Stablecoins have become an essential part of the cryptocurrency market and are increasingly significant in global payments and cross-border settlements. Despite the centralization of the stablecoin market, with over 90% of market share and Tether’s USDT dominating, stablecoins still represent only 0.75% of the M1 money supply according to the 2024 Federal Reserve report. The launch of the Taproot Assets protocol indicates that stablecoins could play a major role in high-frequency, low-value payments, paving the way for their mass adoption as a standard payment method.

1. Stablecoins: The Next Trillion-Dollar Track

The rapid growth of the stablecoin market indicates its potential to become a trillion-dollar sector in the future of finance. Currently, the market capitalization of stablecoins exceeds $160 billion, with daily trading volumes surpassing $100 billion. As major countries introduce regulations for stablecoins, multiple institutions predict that stablecoins will pave the way for a new trillion-dollar market, with the primary growth stemming from their extensive use in global payments.

Stablecoins can be categorized into centralized and decentralized types. Decentralized stablecoins are further subdivided into algorithmic stablecoins, those backed by collateralized crypto assets, and hybrid types combining both methods. At present, centralized stablecoins dominate the market, with the two giants, USDT and USDC, issued by Tether and Circle, accounting for $114.46 billion and $34.15 billion in circulation, respectively. Remarkably, Tether, with only 125 employees, generates an annual gross profit of $4.5 billion. Such lucrative opportunities have naturally attracted significant institutional investments:

• BlackRock issued a tokenized fund, BUILD, on Ethereum, designed to provide stable value and earn yields, becoming a large tokenized fund with a market cap of $384 million.
• On July 24, JD Blockchain Technologies (Hong Kong) announced plans to issue a Hong Kong dollar-pegged stablecoin.

Centralized stablecoins have already achieved widespread adoption within the crypto ecosystem. Most transactions and settlements on both decentralized exchanges (DEX) and centralized exchanges (CEX) are conducted using centralized stablecoins. In contrast, decentralized stablecoins, typically backed by crypto assets, are primarily used in lending protocols.

Although stablecoins play a vital role in cryptocurrency trading and decentralized finance (DeFi), their integration with the traditional business sector is still in its early stages. In the long run, the most promising use case for stablecoins lies in the payments sector, particularly in cross-border payments. Currently, cross-border payments involve multiple intermediaries, including issuing banks, payment gateways, and processors, making the process costly and time-consuming. Stablecoins offer not just a better alternative but also a crucial channel for economic participation. As regulatory frameworks for stablecoins gradually align with compliance standards, their role in global payment scenarios will become increasingly significant. Moreover, the large-scale adoption of stablecoins in payment scenarios will likely drive their integration with DeFi, giving rise to “PayFi,” a new financial paradigm that offers interoperability, programmability, and composability in payment scenarios—features that traditional finance cannot achieve.

2. Taproot Assets Protocol + Lightning Network: The Potential Foundation for a Global Payment Infrastructure

Currently, stablecoins primarily circulate on the Ethereum (ETH) and TRON blockchains, but these networks often involve transaction fees exceeding $1 and on-chain transfer times of over a minute. In contrast, the Lightning Network offers advantages in terms of faster transactions, lower costs, and higher scalability.

2.1 What is the Lightning Network?

The Lightning Network is the first mature Layer 2 scaling solution built on the Bitcoin network. After the release of the Lightning Network whitepaper, several teams, including Lightning Labs, Blockstream, and ACINQ, independently developed their versions of the Lightning Network. Taproot Assets is an asset issuance protocol developed by Lightning Labs.

The process works as follows: Two parties establish a bi-directional state channel. The parties, A and B, create a 2-of-2 multisignature address on-chain, allowing both to transfer or deposit Bitcoin within a set limit. Before making any transfers, they exchange locked data and record transactions, enabling multiple back-and-forth payments. Once all transactions are completed, the parties settle, and the Bitcoin from the multisig address is distributed according to the settlement amounts. Only the latest transaction version is valid, enforced by Hash Time-Locked Contracts (HTLC). Either party can close the channel at any time by broadcasting the most recent version to the blockchain, without requiring trust or custodianship.

This setup allows parties to conduct unlimited off-chain transactions, using the Bitcoin network as an arbitrator. The blockchain is only involved when the transaction is finalized or if an error occurs (e.g., insufficient funds in one party’s wallet), at which point the smart contract intervenes to execute the transaction on the blockchain. This is akin to signing many legal contracts without going to court each time—court only gets involved when final confirmation is needed or if a dispute arises.

