Stablecoin: The Key Driver of the Future Trillion-Dollar Payment Arena

Blockchain technology is essentially an extension of payment scenarios. Stablecoins not only hold an important position in the cryptocurrency market but also play an increasingly significant role in global payments and cross-border settlements. Currently, centralized stablecoins still account for over 90% of the market share, with USDT holding an absolute dominant position. Although stablecoins have issued over $150 billion, compared to the $20 trillion M1 figure reported by the Federal Reserve in 2024, the market value of stablecoins only accounts for 0.75%. In terms of payment applications, stablecoins still have a long way to go. The introduction of the Taproot Assets protocol has brought broad prospects for the application of stablecoins in high-frequency small payment scenarios and has also provided the possibility for the large-scale adoption of stablecoins as a regular payment method.

1. Stablecoin: The Emerging Trillion-Dollar Market

The booming development of the stablecoin market indicates that it is expected to become a trillion-dollar market in the future financial sector. Currently, the market capitalization of stablecoins has exceeded 160 billion USD, with daily trading volume reaching over 100 billion USD. Major countries are introducing relevant policies and regulations, and various institutions predict that stablecoins will lead a new trillion-dollar market, with significant growth stemming from the widespread application of global payment.

Stablecoins can be divided into two main categories: centralized and decentralized. Centralized stablecoins currently dominate the market, with USDT and USDC issuing 114.46 billion and 34.15 billion USD in stablecoins, respectively. Tether's annual gross profit reaches up to 4.5 billion USD, attracting numerous large institutions to enter the market.

Although stablecoins play an important role in cryptocurrency trading and DeFi, their integration with real-world business is still in its early stages. In the long run, the most promising application of stablecoins lies in the payment sector, especially in cross-border payments. Traditional cross-border payments involve multiple intermediaries, are costly, and have long settlement times. Stablecoins are not only a better choice but also an important channel for economic participation. As regulations trend towards compliance, the status of stablecoins in global payments will become increasingly important. In the future, the large-scale adoption of stablecoins in payment scenarios is expected to merge with DeFi, giving rise to PayFi, achieving interoperability, programmability, and composability in payment scenarios, and creating a new financial paradigm and product experience that traditional finance cannot achieve.

2. Taproot Assets Protocol and Lightning Network: Infrastructure for a Global Payment Network

Currently, stablecoins mainly circulate on the ETH and TRON networks, but the transaction fees on these networks usually exceed 1U, and the on-chain transfer time exceeds 1 minute. In contrast, the Lightning Network offers advantages of faster speed, lower cost, and high scalability.

2.1 Introduction to Lightning Network

The Lightning Network is the first relatively mature layer two scaling solution for the Bitcoin network. Multiple teams have independently developed the Lightning Network, including Lightning Labs, Blockstream, and ACINQ. Taproot Assets is the asset issuance protocol developed by Lightning Labs.

The Lightning Network is implemented by establishing a bidirectional state channel. The trading parties create a multi-signature address on-chain, allowing for the transfer of Bitcoin in and out within a limit. Both parties can make multiple payments back and forth until the settlement occurs after the transaction is complete. Only the latest version of the transaction is valid, which is enforced by the Hash Time Locked Contract (HTLC). Either party can broadcast the latest version to the blockchain at any time to close the channel, without the need for trust or custody.

2.2 Lightning Network: The Ideal Infrastructure for Global Payments with Stablecoins

The Lightning Network allows users to conduct an unlimited number of transactions off-chain without congesting the Bitcoin network, while retaining the security of the Bitcoin network. Theoretically, the scalability of the Lightning Network has no limits.

The Lightning Network has been operating for 9 years, built on the Bitcoin network, with over 57,000 nodes and a PoW consensus mechanism, ensuring the highest level of security. Currently, the Lightning Network's capacity exceeds 5,000 bitcoins, with more than 18,000 nodes and over 50,000 channels globally. It enables instant and low-cost transactions through bidirectional payment channels. The Lightning Network is being integrated and used by numerous payment providers and merchants worldwide, gradually becoming the most widely accepted decentralized solution for global payments.

2.3 Taproot Assets Protocol: The Last Mile of the Lightning Network

Before the emergence of the Taproot Assets protocol, the Lightning Network only supported Bitcoin as a payment currency, resulting in limited application scenarios. Although there were previously some issuance protocols on Bitcoin Layer 1, such as Atomical and BRC20 based on Ordinals, they did not support direct access to the Lightning Network. The Taproot Assets protocol addresses this issue.

Taproot Assets is an asset issuance protocol based on the Bitcoin network, led by Lightning Labs. Anyone or any institution can use this protocol to issue their own tokens, including stablecoins corresponding to fiat currency. Compared to other asset protocols, the advantage of Taproot Assets lies in its full compatibility with the Lightning Network, making it possible to use stablecoins for payments on the Lightning Network. This means that a large number of new assets (especially stablecoins) issued based on the Bitcoin network will circulate on the Lightning Network in the future, further enhancing the influence of the Lightning Network in the global payment field.

Leveraging the security and decentralization of Bitcoin, Lightning Labs' advocacy for "Bitcoinizing the dollar and global financial assets" is becoming a reality. The launch of the Taproot Assets mainnet protocol marks the official start of stablecoin applications in trillion-dollar payment scenarios.

3. Taproot Assets Protocol Detailed Explanation

The operational principle of the Taproot Assets protocol (referred to as TA) is deeply rooted in Bitcoin's UTXO model and relies on the Taproot upgrade of the Bitcoin network. These two core elements drive the effective operation of the protocol.

