The world of financial assets and altcoins has officially arrived in Bitcoin. And if it wasn’t already clear after the new series of protocols spawned by the Ordinals movement, launch Lightning Labs’ native Taproot Assets protocol feels like a dedication to this 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. While Taproot Assets has excelled in its efforts to bring assets to Bitcoin through simpler protocols like BRC-20 or Runes, patience has been rewarded as proponents of the protocol claim it is superior in all aspects, from scalability to security.
With billions, if not trillions, of stablecoin opportunities, Taproot Assets is well 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 stacks up against existing solutions, I chatted with some members of the Lightning Labs team as they prepared to integrate the world of finance into Bitcoin Mints. We explored Lightning’s potential as an interoperability layer and why Taproots Assets could open the door to the next phase of Bitcoin’s technical innovation.
Connecting Economies with Lightning Interoperability
The proliferation of stablecoin networks over the past decade has fragmented the global blockchain economy and kept it far removed from the Bitcoin economy. Anyone with even a modicum of experience using these networks can attest to the headaches that come with different token standards and incompatibility.
In today’s blockchain inflation environment, issuers must keep up with the endless integrations needed to support the infrastructure and liquidity needed for these chains to thrive. Users who are unable to send payments across ecosystems are often left to deal with the complexities and risks associated with bridging between chains. The Lightning Labs team believes that the Lightning Network has the potential to shine as the connective tissue for these economies.
“While stablecoins tend to have a network effect, including USDT dominance, the design of Taproot Assets also makes it easy to make transfers between assets, for example sending a stablecoin in USD and receiving it in BTC or sending between two different stablecoins,” says CEO Elizabeth Stark.
What happens when Taproot assets are on the Lightning Network?
⚡️ Instant settlement of foreign exchange!Alice can send US dollars to Bob instantly in euros.
#Lightning_Network #root origins #stablecoins #to deny pic.twitter.com/YOm6PJDwNs— Luke (@Web3Luke) July 20, 2024
Thanks to Taproot Assets’ end-to-end design principle, exchange providers called edge nodes facilitate transfers and exchanges between assets with no additional effort and at low cost to end users. Payees can submit invoices denominated in any currency and leave the payment origin at the payers’ discretion. The Request for Quotation (RFQ) service included in this latest release opens up entirely new opportunities for liquidity providers, exchanges, and brokerages to manage stablecoin inventories 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, global liquidity market. Under this activity, sats are used as routing fuel that allows any Lightning node on the network to transmit these transactions to other peers without concern for the final settlement currency, a process that the Lightning Labs team refers to as “USD to BTC conversion.”
As the industry anticipates continued growth in the number of issuers and assets, proponents of the protocol believe the importance of this compatibility cannot be overstated. The previously fragmented payment experience into individual networks has the opportunity to be unified under the same Lightning umbrella. In the process, the network will benefit from the additional demand for liquidity that will likely be reflected in the cost and reliability of regular Bitcoin transactions. Regular Lightning node operators should also enjoy increased routing fees as Taproot Assets adoption grows.
When asked about the evolution of the protocol since its inception, Stark emphasized the ability to leverage the influence of the existing Bitcoin network as a key component of the original vision.
“We envisioned two main narratives, the rise of the second layer and stablecoins becoming a global asset – both of which came to fruition. As the developer community grew more creative, the need for a scalable, interoperable global protocol for transferring Bitcoin and assets on Bitcoin grew.”
The arrival of new scalability proposals is at the forefront of our minds when discussing the potential of the Asset Protocol with the Lightning Labs team. I’ve previously addressed the challenges posed by these unique designs and there is growing reason to believe that a unified framework for assets brings some coherence to the picture. In further support of the thesis that an interoperable layer is needed to connect these projects, a participant in a recent hackathon organized by the Layer 2 project Botanix Labs suggested using Lightning as a Unreliable Bridge Between EVM and Bitcoin chains.
Head of Business Development at Lightning Labs, Ryan Gentry It was previously highlighted. The opportunity presented by these new layered technologies, claiming that “DeFi will need stablecoins issued by Taproot Assets in order to thrive, so the timing for these new projects couldn’t be better. Lightning will be the glue that holds it all together!”
In our chat, Lightning Labs CTO Olaoluwa Osuntokun echoed his colleague’s sentiments:
“Bringing stablecoins to Bitcoin helps enhance what can be built on the higher layers. Furthermore, being able to properly represent another chain or asset within Bitcoin makes interoperability using structures like bridges easier.”
Bitcoin Development System Support
When asked about the significance of this release, the team was quick to point out how important the developer community as a whole is to this journey. In fact, the prospect of expanding the range of use cases and assets available within the Bitcoin ecosystem has prompted a host of new initiatives to coalesce around the Taproot Assets protocol. The integration of different asset classes into the ecosystem is no longer confined to a store-of-value narrative, but is creating a noticeable buzz among developers. Lightning Labs is excited to capitalize on the momentum generated by this new direction for developers on Bitcoin and believes they are exceptionally well-positioned to do so.
“We’ve been really blown away by the response from developers — we have people staying up late at night to join our community calls, new teams popping up in different places around the world, and so many developers testing and providing valuable feedback,” Gentry shares.
To facilitate developer adoption, Taproot Assets has been carefully designed to be compatible with Lightning Labs’ industry-leading Lightning node implementation. Proponents claim that this distribution in a stable software stack will be key to smoothing the protocol’s network effect. Today’s release comes with a major feature A set of features Which leverages the power of Bitcoin’s Taproot upgrade, allowing developers to take well-known and existing concepts like PSBTs or multi-signature and apply them to different assets.
Although the emergence of alternative asset protocols on Bitcoin has been controversial this year, Taproot Assets was specifically designed with scalability and efficiency in mind. Rather than needlessly consuming Bitcoin’s scarce block space, the protocol allows multiple assets to be issued within a single UTXO and keeps most of the relevant data off-chain for customers to independently verify.
Now that the payment channel implementation is live on the mainnet, the expectation is that developers will start testing their integrations within a real-world environment, although the team advises caution given the beta status.
After facing increasing difficulties since its introduction nearly a decade ago, the Lightning Network has made significant strides recently, reaching an all-time high in USD-denominated liquidity. Protocol developments such as staking and advancements around Lightning Service Providers (LSPs) have enhanced the reliability of the protocol and greatly improved the user experience. Lightning Labs believes that Taproot Assets is likely to help address prominent challenges such as incoming liquidity by expanding developer mind share and incentivizing a new wave of products and companies to come up with innovative solutions.
“The momentum building around Bitcoin is undeniable. With Bitcoin’s native assets on Lightning, the developer momentum will only accelerate, bringing with it new users and new use cases. We are witnessing a global Bitcoin in real time.”
Anyone interested is encouraged to start contributing to the growing developer community that relies on Taproot Assets by reading the available Getting Started guide. here.