2.2 The Lightning Network as the Optimal Infrastructure for Global Stablecoin Payments

This means users can exchange an unlimited number of transactions off-chain without congesting the Bitcoin network, while still relying on Bitcoin’s security. Theoretically, the scalability of the Lightning Network is limitless.

Over the past nine years, the Lightning Network has been built on the Bitcoin network, which is considered the most secure in the crypto ecosystem, with over 57,000 nodes and a Proof-of-Work (PoW) consensus mechanism. This ensures the maximum security of the Lightning Network.

As of now, the Lightning Network has a capacity of over 5,000 BTC, with more than 18,000 nodes and 50,000 payment channels worldwide. By establishing bi-directional payment channels, it enables instant and low-cost transactions. The Lightning Network is increasingly being integrated and used by payment providers and merchants globally, positioning itself as the most widely accepted decentralized solution for global payments.

Bitcoin assets currently dominate half of the total cryptocurrency market capitalization, and as the market cycle shifts back towards the Bitcoin ecosystem, the Lightning Network, as the first Layer 2 scaling solution for Bitcoin, has effectively realized Satoshi Nakamoto’s vision of a peer-to-peer global payment system. The Lightning Network has become the most orthodox and widely accepted solution within the Bitcoin community, making it the ideal infrastructure for global payments.

2.3 Taproot Assets Protocol Completes the Last Mile for the Lightning Network

However, a key limitation of the Lightning Network before the introduction of the Taproot Assets protocol was its support for only Bitcoin as the currency for payments, which restricted its application scenarios. Given Bitcoin’s status as digital gold, most people are reluctant to spend their Bitcoin.

Previously, there were other Bitcoin Layer 1 issuance protocols, such as Atomical and the Ordinals-based BRC20, but these did not support direct integration with the Lightning Network. The Taproot Assets protocol, developed by Lightning Labs, addresses this issue. It is an asset issuance protocol based on the BTC network. Similar to the Ordinals protocol, Taproot Assets allows anyone or any institution to issue their own tokens, including stablecoins pegged to fiat currencies like USD, AUD, CAD, and HKD.

The key advantage of Taproot Assets over other asset protocols is its complete compatibility with the Lightning Network, making it possible to use stablecoins for payments on the Lightning Network. This implies that a large number of new assets (especially stablecoins) issued on the Bitcoin network will likely circulate on the Lightning Network in the future. This development, in turn, enhances the Lightning Network’s global payment capabilities and influence.

Relying on Bitcoin’s security and decentralization, Lightning Labs’ vision of “Bitcoinizing the dollar and global financial assets” is becoming a reality. The launch of the Taproot Assets mainnet protocol marks the official beginning of the trillion-dollar payment scenario for stablecoins.

3. In-Depth Analysis of the Taproot Assets Protocol (TA)

The Taproot Assets (TA) protocol operates on principles deeply rooted in Bitcoin’s UTXO (Unspent Transaction Output) model, and its implementation is dependent on the Bitcoin network’s Taproot upgrade. These two elements are the core drivers behind the effective functioning of the TA protocol.

3.1 UTXO Model vs. Account Model: Differences, Advantages, and Disadvantages

The UTXO model is a crucial concept, serving as the foundation for all Bitcoin Layer 2 protocols and other protocols like Ordinals and Runes. In contrast, most other blockchains, such as Ethereum and Solana, use the Account model. Below is a conceptual comparison of the two:

The Account model is straightforward and intuitive, similar to how an Alipay account works. Each income and expenditure is directly reflected as changes in the account balance that users can see.

The UTXO model, on the other hand, can be understood as a wallet held by an individual “A.” This wallet contains checks authorized by B, C, and D that A can redeem, as well as checks A has authorized for E, F, and G to redeem. The balance in A’s wallet is the total value of the checks from B, C, and D minus the total value of the checks given to E, F, and G. The Bitcoin network functions like a bank that can settle these checks, updating each user’s wallet balance based on the latest transactions between users.

Due to its unique characteristics, the UTXO model inherently prevents double-spending, providing higher security than the account-based model. Additionally, the TA protocol fully inherits the security features of the Bitcoin network, mitigating the risks of incorrect or incomplete transactions.

The TA protocol also employs a concept known as “one-time sealing,” where once a UTXO is confirmed as spent, it cannot be reused. This ensures that assets move with the UTXO. In this system, the miner who mines the longest chain has the final say over the UTXO and controls its use. Unlike BRC20, which relies on off-chain indexes to identify assets, the TA protocol enhances transaction security by preventing double-spending attacks and eliminating the risks of errors or malicious behavior by centralized entities. These characteristics make the TA protocol, combined with the Lightning Network, a reliable infrastructure for payment scenarios.

