Lighting Network goes the right way with Stable Coin

Original | Odaily Planet Daily (@OdailyChina)

Author | Golem (@web3_golem)

On July 23, Lightning Labs, the main software developer of the Lighting Network, announced a major update of Taproot Assets on the Lighting Network, enabling support for long asset transfers other than BTC. Users can now mint Taproot Assets on the Mainnet and transfer assets instantly and at low cost through the Lighting Network.

Lightning Labs believes that this update is significant in helping to bring the multi-trillion dollar stablecoin market into BTC, thereby digitizing the US dollar and world financial assets into BTC. So why is Lightning Labs committed to developing stablecoins on BTC, and what advantages does it have over other asset issuance protocols? These issues will be explored below.

The Lighting Network’s Dedication to Stablecoins

As early as 2022, Lightning Labs launched the Taro protocol, aiming to bring Stable Coin and other assets into BTC and Lighting Network, and emphasized in the protocol release blog the demand for immediate Settlement of Stable Coin in the Lighting Network in countries and regions such as Latin America and West Africa. However, due to a copyright lawsuit storm in March 2023, the project had to be temporarily suspended.

In October 2023, the release of Taproot Assets on Mainnet coincides with the flourishing of BTC ecosystem assets issuance protocol. Therefore, many people may think that Lightning Labs just wants to join in the fun. However, the reality is that Taproot Assets is a continuation of the Taro protocol, and Lightning Labs’ idea of issuing stablecoins on BTC is even earlier than other protocols.

Although the introduction of Taproot Assets into the Nostr network’s Nostr Assets protocol did indeed briefly create a wave of wealth effect for Taproot Assets. However, blindly creating new assets is not the original intention of Lightning Labs, and Stable Coin remains its main development direction. Ryan Gentry, business development manager at Lightning Labs, wrote at the beginning of the Taproot Assets release blog, “Believe that we will see countless global stablecoins as Taproot Assets issuance, and global forex trading will be settled instantly through the Lighting Network.”

And then Lightning Labs has also been pushing for stablecoin experiments. In May 2024, Lightning Labs CEO Elizabeth Stark publicly announced that test transactions had been conducted on the Lighting Network using the Taproot Assets protocol and stated that releasing stablecoins on BTC will promote new financial use cases and bring more people into the currency and digital asset internet.

As of now, Lightning Labs has quietly been developing the technical support for stablecoins and other long assets to run on BTC and the Lighting Network for two years.

Adoption of Lighting Network in Emerging Markets

In mid-2021, after El Salvador announced that BTC would be used as a legal currency and released related infrastructure based on the Lighting Network for long, the number of Lighting Network Nodes and channels increased rapidly. As of the time of writing, there are a total of 13474 Nodes on the Lighting Network, nearly 50,000 payment channels, and the channel funds are about 5219 BTC (approximately 3.47 billion US dollars).

Lighting NetworkNode (left) and channel (right) count, data source: bitcoin visuals

It can be seen that the explosive rise of Lighting Network after 2021 mainly comes from countries and regions with high cost financial intermediaries such as El Salvador in Latin America and West Africa. Users use BTC and Lighting Network for daily transfer transactions, merchant payments, cross-border remittances, etc., which are more convenient and economical.

Before 2021, sending cross-border remittances to residents in El Salvador through TradFi giants such as Western Union required paying expensive service fees. In 2020 alone, remittance payments accounted for 23% of El Salvador’s GDP, approximately $5.9 billion. However, when using BTC as the remittance funds and conducting cross-border remittances using the Lighting Network, the service fees are almost zero in comparison.

Lighting Network needs to develop Stable Coin

In the past five years, Stable Coin has gradually replaced BTC and accounted for more than 50% of global on-chain volume. According to the data from K 33 Research, the annual volume of Stable Coin in 2023 is 11 trillion US dollars, and it is expected to exceed 30 trillion US dollars in 2024, which is twice the annual volume of Visa.

Source: Castle Island

The global demand for stablecoins cannot be denied, and the subsequent rise will be mainly driven by emerging markets such as Asia, Africa, and Latin America. Paolo Ardoino, CEO of Tether, also stated in April this year that stablecoins are not really needed in Europe and the United States, where there is a complete banking system.

In developing countries with incomplete financial systems, people need stable financial facilities that are cheap and have immediate settlement, not unstable assets. Although Lighting Network provides users with low-cost and low-latency settlement, the increasing number and capacity of network channels and the growing demands of application scenarios have increasingly hindered the development of BTC and Lighting Network in payment, decentralized finance and other fields due to the volatility of BTC itself and the resulting large transaction frictions. In this context, Lighting Network needs to develop stablecoins.

Lighting Network development Stable Coin advantages

The importance of stablecoins to the BTC ecosystem is self-evident, and other BTC ecosystem assets such as BRC 20, Runes, RGB++, etc. are also exploring how to issue stablecoins on the BTC ecosystem and create a Decentralized Finance flywheel. However, Taproot Assets, combined with the Lighting Network, have incomparable advantages.

• Complete related functions

On the infrastructure side, all asset issuers do not need to establish their own routing node subnetworks, but can use existing BTCNode routing, which enables Stable Coin to be quickly applied in established Lighting Network payment channels. It also introduces trustless and custody-free on-chain swaps, where Taproot Assets users and developers can natively exchange assets for BTC or other Taproot Assets via PSBT, providing support for subsequent on-chain applications of Stable Coin.

• Leveraging the existing huge user base

Another advantage of the Lighting Network is its rapid rise in the past few years, which has resulted in a large user base and partnerships in emerging markets such as Asia, Africa, and Latin America. This makes it easier for Stable Coins on the Lighting Network to reach real users and quickly cover application scenarios with the help of partners such as Wallet and payment software. In contrast, the Stable Coins issued by other BTC ecosystem assets’ issuance protocol are starting from scratch.

• Or get support from the stablecoin issuer Tether

Tether is the issuance provider of the third-ranked Stable Coin USDT in terms of Market Cap, and as early as 2022, it had planned to collaborate with Synonym to issue Tokens on the Lighting Network. Paolo Ardoino, CEO of Tether, also expressed support for the development of the Lighting Network on social media. In October 2023, when Lightning Labs released the Taproot Assets protocol, he referred to it as the “future.” Paolo Ardoino’s personal X account profile includes the tag “bitcoin + P2P,” and on July 21, he mentioned in a post that USDT and the Lighting Network provide payment support for P2P AI agents.

From these clues, it can be inferred that Tether may still have the idea of launching a stablecoin on BTC, and the Lighting Network may be its preferred partner.

Summary

When the Lighting Network was born, it was to solve the shortcomings of BTC in small payments. After 5 to 6 years of development, the Lighting Network has made initial progress in small payments with BTC. In this process, the vision of the Lighting Network has gradually evolved towards ‘tokenizing the US dollar and world financial assets into BTC’. When people are encouraged to use BTC in their daily lives, they are also willing to use the BTC network for practices in Decentralized Finance and Non-fungible Token fields.

Last October, Lightning Labs supported minting Taproot Assets on BTC Mainnet, but did not support transferring them on the Lightning Network. After half a year, today Lightning Labs has supported transferring Taproot Assets on the Lightning Network, bringing Stable Coin into the BTC ecosystem is just one step away.