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PART 2: If Bitcoin Is the Internet of Money, These Protocols Will Connect It To The World: Taro, Rootstock, Stacks & Liquid

Feb 26, 2023
byNDAX Labs

2. The top 5 cutting-edge protocols being developed on Bitcoin

Bitcoin has been around for over a decade now. It has seen many changes in its lifetime, and it has also seen its fair share of controversies. However, the blockchain technology behind Bitcoin (and its underlying network) are not going anywhere anytime soon–quite the opposite; the network continues to experience exponential growth of use and adoption.

There are many cutting-edge protocols being developed on/for Bitcoin as well. These protocols are making it easier to use bitcoins in everyday life, and they are also improving online payments.

1. Lightning Network

Bitcoin is often criticized for being slow and expensive. However, the Lightning Network has made great strides in solving these problems.

What is the Lightning network?

The Lightning Network is a protocol that operates on top of the bitcoin base layer (or layer 1). It enables near-instant transactions between Lightning nodes that are only later, periodically settled on the main bitcoin blockchain. The Lightning Network is a “second-layer” payment protocol that uses smart contracts to allow two parties to instantly and securely send money to each other without the need for a third party (except that unlike the bitcoin main layer, this happens near instantly–instead of every ten minutes–and for fractions of a penny–vs. $10).

So the Lightning network allows for faster transactions with signinfantly reduced fees, and it scales by moving some transactions off the blockchain and into payment channels, which can be closed when the transaction is complete.

  • These projects work by creating two-way payment channels between two parties and then periodically settling these channels so that they can be included in the blockchain.
  • Transactions occur more quickly, as they do not need to wait for confirmation from miners on the blockchain before being considered valid.
  • They also allow the Bitcoin blockchain to handle more transactions per second and use less energy than before.

The Lightning Network is the most well-known Bitcoin Layer 2 project, but there are others, such as the Taro and Liquid Networks, as well as Rootstock.

Speed and scalability

The Lightning Network makes transactions nearly instant, reduces the cost per transaction, and provides scalability to Bitcoin. For this reason, it has been gaining momentum and excitement in the cryptocurrency community.

The network also solves the issue of scalability by creating a system for off-chain transactions that are not recorded on the blockchain but are instead validated by the blockchain. The Lightning Network can potentially handle millions of transactions per second, as opposed to Bitcoin’s current 7 transactions per second. No small feat!

Potential applications and use cases

The Lightning Network has a wide variety of potential use cases. For instance, users can take advantage of micropayments made possible through the use of off-chain transactions to make purchases without worrying about high network fees, volatile exchange rates or costly exchange commissions.

There are already several applications that have been developed for use with the Lightning Network, including payment apps, games, social media platforms, exchanges, and wallets.

The following is a list of Bitcoin-based applications running on the Lightning Network:

Bitrefill - Allows you to purchase prepaid mobile phone minutes, airtime, data packages, VPN access time, and other digital goods with Bitcoin.

Hodl Hodl - A peer-to-peer Bitcoin exchange that does not require an account to trade bitcoin for any supported fiat currency or cryptocurrency pair.

LightNite - a play-to-earn game that rewards you with bitcoin for high scores.

Strike - a decentralized payment app and social network that rewards users with bitcoin for posting pictures and videos.

2. The Taro Protocol

The Bitcoin community has come up with a new protocol called Taro, which is powered by Taproot, to help make transactions on the Lightning Network fast, cheap, and high-volume. The announcement came in April 2022, and it marked a major transition toward a multi-asset Lightning Network, where currencies from around the world could potentially be settled using Bitcoin liquidity.

What is Taro?

Taro is a new Bitcoin protocol that makes it possible to use Bitcoin (BTC) and other assets in their apps on-chain and via the Lightning Network. This makes the Lightning Network more accessible to more people, which brings more users to the network and raises the volume and liquidity of bitcoin. It also makes it easy for people to trade fiat currency for bitcoin in their apps.

Node operators will incur higher routing costs as network traffic increases, but they will still reap the benefits of the Lightning Network's ability to support multiple cryptocurrencies without having to increase their asset holdings.

How would Taro work?

  • Taro lets developers tap into the Lightning Network and use it to settle transactions in any currency, including fiat currencies.
  • The protocol is designed to reduce the costs of using the Lightning Network and to make it more accessible to a wider range of users.
  • It is also intended to increase the liquidity of bitcoins, which will make it more attractive to businesses and investors.

As traffic on the Lightning Network increases, node operators will incur higher routing costs. However, they will still benefit from the Lightning Network's ability to support multiple currencies without having to increase their asset holdings.

3. Rootstock

Rootstock is a smart contract platform that is powered by the Bitcoin blockchain. It’s a Layer 2 solution that allows for the construction of smart contracts that are capable of running on Bitcoin. Smart contracts on Rootstock are able to run at near-instant speeds and are more scalable than those on Ethereum. In addition, because Rootstock is powered by Bitcoin, it is also more secure, decentralized and immutable than Ethereum.

Rootstock aims to provide a more complete and trustworthy financial infrastructure with features like escrow, collateral, and time locks. The network also enables developers to create their own tokens on top of Rootstock’s platform. Once the platform is fully developed, Rootstock will allow users to create and purchase cryptocurrencies, stocks, and bonds quickly and at near-instant speed.

4. Stacks

The main difference between Stacks and other solutions on this list is that Stacks is a Layer 1 blockchain, while the others are Layer 2 scaling solutions. What this means is that Stacks is its own blockchain that happens to use the same proof-of-transfer consensus mechanism as Bitcoin.

The Stacks protocol is built on the secure, open, and permissionless structure of Bitcoin, but adds new capabilities like NFTs, decentralized finance (DeFi), and smart contracts.

  • Instead of deploying a new blockchain and asking users to lock up their bitcoin in a new system, Stacks allows you to keep your bitcoin and use it to earn rewards for running nodes, launch smart contracts, or mint NFTs.
  • All transactions conducted on Stacks or Stacks-based applications are settled on the Bitcoin blockchain, which helps to improve security.
  • Stacks applications can interact with the Bitcoin blockchain, so users can transact using bitcoin.
  • Stacks can be used to build marketplaces for NFTs, DeFi apps, wallets, and social networks.

5. Liquid Network

Liquid Network is an off-chain solution that aims to solve the problem of bitcoin scalability. It’s a sidechain that provides a decentralized system for transferring assets between Bitcoin exchanges and other financial institutions.

The Liquid Network is a layer on top of Bitcoin, with its own set of rules and network nodes. This means that the Liquid Network can operate independently from the Bitcoin blockchain. The main goal of this project is to provide an efficient way for users to transfer large amounts of funds in real-time, without having to wait for transactions to be confirmed by miners.

  • One of the main benefits of the Liquid Network is that it can support a much higher transaction volume than the Bitcoin blockchain.
  • The Liquid Network uses a technique called “Confidential Transactions”, which hides the amount of each transaction from the public.
  • The Liquid Network also has its own native currency, called L-BTC. L-BTC is pegged to the value of BTC, and can be used to trade assets on the Liquid Network.
  • The main target group for Liquid is traders who want to make a profit from arbitrage between different cryptocurrency exchanges. For example, if the price of Bitcoin is higher on one exchange than another or if there are better lending rates on one exchange than another. Such opportunities often close within minutes, so by the time a normal Bitcoin transaction arrives, it is often too late.

Disclaimer: This article is not intended to provide investment, legal, accounting, tax or any other advice and should not be relied on in that or any other regard. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of cryptocurrencies or otherwise.