Skip to content

Lightning Labs Enables Stablecoin Creation on the Bitcoin Blockchain

The Bitcoin L2 developers have released the alpha version of the Taproot Asset protocol, which allows the building of stablecoins on top of the Bitcoin blockchain.  

Stablecoin lightning

Stablecoins have once again proved their status as blockchain's 'killer-app'. This week, the developers of the Bitcoin Lightning Network (LN) successfully engineered stablecoin functionality on the original peer-to-peer (P2P) network.

The Lightning Network is a Layer 2 solution on top of the Bitcoin blockchain designed to facilitate faster and cheaper payment transfers, especially for low value and micro-payments. It operates via prefunded side ‘channels’ that process transactions without broadcasting them to the blockchain. Due to this LN transactions can also provide for better privacy.

In November 2021, the major Bitcoin network upgrade called Taproot introduced additional tools for programmability on the Bitcoin blockchain.  

Leveraging this functionality, LN developer Lightning Labs announced Taproot Assets in April 2022 – a solution that allows the issuing of various virtual ‘assets’ on the Bitcoin blockchain. Unlike other similar solutions, Taproot assets were designed to be compatible with the Lightning Network.

Having Lightning Network integration was critical since stablecoins were the primary use case for the envisaged asset protocol. Lighting Labs claimed that the ability to add stablecoins was one of the most popular requests they got from developers. Furthermore, easy swapping between bitcoin and fiat-currency-pegged Taproot assets is seen as critical for sourcing liquidity from bitcoin holders.

Ryan Gentry, the head of business development at Lightning Labs expressed his vision of the potential use cases:

“We believe this new era for Bitcoin will see a myriad of global currencies issued as Taproot Assets, and the world's foreign exchange transactions settled instantly over the Lightning Network.”

Industry leaders are already researching Bitcoin LN-based stablecoin options. The technical team at Paxos have revealed internal meetings on the subject during the Stablecoin’s at Scale webinar. Tether, which originated on the Bitcoin blockchain’s Omni layer and only started its crusade on alt-chains after that, is also investing in LN-based solutions. Coinbase’s Brian Armstrong has also recently shared the company's intentions for LN integration, which, if it happens, would probably move USDC on the Lightning Network too.

Lightning Network was designed in 2015 and has been operational since 2019. It was developed to manifest the original promise of the Bitcoin blockchain, enabling cheap and fast P2P payments. While its technical issues were eventually solved, bitcoin’s volatility has hindered its mass adoption and use of Lightning Network for small retail and P2P payments.

At time of writing, the total value locked (TVL) in the Lightning Network is only $150 million. This is just a tiny fraction of that in Ethereum or Tron where TVL is calculated in billions of USD. Considering the Bitcoin network's TVL, this would seem like a huge unused potential.

We shall continue to Observe whether Taproot-based stablecoins can 'make Bitcoin great again'.