This is an editorial by Shinobi, a self-taught Bitcoin educator and host of the tech-oriented Bitcoin podcast.
tarot at last Beta code released for testnetAnd it has continued to be a big talking point for a few weeks now at this point. It is discussed by many as a kind of panacea for the issues of people in developing countries or countries decimated by near or outright hyperinflation. Many present it as the solution to everything. Self-preservation ability, to avoid the inherent volatility of Bitcoin, you can still access Lightning as a payment network. It would have fiat stability without losing access to Bitcoin’s openness and resistance to censorship. It can provide a lot of benefits, and yes it provides fiat “stability” while at the same time allowing interoperability with the Bitcoin network, but it is being sold heavily by many people discussing it.
To use Taro on the Lightning Network, it requires a peer that understands the Taro protocol and, most importantly, owns the asset you wish to receive (or is willing to accept the asset you have and wish to spend), and exchanges that asset both ways with Bitcoin. On the appropriate Lightning Network, nodes on the network simply switch control of Bitcoin in one channel along with control of Bitcoin in another. There are no exchange risks there, no volatility risks – one bitcoin equals one bitcoin. To facilitate the transfer of Taro assets for Bitcoin on the edges of the network, this entire assumption completely goes out the window. Every transaction a user makes is now an exchange rate risk for a node operator that provides services to Taro users on the Lightning Network. Every time a Taro user with an open channel for that node receives money, the node operator buys bitcoin (which they receive over the Lightning Network) using fiat tokens that they send through the Taro channel to that user. Every time a Taro user sends money, the node operator sells bitcoins for fiat when they receive Taro’s stablecoin and then transfers the bitcoins over the Lightning Network.
There is a vastly different skill set required to run such a node for just one Bitcoin. You actually have to day trade at a ridiculously fast rate, where decisions about when to trade aren’t even made by you trying to look for advantageous opportunities, but rather by your Taro channel peers when they need to send or receive money. There are actually only two options for dealing with this problem.
In the first option, you have to trade beyond just the transactions you process. You have to actively trade the market based on the transactions you make (whether you are buying or selling bitcoin), in order to weigh the potential risks you are exposed to. Every time you sell bitcoin by letting a tarot user send a legitimate order, you need to buy the same amount of bitcoin because you are at risk of losing some of the bitcoin if the price goes up before that user receives the money again. all the time you buy bitcoin By allowing a Taro user to receive a fiat order, you need to sell some bitcoin in your balance to ensure that you have a legal order to buy bitcoin the next time a Taro user sends money. This can be done through options, leveraged trading, etc – but the principle remains the same.
The second option is to prevent users from sending or receiving money when you feel the market is about to move against you. This will lead to a completely degraded and impractical user experience for Taro users who have opened channels with you. Think about how frustrating a refusal of incoming or outgoing payments can be caused by a Bitcoin price movement. Which is what happens, literally all the time.
These very different dynamics require a much higher degree of specialization and skill to successfully operate a Taro-Serving Lightning Node. This will definitely lead to a very high degree of centralization in terms of the number of nodes on the network that will actually support the users who open Taro channels with them.
This central pressure is further exacerbated by the fact that there is a larger elephant in the room: regulations. Lightning is not currently declared under current legislation as a money transfer business or regulated financial activity, and a 2014 FinCEN ruling On escrow services that explicitly use cryptocurrency, not transferring funds makes an incredibly strong case for standing that Lightning is at an exact technical level – just an escrow.
The exchange of one asset for another is a clearly regulated activity in most jurisdictions. This is exactly what the Lightning nodes that support the Taro Channel do when the Taro peer sends and receives – they exchange a stablecoin (fiat) for bitcoin or vice versa. as a series of files Trials In exchange for LocalBitcoins, US traders showed, that this business that is regularly committed to making a profit rather than just dealing with your personal investments is absolutely considered a financial services business (MSB).
This comes with all the regulatory requirements for it; Record keeping, Know Your Customer and Anti-Money Laundering regulations, and comply with government requests for action and court orders. It effectively turns those nodes into Strike, a company that must comply with a full set of government regulations and requirements. Don’t get me wrong, for people who are comfortable interacting with companies subject to those requirements, they can certainly provide a significant degree of utility and value, but it is still an organized business. It is not a decentralized panacea that opens the door to self-scalable, sovereign use of stablecoins. It’s a protocol that can make it easier and less annoying for businesses that provide bitcoin/fiat integrations like Strike to handle the legal side of their business.
Now to discuss the activity on the series, Taro has some benefits in this regard. There is no requirement to rely on a Lightning node that will facilitate exchanges between assets here – they are all direct on-chain transactions, however there are still two potential complications here. Cross-chain use of everyday payments is not something that works for everyone; Blockspace may be cheap today, but the drivers of increased demand for blockspace mean that space will become more expensive. Presented as a solution to the problems of currency volatility and uncontrolled payments, this limitation must be recognized just as with Bitcoin itself. The second complication is how the taro works. As it is a data obligation within Taproot UTXO, it actually requires the creation of Bitcoin outputs in order to spend and hold Taro’s assets. For any user who is primarily interested in using Taro assets and not Bitcoin, this will likely be dealing with many Bitcoin UTXOs of very small value just to hold and use the Taro assets. The only way out of this would be to create a protocol using something like PayJoin so that the sender and the recipient collaborate on a transaction that moves Taro assets while ensuring that each of them can maintain just one Bitcoin UTXO instead of creating a lot of little things with each transaction. However, this will have very significant implications for the privacy of Taro users.
In conclusion, Taro offers a real benefit as a means of payment without the volatility found in Bitcoin itself, but it is not a panacea at all. In order to interact with Taro over the Lightning Network, users will have to open channels with Lightning nodes that open themselves up to a huge amount of regulatory compliance requirements, and in order to use Taro directly on the chain, users will have to deal with all the scaling restrictions and costs of Bitcoin itself as well as the need To get a reasonable amount of Bitcoin to handle the Taro assets in the first place (if they are a Taro user and don’t already own an amount of Bitcoin that can be used as a Taro anchor).
This is a very valuable tool for companies that want to offer fiat/Bitcoin interfaces as a service, simplify technical integration and manage the cash side of it, and can be a tool for direct on-chain use of stablecoins and other tarot assets – but it’s not a panacea. It is not a decentralized wonderland. It’s a business tool, and a new way to hold other tokens in the chain. nothing else.
This is a guest post by Shinobi. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
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