering a true era of BRC20. So, what is the technical implementation logic of Taproot Assets? How does it differ from BRC20 on Ordinals? Will it bring about another wave of BRC20 token issuance frenzy? Let’s try to objectively interpret these questions.

Technical Implementation Logic

In my previous introduction to BitVM, I discussed the limited yet achievable programming capabilities of Bitcoin. These capabilities involve writing “simple code” in the Script script of Taproot addresses and executing it as instructions for spending UTXOs. In the context of Taproot Assets’ asset issuance, this simple set of opcodes can be designated for parameters such as total token supply, issuance timing, issuance recipients, and more. These opcodes can be triggered by a set of multi-signature addresses. For instance, if a user at address A generates a multi-signature address B and plans to issue 10,000 USDT to address C through address B, then A can be considered the project owner of USDT assets on the Bitcoin network, and C becomes the first holder of USDT. The successful issuance of the token requires the signature of address A, and any further transfer of assets from C to other addresses would also require the signature of A.

You might be wondering: if address C needs to distribute the token to thousands of addresses, will it have to queue up for address A’s signature? This is a good question, and the key lies in the fact that C, as the address receiving the assets, is usually set up on the Lightning Network. This means that there are established bidirectional channels between two addresses within the Lightning Network, facilitating efficient, low-cost, and frequent interactions. Originally, the Lightning Network only supported point-to-point scenarios, but the new Taproot Asset system has introduced a point-to-multi function, allowing one payment to be forwarded to multiple receiving addresses within a single transaction channel. Scripts can transfer assets to multiple addresses based on specific conditions. This enables the distribution of tokens issued to address C to a large number of addresses, ultimately achieving the dispersion of assets. With this logic, a complete decentralized system for issuing, managing, and distributing assets on the Bitcoin network is realized. Moreover, C can be managed by Lightning Network’s relay nodes, which can execute accounting based on rules. Similar addresses can be managed and distributed by different relay nodes (for example, the owner can hand over their USDT tokens to ten relay nodes for secondary distribution and accounting management). In this way, Owner, issuance condition addresses, receiving condition addresses, multi-signature triggering control, an efficient and trusted distribution network, and other essential components come together to create a comprehensive system for decentralized asset issuance, management, and distribution.

“Real or Fake” BRC20?

The BRC20 logic on Ordinals involves embedding JSON data packets into Script scripts and writing parameters like Mint and Transfer in these packets to define asset circulation rules. The ultimate decision-making authority lies with the third-party Ordinals protocol. Throughout this process, the Bitcoin network’s knowledge serves as a passive data memo, not participating in validation calculations, determining asset ownership disputes, or even dealing with bugs in handling transfer logic. In comparison, Taproot Assets offer a more advanced approach to multi-assets. It features a project owner, and asset issuance and destruction can be determined by the True or False opcode in the Script script. The subsequent circulation of assets is supported by the technically reliable Lightning Network, which inherently serves as a high-frequency circulation application. While it’s not absolute, Taproot Assets’ support for multi-assets seems more like the “new” token standard that geeks find innovative. (Note: Only differences in technical logic are being distinguished here, while factors like market-driven logic, scarcity, and profit effects are beyond the scope of this topic.)

A New Wave of BRC20 Token Issuance?

Perhaps, at this moment, many are envisioning that with the arrival of true BRC20 tokens, the previous glory on Ordinals can be replicated. In theory, it can be done, but I personally believe that the systemic engineering of Taproot Assets is more robust. However, it’s not that easy to complete a full project. This is because the multi-signature system, issuance and transfer logic, especially the operation and maintenance of point-to-multi accounting on the Lightning Network, come with significant costs and barriers. Unlike Ordinals, where you only need to send a transaction to issue tokens, the difficulty of replicating BRC20 tokens on Taproot Assets is higher. On the other hand, the Lightning Network is inherently a suitable setting for high-frequency consumption. Therefore, the ideal tokens to be issued via Taproot Assets are stablecoins like USDT and USDC. It’s clear that the Lightning Network is also emphasizing stablecoins. As for other project owners who want to deploy tokens on Bitcoin rather than Ethereum’s EVM smart contracts, it’s not impossible. If the project owner is willing and the market is receptive, anything is possible. Following the inherent conditions of the Lightning Network payment scenario, I can only see a vision where tokens suitable for payments are to be launched. As for POS staking tokens, it’s best not to play in this space; it would be quite strange. (If there are any, various methods such as DEX, lending, derivatives, and other gameplay are also possible, but it depends on whether anyone is willing to implement them, and at what cost. This is all for now.) To be honest, I prefer to describe Taproot Assets as ushering in a multi-asset era for Bitcoin. Referring to it as BRC20 is just for ease of understanding and to highlight its innovation. Whether Taproot Assets becomes the basis for a new narrative in the market remains to be seen. However, regardless of the market hype surrounding Taproot Assets, there are two promising visions that are quite clear:

