原文作者：Evan  Haozhe, Waterdrip Capital; Peter  Boris, BitTap

introduction

The essence of blockchain is an extension of payment scenarios. In terms of payment scenarios, stablecoins not only occupy an important position in the cryptocurrency market, but also play an increasingly important role in global payments, cross-border settlements, etc. At present, the centralized stablecoin market still occupies more than 90% of the market share. Among them, USDT issued by Tether occupies an absolute dominant position in stablecoins. In addition, although more than $150 billion of stablecoins have been issued, according to the M1 amount of $20 trillion reported by the Federal Reserve in 2024 (including all cash in circulation, traveler's checks, funds in current deposit accounts, etc.), the market value of stablecoins is only 0.75% of M1. The application of stablecoins in payment still has a long way to go. The launch of the Taproot Assets protocol indicates that stablecoins have broad imagination space in high-frequency and small-amount payment scenarios, and also indicates that the large-scale adoption of stablecoins as a conventional means of payment is possible.

1. Stablecoin is the next trillion-dollar track in the future

The booming stablecoin market indicates that it has the potential to become a trillion-dollar market in the future financial sector. Currently, the market value of stablecoins has exceeded $160 billion, and the daily trading volume is as high as more than $100 billion. Mainstream countries have introduced policies and regulations related to stablecoins; at the same time, many institutions predict that stablecoins will attract a new trillion-dollar market, and the new incremental market mainly comes from the widespread use of stablecoins in global payments.

Stablecoins can be divided into two categories: centralized stablecoins and decentralized stablecoins; decentralized stablecoins can be further divided into algorithmic stablecoins and stablecoins issued by pledging crypto assets, as well as a combination of both. Currently, centralized stablecoins occupy an absolute dominant position in the market. The two giants USDT and USDC, Tether and Circle, have issued USD stablecoins worth $114.46 billion and $34.15 billion respectively. Among them, Tether, with a company size of 125 people, has a gross profit of $4.5 billion a year. Such an attractive opportunity naturally attracted many large institutions to enter the market:

  • BlackRock has launched a tokenized fund, BUIDL, on Ethereum, which aims to provide stable value and earn income, becoming a large tokenized fund with a market value of US$384 million.

  • On July 24, according to Cailianshe, JD.com CoinChain Technology (Hong Kong) will issue a cryptocurrency stablecoin pegged 1:1 to the Hong Kong dollar in Hong Kong.

Centralized stablecoins have been widely adopted in the crypto ecosystem. Our daily transactions and settlements in DEX or CEX are all settled and traded through centralized stablecoins; and the collateral assets behind decentralized stablecoins are mostly crypto assets, which are usually used for lending.

Although stablecoins play an important role in cryptocurrency transactions and DeFi, the exploration of their integration with physical commerce is still in its early stages. In the long run, the most promising application scenario for stablecoins is in the payment field, especially cross-border payments. At present, cross-border payments involve multiple intermediaries, including card issuers, payment gateways, payment processors and other complex processes, which are not only expensive but also take a long time to settle. Stablecoins are not only another better choice, but also an important channel for economic participation. As stablecoin regulation gradually develops towards compliance, its position in global payment scenarios will become increasingly important. Not only that, in the future, with the large-scale adoption of stablecoins in payment scenarios, they can be integrated with DeFi to give birth to Pay Fi, realize interoperability, programmability and composability in payment scenarios, and form a new financial paradigm and product experience that traditional finance cannot achieve.

2. Taproot Assets Protocol + Lightning Network is expected to become the infrastructure of the global payment network

Currently, stablecoins are mainly circulated in the ETH and TRON blockchain networks, but their handling fees are generally more than 1 U, and the on-chain transfer time is more than 1 minute. In contrast, the Lightning Network has the advantages of faster speed, low cost and high scalability.

2.1 What is the Lightning Network?

The Lightning Network is the first mature second-layer expansion solution for the Bitcoin network. After the Lightning Network white paper was released, multiple teams began to independently develop the Lightning Network, including Lightning Labs, Blockstream, and ACINQ. Taproot Assets is an asset issuance protocol developed by Lightning Labs.

How is it implemented specifically? The two parties first establish a two-way state channel. The two parties A and B who initiate the payment create a 2-2 multi-signature address on the chain, so that both A and B can transfer bitcoins within the limit from this new address. Before the transfer, the two parties send some locking data and record it to form a transaction payment, which can be paid back and forth multiple times. Until the transaction accounting is completed, the two parties settle, and the bitcoins in the new address are transferred to both parties according to the settlement amount. Therefore, only the latest version is valid, which is implemented and enforced by the hash time lock contract (HTLC). Either party can close this entry at any time by broadcasting the latest version to the blockchain without any trust or custody.

