Discover more from LN Markets’ Newsletter
#51 - Ryan Gentry on Taro, massive stress test, the traveler's life saver and much more!
✨ Ryan Gentry on Taro
Ryan Gentry has a gift: make very complex concepts look very simple, to the point where you almost think you understand them 😅
Since Lightning Labs announced Taro, a new way to more easily transfer dollars and other assets over the Lightning Network, we have been very curious to know more about the rationale, the design and the road ahead for this protocol. Massive thanks to Ryan, Lightning Labs’ Director of Business Development for taking the time to answer our questions 🙏
What led Lightning Labs to create the Taro protocol?
Ryan Gentry: 2021 was the year of emerging markets adoption for the Lightning Network. El Salvador and Bitcoin Beach of course made the biggest headlines, but the Lightning community saw huge growth in countries like Brazil, Nigeria, and Vietnam as well.
We consistently heard from entrepreneurs on the ground that the next tier of users they were looking to acquire loved the benefits of the Lightning Network as a technology, but really needed the stability of the dollar in order to adopt it full time.
That user demand, coupled with the new capabilities introduced by the Taproot upgrade, made it the perfect time to introduce Taro as a means to bitcoinize the dollar.
How do you think Taro will change Bitcoin and Lightning?
Ryan Gentry: Taro makes Bitcoin and Lightning multi-asset networks. Users will be able to open up Taro channels that plug in at the edges and interoperate with the existing Lightning Network.
That means instead of starting from scratch and bootstrapping a new ecosystem of nodes and liquidity, Taro will leverage the existing network effects of both the infrastructure that’s been built out over the last several years plus the 4000+ BTC allocated to the network today as a bridge currency or Medium of Exchange.
For routing nodes in the core of the network, it should mean more volume with no upgrades required. For users at the edges of the network, it should mean all the technological benefits of the Lightning Network – instant settlement, low fees, global reach – with the stability of their preferred Unit of Account.
Leo Weese, Lightning Labs Technical Content Lead, had a great tweet thread on this the other day:
What new functionalities enabled by Taproot were necessary to make Taro work?
Ryan Gentry: Minimizing the validation burden on existing Bitcoin full nodes was a top design priority for re-introducing assets like stablecoins to the Bitcoin network. The Merkelized Abstract Syntax Trees (MAST) data structure that Taproot introduced allowed us to actually embed all the metadata describing these assets inside of existing Bitcoin UTXOs (Lightning Labs Developer Advocate Hannah Rosenberg produced a great Youtube video describing this). That means existing Bitcoin full nodes can process and verify Taro transactions without knowing what Taro is at all – just like Lightning.
I like to describe Taro assets as “UTXOs within a UTXO” because that phrase serves two purposes: first, it communicates that the validation burden is zero if you don’t care about sending/receiving Taro assets, and second, it communicates that Taro assets have all the same capabilities as existing Bitcoin UTXOs, including the ability to transact over Lightning!
Can you walk us through the concept of universes in Taro? How is it different from rollups in Ethereum scaling projects?
Ryan Gentry: As background, when a user receives a bitcoin transaction, their node verifies the transaction is allowed to update the UTXO set. The UTXO set has been built from the chain of signatures from most recent spend all the way back to the original coinbase transactions. This is how we prove it's a "real" bitcoin. Because Taro assets are just “UTXOs within UTXOs” they behave the same way: receiving nodes need to verify the chain of signatures from the most recent spend back to the asset’s genesis/issuance event (which is not as easily distinguishable as a coinbase transaction since Taro genesis/issuance events are embedded within normal bitcoin transactions instead of separated out as a special transaction like coinbases).
So at its most basic level, the protocol includes, for a given asset, this concept of a Universe as a repository for those genesis/issuance events (and specifically the outpoint UTXOs in which those events occurred), helping users verify that the assets they’re receiving were actually issued by the issuer they expect.
Running a Universe is permissionless so anybody can keep track of those genesis/issuance events, but of course we expect that the issuers of a given asset will run one for their users.
This concept can be extended into what the BIPs call a Multiverse: a composition of Universes for multiple assets plus a transaction history for each asset. If the closest analog for a Universe is a repository of coinbase transactions, the closest analog for a Multiverse is a block explorer. Finally, we have the concept of a Pocket Universe which is the most similar to a Rollup in Ethereum - either an issuer or a federation can manage this single UTXO which holds Taro assets owned by users themselves. Unilateral exit (meaning withdrawing from a Pocket Universe without the consent of the issuer or federation managing it) is possible, unlike with Bitcoin sidechains, but will require censorship proofs if the issuer or federation managing the Pocket Universe UTXO does not want to cooperate.
The common thread through these three flavors of Universes is that they are all UTXOs that leverage the Merkle-Sum Sparse Merkle Tree (MS-SMT) data structure that Taro is based on. Expect to see a lot more documentation and explanations of how these structures work as the year progresses!
What are the next steps related to Taro development? If you had to guess a release date, WEN TARO??