3.2 The Taproot Upgrade: Enabling More Complex Functions

The 2021 Taproot protocol upgrade introduced simple smart contract functionality to the Bitcoin network. For instance, P2TR (Pay-to-Taproot) wallet addresses can execute more complex logic via Bitscript, making new and sophisticated types of on-chain transactions possible. An illustration of the Taproot upgrade is provided below:

Taproot Mechanism, River: https://river.com/learn/what-is-taproot/

One of the most critical improvements brought by Taproot is the implementation of multisignature (multisig) capabilities. This feature enhances the security of transactions for institutional users. Multisig addresses have the same length as private wallet addresses on the public key address, making them indistinguishable from external observers, thereby improving security and privacy. This advancement lays a solid foundation for institutional and B2B (business-to-business) transactions, driving broader commercial applications.

The most noticeable change for users is the new wallet address format, with addresses beginning with “bc1p…,” indicating that the wallet supports the Taproot upgrade.

3.3 Technical Principles of Taproot Assets (TA)

Initially, the Ordinals and the derivative BRC20 protocol, which sparked the Bitcoin ecosystem, were based on the account model, where balances were tied to addresses. The issuance of assets was done by “tagging” the smallest unit of Bitcoin, the “satoshi,” by adding specific identifiers or data, effectively mapping the satoshi to a particular asset. The data corresponding to the asset’s state was stored in JSON format within the segregated witness (SegWit) section of a block, which is the area used to store transaction signatures or witness data. Once an asset transaction occurred between two parties, the script recording the asset change would be “inscribed” into the block and interpreted by an off-chain indexer.

However, this method required that every transaction of Ordinals or BRC20 assets be recorded on-chain, leading to increased block sizes and the accumulation of non-essential data, which would be permanently stored on the Bitcoin blockchain. This ultimately puts growing pressure on the data storage requirements of full nodes. In contrast, the TA protocol adopts a more efficient approach, where assets are tagged to each UTXO (Unspent Transaction Output), with only the root hash of a script tree stored on-chain, while the scripts themselves are kept off-chain.

Moreover, TA assets can be deposited into payment channels of the Lightning Network and transferred via the existing Lightning Network infrastructure, meaning that TA assets represent a new type of asset that can circulate on both the Bitcoin mainnet and the Lightning Network.

As the name suggests, Taproot Assets is a protocol developed using Bitcoin’s Taproot upgrade (BIP 341). The Taproot upgrade allows a UTXO to be spent using either the original private key or a script from a Merkle tree.

In summary, the Taproot Assets protocol extends the functionality introduced by the Taproot upgrade by recording asset state transitions on the Merkle tree within Taproot. Additionally, it leverages the “one-time seal” characteristic of Bitcoin’s UTXO to achieve consensus on asset state transitions on the Bitcoin blockchain, eliminating the need for off-chain indexers required by other protocols. The Taproot Assets protocol employs the asset management structure shown in the diagram below, utilizing a Merkle-Sum Sparse Merkle Tree (MS-SMT) to manage asset states, and it defines the standards that must be followed for asset state transitions.

Taproot Assets Trees, Lightning Labs Overview

It’s important to note that not all data from the Merkle tree is written to the Bitcoin blockchain; only the root hash of the Merkle tree is recorded on-chain. This means that regardless of how large the asset data becomes, the transaction size on the Bitcoin blockchain remains unchanged. From this perspective, Taproot Assets is a protocol that does not pollute the Bitcoin blockchain with excessive data.

3.4 Relationship Between the TA Protocol and the Lightning Network

In Lightning Labs’ latest product release, assets under the Taproot Assets protocol can now seamlessly enter Bitcoin’s Layer 2 Lightning Network. This integration is achieved through the Taproot Assets Channel (TA Channel). Previously, the Lightning Network was a peer-to-peer Bitcoin payment network where only Bitcoin could circulate, with no other crypto assets involved. The introduction of the Taproot Assets protocol changes this by allowing the issuance of assets, particularly stablecoins, on the Bitcoin mainnet through the Taproot Assets protocol, which can then circulate within the Lightning Network.

As illustrated in the diagram, a stablecoin asset, L-USD, issued through the Taproot Assets protocol is transferred by Alice to Zane via the Lightning Network, with a value of $10 in L-USD.

Example of a Taproot Assets Payment on the Wider Lightning Network

The implementation of a Taproot Assets Channel (TA Channel) works similarly to a State Channel, as both are based on Hash Time-Locked Contracts (HTLCs). Since Taproot Assets are inherently stored within a UTXO (Unspent Transaction Output), the mechanism for implementing a TA Channel remains unchanged. Previously, the channel could only facilitate the transfer of Bitcoin, but now it also supports the transfer of Taproot Assets. The TA protocol thus enables the seamless transfer of assets like stablecoins across the Lightning Network, extending its utility beyond Bitcoin alone.

