Stablecoin arriving on the L2 network of Bitcoin Lightning Network

Yesterday the Bitcoin developers working on the development of the Lightning Network scaling network found a solution to bring stablecoins into the famous L2.

Thanks to the native protocol “Taporoot Assets“, they managed to solve the problem of liquidity fragmentation in the on-chain world. 

Starting today, it is possible to mint various resources directly in native currency on the Lightning Network, making bitcoin the global routing network for the Internet of money.

Let’s see below how the protocol works.

The problem of liquidity fragmentation in the blockchain and stablecoin world

The issue of liquidity fragmentation is a problem that not only affects the Bitcoin Lightning Network, but the entire blockchain and stablecoin sector.

The strong proliferation of cryptographic networks has led to the creation of a digital economy with various poles of interest detached from one another.

Not all layers are in fact natively connected and often third-party routers and services are needed to move value across chains with different languages.

Anyone with modest experience in the web3 sector can indeed attest to the headache created by various symbolic standards and their incompatibility.

Users, unable to send payments across different ecosystems, are often left to navigate the complexity and risk of the bridge.

In addition to the difficulty in moving Bitcoin, various perils are encountered in the stablecoin front, where a large amount of economic value is fragmented across multiple networks.

Think that according to what was reported by K33 Research, the annual volume of stablecoins is projected to reach 30 trillion dollars in 2024, more than double the annual volume of Visa. Stablecoins today are responsible for about ⅓ of all the money moved on blockchain.

Source: https://lightning.engineering/posts/2024-07-23-taproot-assets-LN/

The team of developers at Lightning Labs believes that the Lightning Network can offer a great deal to serve as a connective tissue for multiple networks

Thanks to the latest invention of the “Taporoot Assets” protocol, users can conceive a new use for resources in Bitcoin and stablecoin, with greater flexibility in exchanges.

As stated by the CEO Elizabeth Stark:

“While the stable ones tend to have a network effect, including the dominance of USDT, the design of Taproot Assets also makes it easier to make transfers between assets, for example sending a stable coin in USD and receiving in BTC or sending between two different stable coins.”

The interoperability of the Lightning protocol “Taproot Assets”

The Bitcoin protocol based on Lightning Network “Taproot Asset” opens the doors to a new interoperable era for stablecoin and a wide range of resources.

Thanks to this version, various coins can be minted on bitcoin and sent immediately via the Lightning network at low cost.

Users can take advantage of the trustless payment network by routing the liquidity present in the Lightning Network and obtaining any stablecoin or currency as output.

By doing so, Bitcoin becomes a global routing network for the Internet of money, all while maintaining its scalability and decentralization features.

With an emblematic statement, the developer Ryan Gentry described what the vision of his own lightning team is:

“Together we are bitcoinizing the dollar and the financial assets of the world.”

The first users who participated in the test phase of the protocol have already minted over 170,000 assets on the chain.

The builders can now move from development on the chain to giving their users access to resources on a global network of low-cost payments with Lightning.

This feature will greatly improve the user experience and the variety of applications that developers can create, with many more connections and more liquidity.

It is important to emphasize that with Taproot Assets, asset issuers do not need to start their own node to exchange value in a payment channel.

Rather, they can take advantage of the nodes existing and the current network capacity Lightning equal to 5,279 Bitcoin, or 350 million dollars.

In practical terms, with multi-asset Lightning functionality now available, developers can open Lightning channels denominated in a unit of account of their choice that can interact natively with the rest of the network.

One of the most interesting possibilities introduced with this technology, however, concerns the transfer of stablecoin via Lightning Network.

This introduces for the first time in the history of Bitcoin the opportunity to manage a stable currency on the chain, without having to submit to the volatility of BTC.

Furthermore, with Taproot Assets, these users will have access to the Lightning ecosystem to improve speed, security, and UX.

Introduced stablecoin on the L2 network of Bitcoin Lightning Network

As mentioned, the end-to-end design principle of Taproot Assets has introduced the possibility of exchanging stablecoin on the Bitcoin Lightning Network. How does this protocol work in detail? 

The beneficiaries who need to receive a payment can send invoices denominated in any currency and leave the payment activity at the discretion of the payers.

This is where the swap providers come into play, facilitating the transfer between Lightning Network and another network.

The Request for Quote (RFQ) service included in this latest version also allows liquidity providers to manage their inventory of stablecoin and volatile assets independently, thus protecting themselves from the different market conditions.

Using the protocol, applications can negotiate the best exchange rates for users based on the offers of an open and global market.

The sats are used as routing fuel that allows Lightning nodes to forward such transactions to other peers without worrying about the final currency.

A process defined by the developers as “bitcoinizzazione del dollaro”

Thanks to Taproot Asset, the L2 Bitcoin will benefit from the additional demand for liquidity that will likely come from users. Regular Lightning node operators should also enjoy a increase in routing fees as the adoption of Taproot activities increases.

In this regard, the CEO of the Lightning Network Elizabeth Stark emphasized how important it is to leverage the Bitcoin network effect, introducing stablecoin and other currencies.

“We have imagined two important narratives, the rise of Layer 2 and stablecoin becoming a significant global asset – and both have been realized. As we have seen an explosion of creativity in the developer community, the need for a global, scalable, and interoperable protocol for the transfer of bitcoin and assets on bitcoin has only increased in importance.”