The world of financial assets and alternative currencies has officially arrived at Bitcoin. If it wasn’t already clear after the slew of new protocols birthed by the Ordinals movement, the Edition of Lightning Labs’ Lightning-native Taproot Assets protocol feels like a commitment 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. While Taproot Assets was bypassed in its bid to bring assets to Bitcoin by more naïve protocols like BRC-20 or Runes, patience has been rewarded as proponents of the protocol claim it is superior in every way, from scalability to security.
With billions, if not trillions, of stablecoin opportunities abounding, Taproot Assets is a strong candidate to bridge the current gap between the dollar economy and Bitcoin.
To get a better sense of how their protocol compares to existing solutions, I sat down with a few members of the Lightning Labs team as they prepare to put the world of finance on 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
The proliferation of stablecoin networks over the past decade has fragmented the global on-chain economy and distanced it from Bitcoin’s. Anyone with even a passing experience using those networks can attest to the headaches created by differing token standards and their incompatibility.
In today’s blockchain inflationary environment, issuers must maintain endless integrations to support the infrastructure and liquidity needed to keep those chains thriving. Users who can’t send payments between ecosystems are often left to navigate the complexity and risk of cross-chain bridges on their own. The team at Lightning Labs believes that the Lightning Network can shine as the connective tissue for those economies.
“While stablecoins tend to have a network effect, including the dominance of USDT, Taproot Assets’ design also makes it easier to perform cross-asset transfers, for example sending a USD stablecoin and receiving it in BTC or sending between two different stablecoins,” said CEO Elizabeth Stark.
What happens if Taproot Assets are on the Lightning Network?
⚡️ Instantly processed foreign transactions!Alice can directly send USD to Bob in EUR.
#LightningNetwork #TaprootAssets #StableCoins #Lnfi photo.twitter.com/YOm6PJDwNs— lucas (@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 minimal effort and at low cost to end users. Beneficiaries can submit invoices denominated in any currency, leaving the settlement assets at the discretion of the payers. The Request for Quote (RFQ) service included in this latest release opens up entirely new possibilities for liquidity providers, exchanges, and brokers 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, global liquidity market. In this activity, sats are used as routing fuel, allowing any Lightning node on the network to relay those transactions to other peers without worrying about the final settlement currency, a process the Lightning Labs team has referred to as “bitcoinizing the dollar.”
As the industry anticipates continued growth in the number of issuers and assets, proponents of the protocol believe that the importance of this interoperability cannot be overstated. A payment experience that was previously fragmented into separate 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, which will likely be reflected in the cost and reliability of regular Bitcoin transactions. Regular Lightning node operators should also benefit from an increase in routing fees as the adoption of Taproot Assets increases.
When asked about the protocol’s evolution since its inception, Stark emphasized that leveraging Bitcoin’s existing network effect was central to the original vision.
“We had two major stories in mind: the rise of Layer 2s and stablecoins becoming a globally significant asset, and both have come to pass. 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 become more important.”
The arrival of new scaling proposals is at the top of the agenda when discussing the potential of their asset protocol with the Lightning Labs team. I’ve previously discussed the challenges that come with these unique designs, and there’s growing reason to believe that a standardized framework for assets will bring some coherence to the picture. In support of the argument that an interoperable layer is needed to connect these projects, an attendee at a recent hackathon hosted by layer two project Botanix Labs suggested using Lightning as a bridge without trust between EVM chains and Bitcoin.
Ryan Gentry, Head of Business Development at Lightning Labs previously marked the opportunity created by those new layer technologies, claiming that “DeFi needs the stablecoins issued on Taproot Assets to thrive, so the timing for these new projects couldn’t be better. Lightning will be the interoperable glue that ties them all together!”
In our conversation, Olaoluwa Osuntokun, CTO of Lightning Labs, echoed his colleague’s sentiments:
“Bringing stablecoins to Bitcoin helps to strengthen what can be built on the higher layers. Additionally, being able to properly represent another chain or asset within Bitcoin makes interoperability easier using constructs like bridges.”
Feeding the Bitcoin Development Ecosystem
When asked 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 within the Bitcoin ecosystem has led to a collection of new initiatives to join the Taproot Assets protocol. No longer pigeonholed by the store of value narrative, the integration of multiple asset classes into the ecosystem is creating a noticeable buzz within the developer ranks. Lightning Labs is excited to ride the momentum generated by this new wave of Bitcoin-based builders and believes they are exceptionally well-positioned to do so.
“We’ve already been blown away by the response from developers. People are staying up late into the night to participate in our community conversations, new teams are popping up all over the world, and many developers are testing and providing valuable feedback,” Gentry said.
To facilitate developer adoption, Taproot Assets has been carefully designed to be compatible with Lightning Labs’ industry-leading Lightning node implementation. Proponents argue that this distribution in an established software stack will be key to bootstrapping the protocol’s network effect. Today’s release comes with a significant series of functions which harnesses the power of Bitcoin’s Taproot upgrade, allowing developers to pick up known and existing concepts like PSBTs or multi-signature and apply them to different assets.
While the rise of alternative asset protocols on Bitcoin has generated controversy this year, Taproot Assets was specifically designed with scalability and efficiency in mind. Rather than unnecessarily consuming scarce Bitcoin block space, the protocol allows for the issuance of multiple assets within a single UTXO and keeps most relevant data off-chain for clients to independently validate.
Now that the payment channel implementation is available on the main network, we expect developers to start testing their integrations in a real-world environment. However, the team advises caution given the alpha status of the release.
The Lightning Network has faced growing pains since its introduction nearly a decade ago, but has made great strides recently, reaching an all-time high in USD-denominated liquidity. Advances in the protocol, such as splicing and progress around Lightning Service Providers (LSPs), have bolstered the protocol’s reliability and significantly improved the user experience. Lightning Labs believes that Taproot Assets is likely to help address lingering challenges, such as incoming liquidity, by increasing developer focus and encouraging a new breed of products and companies 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 increase, bringing with it new users and use cases. We are witnessing global Bitcoinization in real time.”
Anyone interested is encouraged to contribute to the growing community of developers building on Taproot Assets by reading the available Getting Started Guide. here.