Taproot Assets: The next growth point for the stablecoin track to exceed a trillion-dollar market value

Written by: Evan & Haozhe, Waterdrip Capital; Peter & Boris, BitTap

Introduction

Blockchain is essentially an extension of payment scenarios. In terms of payment scenarios, stablecoins not only occupy an important position in the cryptocurrency market, but are also playing 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. Stablecoins are the next trillion-dollar track in the future

The booming stablecoin market indicates that its track has the potential to become a trillion-dollar market in the future financial field. At present, the market value of stablecoins has exceeded 160 billion US dollars, and the daily trading volume is as high as more than 100 billion US dollars. Mainstream countries have issued 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 subdivided into algorithmic stablecoins and stablecoins issued by pledging crypto assets, as well as types that combine both. At present, 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 has a company size of 125 people and a gross profit of $4.5 billion a year. Such an attractive opportunity naturally attracted many large institutions to enter the market:

· BlackRock issued 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 $384 million.

· On July 24, according to Cailianshe, JD CoinChain Technology (Hong Kong) will issue a cryptocurrency stablecoin anchored 1:1 with 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 settled and traded through centralized stablecoins; while the collateral assets behind decentralized stablecoins are mostly crypto assets, which are usually used for lending.

Although stablecoins play an important role in cryptocurrency trading and DeFi, the exploration of combining them with physical business 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 moves 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, it 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.

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

Currently, stablecoins are mainly circulated in ETH and TRON blockchain networks, but their handling fees generally exceed 1U, and the on-chain transfer time exceeds 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 relatively mature second-layer expansion solution for the Bitcoin network. After the white paper of the Lightning Network came out, 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 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 off-chain transactions without restrictions and use the Bitcoin chain as an arbitrator, but only after the transaction is completed or 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 Stablecoin Global Payment

That is, 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 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 worldwide, and 50,000+ channels; by establishing a two-way payment channel, instant and low-cost transactions are achieved. 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 agreed decentralized solution for global payments.

Data source

Bitcoin assets account for half of the crypto market value, and with this round of cycle, the Bitcoin ecosystem is back; 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 ideal solution for global payment.

2.3 The 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 the application scenarios were very limited. Today, when Bitcoin has become digital gold, most people are unwilling to pay their Bitcoin.

Although there have been some Bitcoin layer issuance protocols before, such as Atomical and BRC20 based on Odinals, they do not support direct access to the Lightning Network. The launch of the Taproot Assets protocol can solve this problem. It is an asset issuance protocol based on the Bitcoin network and is led by Lightning Labs. Like the Odrinals protocol, anyone or institution 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 to 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. Therefore, it means that in the future, a large number of new assets (especially stablecoins) issued based on the Bitcoin network will circulate to the Lightning Network, which in turn enables the Lightning Network's global payment layout and influence.

Depending 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.

Detailed explanation of the Taproot Assets protocol (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.

3.1 Similarities, Differences, Pros and Cons of UTXO Model and Account Model

Comparison between Account Model and UTXO Model

UTXO (unspent transaction output) is a very important concept. It is the basis for all Bitcoin Layer 2 and Ordi, 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:

The account model is easy to understand, just like our Alipay account; every income and expenditure corresponds to 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, and D to A for redemption, as well as checks authorized by A to E, F, and G for redemption; at this time, the balance of A's wallet = (face value of checks from B, C, and D to A) - (face value of checks from A to E, F, and 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 BRC20, 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 2021 Taproot protocol upgrade 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

The most critical improvement is the implementation of multi-signature (multi-signature). This feature makes transactions for institutional users safer. On the public key address, the multi-signature address has the same length as the private wallet address, and the outside world cannot distinguish them, 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 "bc1p..." is the wallet address that supports the Taproot upgrade.

3.3 TA Technical Principles

Initially, Ordinal, which ignited the Bitcoin ecosystem, and the derived BRC20 protocol were based on the account model, with the balance bound to the address; 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, and the data corresponding to the asset status was stored in the isolated witness part of the block (where the transaction signature or witness data is 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 BRC20 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. Assets are marked on each UTXO, and only the root hash of the script tree is stored on the chain, while the script is saved off-chain.

In addition, TA assets can be deposited into 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 a UTXO to be spent 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 the asset status transition on the Taproot Merkle tree; at the same time, it uses the "one-time seal" feature of Bitcoin UTXO to obtain 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 below, and uses a sparse Merkle Sum 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

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 be seamlessly entered into Bitcoin's second-layer Lightning Network, which is achieved through the TA channel (Taproot Assets Channel). The previous Lightning Network has always been a peer-to-peer Bitcoin payment network, and there are no other crypto assets circulating 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 is issued through the Taproot Assets protocol, and Alice transfers $10 worth of L-USD to Zane through the Lightning Network.

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

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 is in a UTXO, the implementation mechanism of TA channel has not changed, except that Channel could only circulate Bitcoin before, but now Channel also supports the circulation of TA assets.

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

3.5 The cost of user use is too high, and the problem of centralized custody still needs to be solved

Although TA protocol only records the root hash of each transaction on the chain to ensure the simplicity of Bitcoin chain, the cost of doing so is that asset data needs to be stored on every client off the chain. Like RGB protocol, client verification (CSV) of asset validity is required. If users want to use Taproot Assets like Bitcoin, they must first have the private key of the UTXO (Virtual UTXO) corresponding to the asset, and secondly, they must 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 there is no account management mechanism. The unique architecture of the Lightning Network determines that its decentralized way is that users 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, that is, the Bitcoin mainnet, because the mainnet is more secure and has 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 allow users to fully own stablecoins in a more decentralized way.

4. Self-custody solution - the last piece of the puzzle to complete the lightning payment network

At present, there are many teams on the market that have developed decentralized solutions for the circulation of TA assets on the lightning network. For example, LnFi 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 building a 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 wallet page display, source: BitTap team

BitTap proposed an innovative wallet protocol (Bittapd), in which the user's private key is completely in the hands of the wallet user. When a transaction needs to be signed, Bittapd interacts with Tapd on behalf of the user, so that the user 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 principle of BitTap is as follows:

BitTap wallet architecture, BitTap Docs

The Bittapd protocol is equivalent to the decentralized proxy of the TA protocol. It transforms the centralized escrow account system native to Tapd into a decentralized solution; it also plays the role of network communication and forwarding tasks for plug-in wallet users when making transaction requests.

5. Summary

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

In addition, in response to the centralization 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 of managing 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 with and supervision by the government, and brand awareness as endorsements, their custodial 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; it also realizes the de-trust of payment through sophisticated code design. At the same time, the self-custodial solution in the ecosystem guarantees the user's autonomy over assets, and can support the free transfer of TA protocol tokens anytime, anywhere and without restrictions; it has raised the freedom of payment to an unprecedented level.

Reference:

· Web3 payment 10,000-word research report: From electronic cash, tokenized currency, to the future of PayFi

· OKX Ventures Research Report: One article to understand the development pattern and future direction of stablecoins :

· What Is Taproot and How Does It Benefit Bitcoin?

· About BitTap

· Taproot Assets Protocol