Ryan Gentry: I’m not going to guess release dates, it’ll be ready when it’s ready, but we are moving as quickly as we can and hope to have some initial code out soon™. Development will happen in phases: first, all of Taro requires Taproot functionality as a prerequisite, which is why the team sprinted hard to ensure lnd v0.15 has the most fully featured on-chain Taproot wallet functionality on the market, including keypath spends, script-path spends, ability to receive Taproot outputs, and even experimental MuSig2 APIs.
That work is done, so the next phase is building all the on-chain functionality for Taro assets – issuance, transfers, redemption, Universes, etc. Once the on-chain functionality is complete, we can move on to the Lightning integration: opening channels, sending payments, receiving payments, closing channels, etc.
We are and will continue to be in constant communication with the developer community regarding progress on these phases, and are excited to start shipping code and getting feedback!
Where do you see Taro usage to be the most important in the future? Bitcoin on-chain? On Lightning? Elsewhere?
Ryan Gentry: Definitely on Lightning. The benefits and network effects of Lightning – instant settlement, low fees, global reach – already make it a world class payments network, especially for those in emerging markets that don’t have Visa cards or Venmo-style apps.
Giving those specific users the option to transfer their preferred Unit of Account over these bitcoin-powered rails, all while routed through bitcoin the asset, will be an absolutely killer combination.
Congratulations to the team on the massive $70M fundraise! Do you see Taro enabling new business opportunities for Lightning Labs?
Ryan Gentry: Yes, but more important than short term business opportunities is overall network growth. We’re an infrastructure company providing developer tools for startups like LNM that take our technology to the end users. We see Taro as a new greenfield opportunity for developers to build with, a new tool for them to leverage to acquire more users, and ultimately something that will grow network capacity and total volume, all of which will present the new business opportunities in question. Our mission is to bring bitcoin to billions, and we see Taro as a key component in onboarding the next billion people to the Lightning Network.
As a former VC, which advice would you give to start-ups building in the Bitcoin & Lightning space as market conditions have changed radically about the past weeks?
Ryan Gentry: Stay lean, and stay focused on solving real problems for real users. We are going to win. As long as balance sheets are being managed conservatively, I think now is actually a fantastic time for Bitcoin and Lightning entrepreneurs as the tide in the broader crypto/DeFi/NFT space goes out and reveals almost everybody involved to be swimming naked (to paraphrase Warren Buffet), while Lightning continues to grow at a steady pace. As an ecosystem, we’ve always known this would be a decade-long project (e.g. Lightning Labs’s Series A announcement) and that this particular decade would be volatile for the fiat financial system.
Stay the course, and stay focused on the long-term, I’ve honestly never been more bullish on Bitcoin and Lightning than I am right now. One of the best signals backing my bullishness up is the rise of the Bitcoin-only VC.
When I first started at Lightning Labs there was maybe only Stillmark Capital (shoutout to Alyse Killeen!) as a VC focused on Bitcoin, and now I can think of 5 or 6 firms with total AUM in the hundreds of millions USD off the top of my head. The funding will be there to extend runway through the bear market if need be, just stay focused on building and solving real problems for the long term.
📊 Crypto lending platforms experiencing a massive stress test
Uncertainty related to the collapse of 3AC, corresponding defaults, and lending platform Celsius’ halting of withdrawals as they face a potential bankruptcy is leading to a vicious withdrawal cycle on other centralized lending platforms.
Voyager is, per current public knowledge, the most distressed lending platform following the 3AC collapse. On Monday, Voyager issued a notice of default to 3AC of a loan amounting to 15,250 BTC and $350m USDC.
The platform fulfills customer withdrawals and has accessed a 15,000 BTC and $200m USDC revolver from FTX, in which no more than $75m may be drawn over any 30-day rolling period. Voyager has accessed the $75m line of credit made available by Alameda.
Still, in a Wednesday press release, Voyager announced $152m cash and owned crypto assets at hand, vs. $137m cash and owned crypto assets at hand on Monday, suggesting substantial customer withdrawals over the last week.
Assessing the state of the other crypto lenders is difficult due to a general lack of transparency. However, Nexo provides daily attestations through the accounting firm Armanino.
By accessing previous data through the Wayback Machine, we find that Nexo has experienced outflows equivalent to 58,478 BTC since May 12th, with withdrawal activity rising over the weekend following twitter threads by otteroooo later addressed by Nexo.
The growing withdrawals suggest that users of crypto lending platforms are getting more cautious amid the growing uncertainty in the market, leading to a bank run and a vicious feedback loop for lending platforms, which already experience massive pressure pending the unresolved 3AC contagion.
Nexo has said that the firm had zero exposure to Three Arrows, but they are the only lending provider following a proof of reserves methodology through daily attestations provided by Armanino and is thus a great source for examining the high temperature in the crypto lending market.
The contagion and bankrun is evident everywhere in the lending market
The increased withdrawals are not an isolated Nexo or Voyager case. It happens across the entire lending market.
