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What is the Taproot Assets Protocol (TAP)? A Beginner's Guide

October 26, 2023

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Several new protocols are augmenting Bitcoin’s utility and functionality by taking advantage of previous soft forks. This guide will focus on the Taproot Assets Protocol, one of the newest Bitcoin layers set to broaden Bitcoin’s ecosystem.  

What Is Taproot Assets?

Taproot Assets, previously Taro, is a Taproot-powered protocol that is set to allow users to issue fungible and non-fungible tokens on the Bitcoin blockchain. It was introduced by Lightning Labs at the end of 2022. Its goal is to bring asset issuance to Bitcoin.

Taproot Assets Protocol (TAP) is based on the Taproot Bitcoin upgrade implemented in November 2021. The upgrade enables developers to embed an asset’s metadata within an existing, unspent transaction output (UTXO). It also uses Schnorr signatures for better scalability and simplicity, as well as Lightning compatibility. 

TAP permits users to transfer assets over the Lightning Network (LN), allowing them to enjoy near-instant and affordable transactions. Therefore, it leverages the scalability, speed, and cost-effectiveness of Lightning while, at the same time, utilizing the stability and security of the Bitcoin network.

Lightning Labs launched Taproot Assets v0.2 in May 2023. The release is in the testnet stage. Taproot Assets was ultimately inspired by RGB, a similar version for bringing assets to Bitcoin built by the LNP/BP association.

How Does Taproot Assets Work?

Now, let’s take a look at how the Taproot Assets Protocol works. 

The Taproot Upgrade

The Taproot upgrade (soft fork) was implemented to improve Bitcoin scalability. It encompasses three improvement proposals: Schnorr signatures, Tapscript, and Taproot

Schnorr signatures enable multiple transactions to be validated in a single bundle, while Tapscript supports Taproot and Schnorr signatures and makes it easier to code new features on the blockchain. Taproot brings privacy to the Bitcoin network by allowing users to set spending conditions for a UTXO so that only the condition that is met is visible on the blockchain to the public.

These conditions are arranged in a tree-like structure called a Taproot script tree. The structure reduces the amount of data required to verify transactions, lessening the nodes’ burden. Additionally, the Taproot script tree ensures that no one viewing the blockchain can see the other conditions that were created to spend the transaction since only the tree’s hash is included in the transaction output.

Taproot Assets need Taproot to operate efficiently. It uses the upgrade to embed asset metadata within a transaction output and to set rules on how to verify the asset’s data and interact with it. In other words, an asset issued on the Taproot Assets Protocol is embedded in the Taproot script tree of the Taproot UTXO, which is enclosed within a Bitcoin transaction output.

Only the root hash of a Taproot asset script is incorporated in the Taproot transaction. Again, this leads to the fact that a person observing the blockchain cannot tell if it is a Taproot Asset transaction, as the hash could represent anything on-chain.

The Taproot soft fork is also responsible for increasing the Bitcoin block size limit to 4 MB.

Taproot Assets on Bitcoin

Users can issue assets on TAP using its client on the Bitcoin testnet. Asset issuance on the protocol involves making a Bitcoin transaction and paying transaction fees in BTC. 

A Taproot asset is considered to be live once it has been issued and its genesis transaction has been verified on the blockchain. Only then can the asset be transferred.

Issuers must define an asset’s rules when minting a fungible or non-fungible token. For example, the rules can state what the total supply of an asset is and whether it is capped. The Taproot Assets client is responsible for cryptographically enforcing the supply controls of assets.

TAP permits multiple assets to be controlled by the same output. It also allows users to aggregate many transactions into a single UTXO. These functions enable the protocol to optimize unspent transaction outputs.  

Taproot Assets on Lightning

The Taproot Assets Protocol is compatible with the Lightning Network. This makes it even more powerful because issued assets can be deposited into Lightning channels and transferred between parties. 

Additionally, assets can be transferred over the Lightning Network without leaving the Layer-2 protocol.

Taproot asset transfers are only known by the participants of a Lightning channel. The asset transfer looks like any other Lightning transfer to routing nodes.

Taproot Assets enables a payment-routing model where the Lightning Network can handle channels with any asset. If a route denominated in a given asset doesn’t exist, the asset is converted to BTC and routed to its destination, where it is swapped back. Routing fees are paid to LN nodes.

Holding and Sending Taproot Assets

Assets are held in a wallet that stores Taproot Assets keys and Taproot keys. The Taproot Assets wallet also knows which digital assets are held in which UTXOs. 

To send a Taproot asset to someone, they must provide their Taproot Assets wallet address, which consists of the asset’s information and the public keys.

What Is a Taproot Asset Universe?

Taproot Asset Universe is a place where an asset’s details and proofs are stored. It contains information about which assets have been issued, their rules, quantity, and proof of recent transfers. A universe operator is in charge of setting the criteria for releasing this data.

TAP also features a pocket universe that allows users to collectively batch their transactions and share on-chain fees. A pocket universe has control over the Taproot key to a UTXO. However, it doesn’t control the keys to the assets contained in that UTXO. 

How Could Bitcoin Benefit from Taproot Assets? 

Taproot Assets brings asset issuance to the Bitcoin blockchain while offering users transactional privacy. It joins other projects like Ordinals, which are leveraging previous upgrades to expand Bitcoin’s ecosystem. 

Nevertheless, Taproot Assets stands out for its compatibility with the Lightning Network. Therefore, it will be exciting to see the protocol’s impact once it is released to the public.

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What Was Taproot, and How Has It Helped Bitcoin Builders? 

Taproot is the second major upgrade implemented on Bitcoin since its inception. It introduced privacy, Schnorr signatures, and the ability to add more functionality to the blockchain. Moreover, Taproot raised the overall block size to a maximum of 4 MB.

These improvements have allowed developers to create projects such as Ordinals and the Taproot Assets Protocol (TAP) without making any changes to the underlying base layer blockchain, such as smart contract functionality. As a result, Bitcoin-native fungible and non-fungible tokens can now be issued directly on the most secure blockchain today. 

What Are Taproot Assets?

Taproot assets are fungible or non-fungible tokens issued on Bitcoin using the Taproot Assets Protocol (TAP). The protocol derives its name from its reliance on the Taproot upgrade. It uses the upgrade to embed asset metadata into a UTXO. TAP is also compatible with the Lightning Network. Therefore, users can deposit Taproot assets into Lightning channels and transact off-chain.