Therefore, both parties can conduct transactions off-chain without restriction and use the Bitcoin chain as an arbitrator, but only after the final transaction is completed or when one party makes an error (such as insufficient balance in one party's wallet), the smart contract will intervene and execute on the blockchain. This is similar to A and B signing many legal contracts, but they will not go to court every time they sign a contract. The court will only intervene after the final contract is confirmed or when non-cooperation occurs.

2.2 Lightning Network becomes the best infrastructure for global stablecoin payments

That is to say, users can send unlimited transactions to each other off-chain without causing congestion on the Bitcoin network itself; at the same time, they can rely on the security of the Bitcoin network. In theory, there is no upper limit to the scalability of the Lightning Network.

So far, the Lightning Network has been running for 9 years and is built on the most secure network in the current crypto ecosystem - the Bitcoin network (with more than 57,000+ nodes and the Pow proof-of-work mechanism), which can ensure the security of the Lightning Network to the greatest extent.

As of now, the Lightning Network has a capacity of more than 5,000 bitcoins, 18,000+ nodes, and 50,000+ channels worldwide. By establishing a two-way payment channel, it has achieved instant and low-cost transactions. The Lightning Network is being integrated and used by a large number of payment providers and merchants around the world, and is gradually becoming the most widely recognized decentralized solution for global payments.

Data source: https://mempool.space/zh/lightning

Bitcoin assets account for half of the crypto market value, and with this cycle, the Bitcoin ecosystem is returning to the upsurge; the Lightning Network, as the first second-layer expansion solution for Bitcoin, truly solves the idea of ​​peer-to-peer global payment built by Satoshi Nakamoto. The Lightning Network has become the most orthodox and most consensus-based Bitcoin community, and is the best solution for ideal global payment.

2.3 Taproot Assets protocol fills the last mile of the Lightning Network

The only drawback is that before the emergence of the Taproot Assets protocol, the Lightning Network only supported Bitcoin as a payment currency, and its application scenarios were very limited. Today, when Bitcoin has become digital gold, most people are unwilling to pay their Bitcoins.

Although there have been some Bitcoin layer issuance protocols before, such as Atomical, BRC 20 based on Odinals, but they do not support direct access to the Lightning Network. The launch of the Taproot Assets protocol can just solve this problem. It is an asset issuance protocol based on the Bitcoin network and developed by Lightning Labs. Like the Odrinals protocol, anyone or organization can use the Taproot Assets protocol to issue their own tokens. It also supports the issuance of stablecoins corresponding to fiat currencies, such as stablecoins corresponding to USD, AUD, CAD, and HKD.

Compared with other asset protocols, the assets of the Taproot Assets protocol will be fully compatible with the Lightning Network, making it possible to use stablecoins for payments on the Lightning Network. This means that in the future, a large number of new assets (especially stablecoins) issued based on the Bitcoin network will circulate on the Lightning Network, which in turn enables the Lightning Network's global payment layout and influence.

Relying on the security and decentralization of Bitcoin, Lightning Labs's goal of "Bitcoinizing the U.S. dollar and world financial assets" is becoming a reality. The launch of the Taproot Assets mainnet protocol means that the trillion-dollar payment scenario of stablecoins has officially begun.

3. Taproot Assets Agreement (hereinafter referred to as TA)

The operating principle of the TA protocol is deeply rooted in the UTXO model of Bitcoin, and its implementation relies on the Taproot upgrade of the Bitcoin network. As the core elements of the TA protocol, the two drive the effective operation of the protocol.

Account

UTXO (Unspent Transaction Output) is a very important concept. It is the basis for all Bitcoin Layer 2 and Ordi and Runes protocol implementations. In fact, almost all public chains such as Ethereum and Solana use the Account model. The following is an interpretation and comparison of the two concepts:

Comparison between Account Model and UTXO Model

The account model is easy to understand, just like our Alipay account; for each income and expenditure, the corresponding personal intuitive feeling is the change of numbers in the account interface.

The UTXO model can be understood as a wallet of a person "A". It contains checks authorized by B, C, D to A for redemption, as well as checks authorized by A to E, F, G for redemption; at this time, the balance of A's wallet = (face value of checks from B, C, D to A) - (face value of checks from A to E, F, G). The Bitcoin network is equivalent to a bank that can accept these checks. It can calculate the latest balance in each user's address through the latest situation of users trading these checks with each other.

Due to the unique nature of the UTXO model, it naturally eliminates the double-spending problem and provides higher security than the account-based model. In addition, the TA protocol fully inherits the security features of the Bitcoin network layer, avoiding the risk of erroneous transfers or missed transfers.

In addition, the TA protocol adopts the concept of one-time sealing, that is, each UTXO cannot be used again after it is confirmed to be spent; ensuring that assets move with UTXO. Under this mechanism, the miner who mines the longest chain has the final right of interpretation of the UTXO and can control its use. Unlike BRC 20, which relies on off-chain indexes to identify assets, the TA protocol enhances the security of transactions, avoids double-spending attacks, and eliminates the risk of errors or malicious behavior that may be caused by centralized institutions. These features make the TA protocol + Lightning Network a reliable payment scenario infrastructure.