BlockFi’s CEO Zac Prince announced on the On The Brink podcast that BlockFi had experienced withdrawal volumes in the week after the 3AC liquidations of greater than 10% of their overall balances while noting that the withdrawal volume was softening last week.
In addition to offering a line of credit to Voyager, FTX/Alameda has also offered a $250m line of credit to BlockFi. Morgan Creek Digital, who have participated in BlockFi’s seed A through D fundraising rounds, have responded by attempting to raise $250m in equity capital to BlockFi, noting that the credit line could enable FTX to buy BlockFi at essentially zero price.
Hodlnaut co-founder JT also announced net outflows of 35% of their AUM over recent weeks in a twitter thread.
There ain't no such thing as a free lunch
What we’ve witnessed in the last couple of weeks is a massive stress test of centralized crypto lenders, driven by Luna and 3AC-related contagion.
While the second-order effects of these pressuring conditions remain uncertain, crypto owners should learn that there ain't no such thing as a free lunch. These interest rates originate through the introduction of new risk elements to already volatile crypto assets.
👉 To dig deeper, check out the new Arcane Research’s platform
🧭 Bitcoin - the traveler's life saver
A real story about a fellow Anon in a hairy situation and how Bitcoin and good people saved the day.
I like to travel solo. Intentionally low budget and no plans. If I want to stay in a spot, I stay, if I want to move, I move. It's epic, but if you travel alone, all of the responsibility is on you. If you mess up, no one will correct your mistakes.
It's just like Bitcoin where you alone are responsible for all of your actions. As a reward, you'll get the ultimate freedom.
March 2022: I travel through the north coast of Colombia. After a week of living on the beach, a power surge (probably) fried my laptop. It died on spot.
Later in March: I lost my only credit card. Annoying but I can function just with the phone.
April 5th: After a marvelous day at the beach, I'm walking with some friends back to the town. Someone stops for a tea. I don't want it, so I just sit on the curb and enjoy a cig. I probably took my phone out of pocket and forgot it there or someone snatched it.
After 10 or so minutes, we came back to the hostel and with absolute horror, I noticed it finally happened, I lost my phone. My only device.
Adrenaline fueled, I ran back, looking everywhere, asking around, got a stranger to help me and call my number. It rang for some while but nobody picked up. That phone is worth a month of cheap life there if sold well…
I returned to the hostel and convinced a dude there (interhuman trust ftw) to let me log in to my password manager through his laptop and to try to locate my phone with Google. No luck. Can't connect.
Before I departed on this trip I was thinking about what would happen if this exact thing happened to me, to not lock myself out of everything.
I'm using random passwords everywhere, so I can't access anything unless I'm in my password manager. I also have a 2FA activated. Which, got lost with my phone. This would be a total nightmare, but thankfully I had backup code written on a piece of paper in my wallet which I didn't lose.
Tip 1: Carry offline backups!
In a stroke of "luck", I ran out of cash the same night. So here I am, cashless, cardless and phoneless. My brain is crunching numbers and calculating my options. Wtf do I do?
Tip 2: Carry a cash reserve!
There is a service I knew in Colombia about which exchanges BTC for pesos. But for that I needed to get to by BTC. So I have asked the same helpful awesome dude to help me recover my Bitcoin Lightning wallet on his phone. It was super easy and in just few minutes I had my funds at hand.
I had to exchange sats for LTC and exchange those for pesos. This exchange sent to the hostel owner where I stayed.
I managed to pay for my stay and got enough cash to buy an old (most likely stolen) smartphone to recover my accounts and wallets. Most of the Bitcoin wallets were easy to recover. However, I cant access Bitcoin Beach wallet cos it is connected to my phone number which I also lost with the phone.
Muun, Phoenix, Blue, Wallet of Satoshi, Exodus - easy recovery.
Simple Bitcoin Wallet gets a 3/5 stars, because there is no automatic recovery. You need access to your previous device to get your channel backups. I had multiple channels with various nodes and I had to close them all and reopen. Just some time and a few thousand sats lost.
For some reason I can't recover Blixt wallet at all. Some of my sats still sit there.
My shitcoin (fiat) banking app needs my, now lost, phone number to function so I'm "locked out" of those until I get a new SIM with the old number.
Did I learn to be more careful about my stuff? No.
But I learned few other things:
- Bitcoin rules, fiat sucks
- have offline backups when traveling
- have cash reserve (I know, fiat smells)
- all my actions to get cash were trusted. I trusted a service and multiple people not to scam me. Communism works well in a small group of good people.
If you like to travel light, don't burden yourself with ties to the fiat banking system, opt out and fly free.
👉 If you enjoyed this story, feel free to tip your fellow Anon here: https://legend.lnbits.com/tipjar/254
⚠️ Important reminder by the co-author of the Lightning Network white paper
🐻 Bear markets, the perfect time for some introspection
😇 Space cat is right you know