3.1 Comparison of UTXO Model and Account Model

UTXO (Unspent Transaction Output) is the foundation realized by the Bitcoin Layer 2 and the Ordi, Runes protocols. Unlike the Account model adopted by most public chains, the UTXO model can be understood as a wallet that holds redeemable checks. The Bitcoin network acts as a bank that can cash these checks, calculating the latest balance for each address through users trading these checks.

The UTXO model inherently eliminates the double-spending problem and provides higher security guarantees. The TA protocol fully inherits the security features of the Bitcoin network layer, avoiding the risks of erroneous transfers or missed transfers. In addition, the TA protocol adopts the concept of one-time sealing, ensuring that assets move with UTXO, enhancing transaction security and avoiding the risks of double-spending attacks and errors or malicious behaviors that may be caused by centralized institutions.

3.2 Taproot Upgrade: Achieving Complex Functions

The Taproot protocol upgrade in 2021 brought simple smart contract functionality to the Bitcoin network. Wallet addresses in P2TR format can implement more complex logic through Bitscript, making new and complex transaction types possible on-chain.

The most critical improvement is the implementation of multi-signature (multi-sig). This enhances the security of transactions for institutional users while improving privacy protection. Multi-sign addresses are the same length as private wallet addresses, making it impossible for outsiders to distinguish between them. This provides a solid foundation for institutional and B2B transactions, promoting broader commercial applications.

The most intuitive feeling for users is the change in wallet address format, with addresses starting with "bc1p..." indicating support for the Taproot upgrade.

3.3 TA Technical Principles

Unlike Ordinal and BRC20, the TA protocol adopts a more efficient method. Assets are marked on each UTXO, and only the root hash of the script tree is stored on-chain, while the scripts are kept off-chain. This approach reduces the issues of increasing block size and the accumulation of invalid data.

TA assets can be deposited into payment channels of the Lightning Network and transferred through the existing Lightning Network, enabling circulation between the Bitcoin mainnet and the Lightning Network.

The TA protocol utilizes the Taproot upgrade to record asset state transition on the Merkle tree of Taproot, while leveraging the "one-time seal" feature of Bitcoin UTXOs to achieve consensus on asset state transitions on the Bitcoin chain. This allows the TA protocol to operate without running off-chain indexers of other protocols.

The TA protocol uses a Sparse Merkle Summation Tree (MS-SMT) to manage asset states and defines the standards for asset state transitions. It is worth noting that only the root hash of the Merkle tree is written to the Bitcoin chain, ensuring the simplicity of the Bitcoin chain.

The relationship between 3.4 TA protocol and the Lightning Network

Taproot Assets protocol assets can seamlessly enter the Lightning Network, which is achieved through TA channels. This allows assets issued on the Bitcoin main chain, especially stablecoins, to circulate in the Lightning Network.

The implementation principle of the TA channel is the same as that of the state channel, based on hash time-locked contracts. The TA assets themselves are already within UTXO, so the implementation mechanism of the TA channel has not changed; it just means that the current channel also supports the circulation of TA assets.

3.5 User Costs and Centralized Custody Issues

Although the TA protocol only records the root hash of transactions on-chain, asset data needs to be stored off-chain on each client. Users need the private keys corresponding to the asset's UTXO and the relevant data of that asset on the Merkle tree.

The official implementation of the TA protocol (Tapd) heavily relies on the wallet service of Lightning nodes (LND) and lacks an account management mechanism. The decentralized nature of the Lightning Network requires users to build their own nodes, which presents a certain difficulty for ordinary users.

Currently, the wallet services on the Lightning Network are basically all custodial wallet solutions, which means that the new assets issued by TA will also be stored in custodial wallets. In the future, when a large amount of stablecoins circulates in TA's assets, large assets will prioritize being stored on the Bitcoin mainnet, while small assets and change will be recharged to the Lightning Network to meet payment needs. Therefore, decentralized storage and secure management of large assets become particularly important.

4. Self-Custody Solutions: Perfecting the Lightning Payment Network

Various decentralized solutions have emerged in the market for TA assets circulating on the Lightning Network. For example, LnFi has proposed a cloud hosting solution that lowers the threshold for users to deploy Lightning Network nodes.

The BitTap team focuses on the decentralized infrastructure of the TA protocol ecosystem and has developed a decentralized browser plugin wallet for TA, providing users with a self-custody wallet option.

The innovative wallet protocol proposed by BitTap (Bittapd) allows users to have complete control over their private keys. When a transaction needs to be signed, Bittapd interacts with Tapd on behalf of the user, providing a decentralized experience and security similar to that of the Metamask wallet. Users can use the BitTap wallet to store and transfer stablecoin assets on the Bitcoin mainnet, and freely transfer small amounts to the Lightning Network.

The Bittapd protocol is equivalent to a decentralized proxy of the TA protocol, transforming the centralized custodial account system of Tapd into a decentralized solution, while also serving as the network communication and forwarding role for plugin wallet user transaction requests.

5. Summary

Stablecoins are expanding from cryptocurrency trading into the global payment sector. The Lightning Network, with its low fees and fast transaction characteristics, has become an ideal infrastructure for achieving global payments. The launch of the Taproot Assets protocol further enhances the functionality of the Lightning Network, making it possible to issue and circulate stablecoins on the Bitcoin network, addressing the volatility issue of Bitcoin and improving its applicability in the payment field.

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