1. Stablecoins like USDT will retest the Bitcoin network and become the mainstream currency within the Lightning Network’s application scenario. Whether they can reclaim the dominant position of stablecoins in the TRON ecosystem is something to look forward to.

2. The Lightning Network’s companion wallet applications, offline payment channels, and other data points will likely see substantial growth, which will be a turning point for the Lightning Network. Whether this will stimulate incentives for social platforms related to potential Nostr is yet to be seen.

In addition, there are two “controversial” viewpoints regarding the Lightning Network’s Taproot Assets:

1. There’s no such thing as a “fair launch” in Taproot Assets’ multi-asset issuance mechanism; it’s more like a brand new ICO platform.

Project owners can issue tokens on the Bitcoin network and manage asset reception and distribution through multi-signatures and hash time locks, with asset circulation occurring efficiently on the Lightning Network. The entire process of asset issuance, management, and circulation places a significant emphasis on the project owner’s operational abilities and is suitable for project owners with significant capabilities who can provide full “empowerment.” The idea of a fair launch is cool, but what’s the point of a token without continuous empowerment from a strong project owner, even if it’s fairly launched? Fortunately, there will be numerous innovative methods for distributing assets within the Lightning Network, similar to NFT-like pre-sales, public sales, or even scheduled subscriptions. But remember that these “minting” methods are entirely different from Ordinals, and project owners have the privilege of burning tokens and altering asset distribution rules. So, please exercise caution when participating in “fair launch” or “minting” FOMO events.

2. Taproot Assets rely on the Lightning Network for circulation, which presents the possibility of a “substitution loop attack,” but this logic’s underlying assumptions are flawed.

The reason for this kind of malicious attack is because asset circulation in the Lightning Network is completed within payment channels. Before both parties establish trust, they first lock a portion of common assets on the main network and agree to complete asset settlement within a specified time frame. Suppose A and B trust each other and agree to settle in a certain block. However, if, during the arrival of that block, A performs a malicious attack, using a higher miner fee to ensure the agreed-upon block cannot be processed, then A essentially appropriates the assets that originally belonged to B.

However, the assumption behind this vulnerability is problematic. It assumes that A and B must trust each other and establish a channel for payment. If A is malicious, the channel would break, and the significance of the attack would be minimal. Theoretically, even if A doesn’t carry out an attack, network congestion can result in similar consequences.

So, does this undermine the prospects of the Lightning Network as a platform for Taproot Assets’ multi-assets? I am personally optimistic. Because creating a channel in the Lightning Network itself is a “high threshold,” it assumes that the operator has the ability to manage asset circulation and avoid situations like the one described above. A “trusted” relay node is a prerequisite for carrying a significant amount of asset circulation and users, and this is fundamental. If we move beyond this prerequisite, any technical bugs become less significant.

It’s heartening to see that, driven by Taproot Assets in recent days, the attention to Bitcoin’s ecosystem has increased significantly. Technologies like the Lightning Network and the RGB client for asset verification, which were once quite niche, are now attracting more attention. Many project owners have already started quietly making plans to be the first to implement this innovative concept. Regular individuals are also unable to resist participating in this burgeoning market. However, I must be a wet blanket and note that the implementation of Taproot Assets is challenging, and it won’t create as much FOMO as the previous wave of BRC20. If you’re feeling the FOMO, please reevaluate if you’re in the right “lane.” If you believe in the concept, be prepared to endure the loneliness, find the entrepreneurial power of the midstream, and choose the right people and team to support your venture.

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