3.2 Taproot upgrade to achieve more complex functions

The Taproot protocol upgrade in 2021 brings simple smart contract functions to the Bitcoin network. For example, wallet addresses in P2TR format can implement some more complex logic through Bitscript, making new and complex transaction types possible on the chain. The Taproot upgrade is shown in the figure below:

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

The most critical improvement is the implementation of multi-signature (multi-signature). This feature makes transactions for institutional users safer. In terms of public key addresses, the multi-signature address has the same length as the private wallet address and cannot be distinguished by the outside world, thereby enhancing security and privacy protection. This technological advancement also provides a solid foundation for institutional and B2B (business-to-business) transactions and promotes wider commercial applications.

The most intuitive feeling presented to users is the change in the format of the wallet address. The wallet address starting with "bc 1 p..." is the wallet address that already supports the Taproot upgrade.

3.3 TA technical principle

Initially, the Ordinal protocol that ignited the Bitcoin ecosystem and the derived BRC 20 protocol were both based on the account model, with balances tied to addresses; the issuance of assets was done by adding specific identifiers or data to "mark" the smallest unit of Bitcoin, Satoshi, and mapping Satoshi to a certain asset. The data corresponding to the asset status was stored in the isolated witness part of the block (where transaction signatures or witness data are stored) in JSON format. Once an asset transaction occurs between the two parties, the script recording the asset change will be "inscribed" into the block and interpreted by the off-chain indexer.

However, this approach will cause every transaction of Ordinals or BRC 20 assets to be recorded in the block, which will increase the size of the block, causing invalid data to accumulate and be permanently stored on the Bitcoin chain, and ultimately put increasing pressure on the data storage of the full node. In contrast, the TA protocol adopts a more efficient method, where assets are marked on each UTXO, and only the root hash of the script tree is stored on the chain, while the script is stored off-chain.

In addition, TA assets can be deposited in the payment channel of the Lightning Network and transferred through the existing Lightning Network, which means that TA assets are a new type of asset that can circulate on 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 spending a UTXO using either the original private key or a script on the Merkle tree.

In short, the Taproot Assets protocol expands on the Taproot upgrade and records asset status transitions in Taproot’s Merkle tree. At the same time, it leverages the “one-time seal” feature of Bitcoin’s UTXO to achieve consensus on asset status transitions on the Bitcoin chain, which also means that the Taproot Assets protocol does not need to run off-chain indexers of other protocols.

The Taproot Assets protocol uses the asset management structure shown in the figure below, and adopts the Merkle-Sum Sparse Merkle Tree (MS-SMT) to manage asset status. The Taproot Assets protocol defines the standards to be followed for asset status transitions.

Taproot Assets Trees, Lightning Labs: https://docs.lightning.engineering/the-lightning-network/taproot-assets/taproot-assets-protocol

It should be noted that not all data in the Merkle tree is written to the Bitcoin chain. Only the root hash of the Merkle tree is written to the chain. In other words, no matter how large the asset data is, the transaction length on the Bitcoin chain remains unchanged. From this point of view, Taproot Assets is a protocol that does not pollute the Bitcoin chain.

3.4 Relationship between TA Protocol and Lightning Network

In the latest product release of Lightning Labs, Taproot Assets protocol assets can now be seamlessly accessed into the Bitcoin Layer 2 Lightning Network through the TA channel (Taproot Assets Channel). The previous Lightning Network has always been a peer-to-peer Bitcoin payment network, and no other crypto assets circulate in the network except Bitcoin. The emergence of the Taproot Assets protocol has changed this situation, allowing assets, especially stablecoins, to be issued through the Taproot Assets protocol on the Bitcoin main chain, and then the assets enter the Lightning Network for circulation.

As shown in the figure below, the stablecoin asset L-USD was issued through the Taproot Assets protocol, and Alice transferred L-USD worth $10 to Zane through the Lightning Network.

An example of a Taproot Assets payment made to the wider Lightning Network, Lightning Labs: 

https://docs.lightning.engineering/the-lightning-network/taproot-assets/taproot-assets-on-lightning

The implementation principle of TA channel is the same as that of state channel, which is also based on hash time lock contract. Because Taproot Assets itself is in a UTXO, the implementation mechanism of TA channel has not changed, but before Channel could only circulate Bitcoin, while now Channel also supports the circulation of TA assets.

The TA protocol makes it possible to circulate assets other than Bitcoin through the Lightning Network, realizing the seamless transfer of assets such as stablecoins on the Lightning Network.

