Stablecoins Are Coming To Bitcoin's Lightning Network

The world of financial assets and alternative currencies has officially arrived to Bitcoin. If it wasn’t clear already following the slew of new protocols birthed by the Ordinals’ movement, the release of Lightning Labs’ Lightning-native Taproot Assets protocol feels like a consecration to the phenomenon.

More than two years after the protocol was originally announced, users and developers can now open channels denominated in a unit of account of their choice and leverage the existing Lightning Network infrastructure. Though Taproot Assets was leapfrogged in its effort to bring assets to Bitcoin by more naive protocols such as BRC-20 or Runes, patience has been rewarded as advocates of the protocol contend it is superior in all aspects, from scalability to security.

With billions, if not trillions, of stablecoin opportunities abound, Taproot Assets is positioned as a strong contender to bridge the current gap between the dollar economy and Bitcoin.

To get a better sense of how their protocol stands up to existing solutions, I had a conversation with some members of the Lightning Labs team as they prepared to onboard the world of finance onto Bitcoin rails. We explored Lightning’s advantage as an interoperability layer and why Taproots Assets could unlock the next phase of Bitcoin technical innovation.

Bridging Economies Using Lightning Interoperability

Last decade’s proliferation of stablecoin networks has fragmented the global on-chain economy and kept it at arm's length from Bitcoin’s own. Anyone with modest experience using those networks can attest to the headaches created by different token standards and their incompatibility.

In today’s blockchain inflation environment, issuers must keep up with endless integrations to support the infrastructure and liquidity required for those chains to thrive. Users, unable to send payments across ecosystems, are often left to navigate the complexity and risk of cross-chain bridges. The team at Lightning Labs is convinced of Lightning Network’s opportunity to shine as a connective tissue for those economies.

“While stablecoins do tend to have a network effect, including the dominance of USDT, the design of Taproot Assets also makes it easier to do cross-asset transfers, for example sending a USD stablecoin and receiving in BTC or sending between two different stablecoins,” says CEO Elizabeth Stark.

What happens when Taproot Assets are on the Lightning Network?
⚡️ Instant Settled Foreign Exchange!

Alice can send USD to Bob instantly in EUR.
#LightningNetwork #TaprootAssets #StableCoin #Lnfi pic.twitter.com/YOm6PJDwNs— luke (@Web3Luke) July 20, 2024

Thanks to Taproot Assets’ end-to-end design principle, swap providers called edge nodes facilitate transfers and exchanges between assets with no additional effort and at low costs to end users. Payees can submit invoices denominated in any currency and leave the payment asset at the payers’ discretion. The Request for Quote (RFQ) service included in this latest release opens up entirely new opportunities for liquidity providers, exchanges & brokerages to manage their stablecoin inventory and hedge against different market conditions. Using the protocol, applications can seamlessly negotiate the best exchange rates for end users based on offers from an open and global liquidity market. Underneath this activity, sats are used as the routing fuel allowing any Lightning node on the network to relay those transactions to other peers without concern for the ultimate settlement currency, a process the Lightning Labs team has referred to as “bitcoinizing the dollar.”

As the industry envisions continued growth in the number of issuers and assets, proponents of the protocol believe the importance of this interoperability cannot be overstated. A payment experience previously fragmented into individual networks has the opportunity to be unified under the same Lightning umbrella. In the process, the network stands to benefit from the additional demand for liquidity which is likely to reflect in the cost and reliability of regular Bitcoin transactions. Regular Lightning node operators should also enjoy an uptick in routing fees as the adoption of Taproot Assets ramps up.

Asked about the evolution of the protocol since its inception, Stark stressed the ability to leverage Bitcoin’s existing network effect as central to the original vision.

“We envisioned two major narratives, the rise of Layer 2s and stablecoins becoming a globally significant asset – and both have come to fruition. As we’ve seen an explosion of creativity in the developer community, the need for a global, scalable, interoperable protocol for transferring bitcoin and assets on bitcoin has only increased in importance.”

The arrival of new scaling proposals is top of mind when discussing the potential of their asset protocol with the Lightning Labs team. I’ve previously covered the challenges created by those unique designs and there are increasing reasons to believe that a standardized framework for assets brings some cohesion to the picture. Further supporting the thesis that an interoperable layer is needed to connect those projects, a participant in a recent hackathon organized by layer two project Botanix Labs proposed to use Lightning as a trustless bridge between EVM chains and Bitcoin.

Lightning Labs’ Head of Business Development Ryan Gentry previously highlighted the opportunity created by those novel layer technologies, claiming that “DeFi will require the stablecoins issued on Taproot Assets in order to thrive, so the timing for these new projects couldn’t be better. Lightning will be the interoperable glue that will connect them all!”

In our chat, Lightning Labs CTO Olaoluwa Osuntokun echoed his colleague’s sentiments:

“Bringing stablecoins to Bitcoin helps to supercharge what can be built on the higher layers. Further, being able to properly represent some other chain or asset within Bitcoin makes interoperability using constructs like bridges easier.”

Fueling The Bitcoin Development Ecosystem

When questioned about the importance of this release, the team is quick to point out how essential the developer community at large has been in this journey. Indeed, the prospect of expanding the range of use cases and assets available within the Bitcoin ecosystem has propelled a collection of new initiatives to rally around the Taproot Assets protocol. No longer pigeonholed by the store of value narrative, the integration of different asset classes into the ecosystem is creating a noticeable buzz in developers' ranks. Lightning Labs is excited to ride the momentum generated by this new trend of builders on Bitcoin and believes they are exceptionally positioned to do so.

“We've been blown away by the developer response already--we have people staying up late at night to join our community calls, new teams popping up in various places around the world, and lots of devs testing and providing valuable feedback,” shares Gentry.

To facilitate developer adoption, Taproot Assets was carefully engineered to be compatible with Lightning Labs’ industry-leading Lightning node implementation. Supporters argue this distribution into an established software stack will be key to bootstrap the protocol’s network effect. Today’s release comes with a significant suite of features that harnesses the power of Bitcoin’s Taproot upgrade, allowing developers to pick up known and existing concepts such as PSBTs or multi-signature and apply them to different assets.

Although the emergence of alternative asset protocols on Bitcoin has generated controversy this year, Taproot Assets was specifically designed with scalability and efficiency in mind. Rather than needlessly consume scarce Bitcoin block space, the protocol allows for the issuance of multiple assets within a single UTXO and keeps most of the relevant data off-chain for clients to independently validate.

Now that the payment channel implementation is available on mainnet, the expectation is for developers to start testing their integrations within a real-world environment though the team advises caution given the alpha status of the release.

Having faced growing pain since its introduction nearly a decade ago, the Lightning Network has hit significant strides recently, reaching an all-time high in USD-denominated liquidity. Advances to the protocol such as splicing and the progress around Lightning Service Providers (LSPs) have bolstered the protocol’s reliability and improved the user experience considerably. Lightning Labs believes Taproot Assets is likely to help address outstanding challenges such as inbound liquidity by expanding the developer mind share and incentivizing a new cohort of products and businesses to come up with innovative solutions.

“The growing momentum around building on Bitcoin is undeniable. With bitcoin-native assets on Lightning, developer momentum will only accelerate, bringing new users and use cases along with it. We are witnessing global bitcoinization in real-time.”

Anyone interested is encouraged to start contributing to the growing community of developers building on Taproot Assets by reading the getting started guide available here.