3.5 High User Costs and Centralized Custody Issues

Although the TA protocol records only the root hash of each transaction on-chain, ensuring the simplicity of the Bitcoin blockchain, the trade-off is that asset data must be stored off-chain on each client. Similar to the RGB protocol, users must rely on Client-Side Validation (CSV) to verify the validity of assets. For users to handle Taproot Assets as easily as BTC, they must have the private key corresponding to the asset’s UTXO (or Virtual UTXO) and the related data from the Merkle tree.

Furthermore, the official implementation of the Taproot Assets protocol (Tapd) heavily relies on the wallet services of Lightning nodes (LND) and lacks an account management system. The decentralized architecture of the Lightning Network means that users must set up their own nodes, a challenging task for most users, which has hindered the widespread adoption of the Lightning Network.

As a result, most wallet services on the Lightning Network are custodial solutions, meaning that assets issued under the TA protocol are also likely to be stored in custodial wallets. In the future, when a significant volume of stablecoins circulates as TA assets, large amounts will likely be stored on the Bitcoin mainnet due to its higher security and stronger consensus. Only smaller amounts needed for payments will be transferred to the Lightning Network. Therefore, for the storage and secure management of large assets, it is crucial to adopt more decentralized methods that allow users to fully own their stablecoins.

4. Self-hosted solution – completing the last piece of the Lightning Payment Network puzzle

At present, there are many decentralized solutions for the circulation of TA assets on the Lightning Network that have appeared on the market. For example, LnFi has proposed a cloud hosting solution that allows users to easily deploy their own Lightning Network nodes, effectively lowering the threshold for user participation.

And the BitTap team, which focuses on developing decentralized infrastructure for the TA protocol ecosystem, has developed TA’s decentralized browser plug-in wallet, providing users on TA with the right to self-host their wallets.

BitTap’s Innovative Wallet Protocol (Bittapd)

The Bittapd protocol, introduced by BitTap, offers a decentralized wallet solution where users maintain full control over their private keys. When a transaction requires a signature, Bittapd interacts with Tapd on behalf of the user, providing a fully decentralized experience and security similar to that of the MetaMask wallet. This setup ensures that when stablecoins are issued and circulated on the Taproot Assets (TA) protocol, users can store and transfer their stablecoin assets on the Bitcoin mainnet using the BitTap wallet. Additionally, they have the freedom to transfer small amounts to the Lightning Network as needed. The technical principle of BitTap is as follows:

BitTap wallet architecture, Bittap Docs: https://doc.bittap.org/developer-guides/overview

The Bittapd protocol acts as a decentralized proxy for the TA protocol, transforming Tapd’s originally centralized custodial account system into a decentralized solution. It also handles the network communication and transaction forwarding tasks when users of the plugin wallet initiate transaction requests.

5. Conclusion

Stablecoins have garnered widespread attention and adoption globally, evolving from a niche tool for cryptocurrency trading to a crucial option for global payments. The Lightning Network, with its low fees and fast transactions, has become an ideal infrastructure for enabling global payments. The introduction of the Taproot Assets (TA) protocol further enhances the functionality of the Lightning Network by enabling the issuance and circulation of stablecoins on the Bitcoin network. This protocol addresses the volatility of Bitcoin, significantly increasing its applicability in the payments sector.

Moreover, to address the centralization issues in the Lightning Network and its wallet services, decentralized wallet solutions such as those developed by the BitTap team have emerged. These solutions offer users a more secure and decentralized way to manage their assets, completing the final piece of the puzzle for making Taproot Assets and the Lightning Network a global payment infrastructure.

While traditional payment infrastructures like Alipay, PayPal, and Stripe leverage their transaction volume, large user bases, government cooperation, and brand recognition, they are still bound by their custodial nature. Their reliance on complex internet and banking systems can lead to inefficiencies, potential for malicious behavior, and the possibility of government sanctions. Additionally, in cross-border payments, strict regulatory policies and institutional limitations often restrict payment accounts based on their jurisdiction and transfer limits. These factors collectively impact the security and flexibility of traditional payment methods.

The payment infrastructure formed by the TA protocol and the Lightning Network not only matches traditional payment institutions in terms of immediacy but also achieves trustlessness through sophisticated code design. The self-custody solutions within this ecosystem ensure that users retain full ownership of their assets, supporting the unrestricted and unconditional transfer of TA protocol tokens anytime, anywhere. This elevates payment freedom to an unprecedented level.

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