3.5 User usage costs are too high, and the centralized hosting problem still needs to be solved

Although the TA protocol only records the root hash of each transaction on the chain to ensure the simplicity of the Bitcoin chain, the cost of doing so is that the asset data needs to be stored on every client off the chain. Like the RGB protocol, the client needs to verify (CSV) the validity of the asset. If a user wants to use Taproot Assets like Bitcoin, first, they need to have the private key (key) of the UTXO (Virtual UTXO) corresponding to the asset, and second, they need to have the relevant data of the asset on the Merkle tree.

At the same time, the official implementation of the Taproot Assets protocol (Tapd) is deeply dependent on the wallet service of the Lightning Node (LND) and has no account management mechanism. The unique architecture of the Lightning Network determines that its decentralized method is for users to build their own nodes, and it is difficult for ordinary users to participate in the construction of nodes. This is also one of the important reasons why the Lightning Network has not yet been widely popularized.

Therefore, the current wallet services on the Lightning Network are basically custodial wallet solutions, which means that new assets issued by TA will also be stored in custodial wallets. In the future, when a large number of stablecoins are circulated on TA assets, large assets will be stored on TA first, that is, on the Bitcoin mainnet, because the mainnet has higher security and the strongest consensus; only small assets and change will be recharged to the Lightning Network to meet payment needs. Therefore, for the storage and security management of large assets, it is particularly important to use a more decentralized way to allow users to fully own stablecoins.

4. Self-custodial solution - the last piece of the puzzle for the Lightning Payment Network

At present, there are many teams in the market that have developed decentralized solutions for the circulation of TA assets on the Lightning Network. 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.

The BitTap team, which focuses on building the decentralized infrastructure of 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 wallet page display, source: BitTap team

BitTap’s innovative wallet protocol (Bittapd) allows users to keep their private keys in the hands of wallet users. When a transaction needs to be signed, Bittapd interacts with Tapd on behalf of the user, so that users can enjoy a completely decentralized experience and security similar to the Metamask wallet. When stablecoins are issued and circulated on TA, users can use the BitTap wallet to store and transfer stablecoin assets on the Bitcoin mainnet, and can freely transfer change to the Lightning Network. The technical principles of BitTap are as follows:

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

The Bittapd protocol is equivalent to a decentralized agent of the TA protocol. It transforms Tapd's native centralized custodial account system into a decentralized solution. It also plays the role of network communication and forwarding tasks for plug-in wallet users when requesting transactions.

5. Conclusion

Stablecoins have gained widespread attention and applications around the world, and have gradually expanded from the narrow scenario of cryptocurrency transactions to an important choice for global payments. With its low fees and fast transactions, the Lightning Network has become an ideal infrastructure for global payments. At the same time, the launch of the Taproot Assets protocol further enhances the functionality of the Lightning Network, making it possible to issue and issue tokens on the Bitcoin network. Circulating stablecoins becomes a reality. This agreement solves the problem of Bitcoin's high volatility and significantly improves its applicability in the payment field.

In addition, in response to the centralization problem of the Lightning Network and its wallet services, decentralized wallet solutions such as those developed by the BitTap team have emerged on the market, providing users with a more secure and decentralized way to manage assets. This completes the last piece of the puzzle for Taproot Assets + Lightning Network to become a global payment facility.

Although traditional payment infrastructures such as Alipay, PayPal and Stripe use their own transaction volume, large number of users, cooperation and supervision by the government, and brand recognition as endorsement, their escrow nature and reliance on complex Internet and banking systems still lead to inefficiency and the possibility of malicious behavior or government sanctions. In addition, in the field of cross-border payments, payment accounts are often restricted by the place of attribution and transfer amount due to strict regulatory policies and restrictions of the institutions themselves. These factors jointly affect the security and flexibility of traditional payment methods.

The payment infrastructure composed of TA Protocol + Lightning Network is not only comparable to traditional payment institutions in terms of immediacy, but also realizes the de-trust of payment through sophisticated code design. At the same time, the self-custody solution in the ecosystem guarantees the user's autonomy over assets and can support the free transfer of TA Protocol tokens anytime, anywhere without restrictions, bringing the freedom of payment to an unprecedented level.

reference

Web3 Payment Research Report: From Electronic Cash, Tokenized Currency, to the Future of PayFi: https://www.theblockbeats.info/news/54626

OKX Ventures Research Report: Understanding the Development Pattern and Future Direction of Stablecoins in One Article: https://www.theblockbeats.info/news/48341

What Is Taproot and How Does It Benefit Bitcoin? https://river.com/learn/what-is-taproot/

About BitTap: https://doc.bittap.org/

Taproot Assets Protocol: https://docs.lightning.engineering/the-lightning-network/taproot-assets/taproot-assets-protocol

Ten years of stablecoins: What impact have they had on global development trajectory, economic impact, and monetary system? https://foresightnews.pro/article/detail/65637