Stablecoins over Bitcoin’s Lightning Network. Redundant or the next big thing?

One of the main ideas circulating through the Bitcoin 2022 conference was the possibility of enabling stablecoins to be sent and received over the Lightning Network. On stage, nearly everyone at least mentioned it and there were a few panels about it as well. The day before the conference, Lightning Labs had dropped the bomb. They will introduce a Bitcoin Improvement Proposal code named Taro that, if approved, will allow the issuance of assets on the most decentralized and resilient blockchain on the planet. 

That’s right, I wrote “assets.” Besides stablecoins, he the Lightning Network can and will transfer NFTs and other coins and tokens. This guarantees low fees, instant transactions, and the solidity of the bitcoin blockchain as a backup. According to Lightning Lab’s CEO Elizabeth Stark, “Eventually it all comes back to bitcoin.” Meaning, bitcoin is at the center of all of this.

Besides Taro, there’s another project trying to accomplish similar objectives. Using other methods, a Tether-backed company named Synonym has already managed to make the first USDT transaction through the Lightning Network. More on that later. My questions are: are these two companies working on this idea by chance? Or is there a push coming from the top to accomplish this goal by whatever means necessary?

Not everyone is on-board with this plan. There’s a high percentage of bitcoiners who view the possibility of issuing assets as an unnecessary risk. Some of them even think it’s an attack on the bitcoin network. Does the world need more stablecoins? Why is everyone so fixated on this idea all of a sudden?  Aren’t bitcoin and satoshis more than enough? Let’s put those considerations aside for a minute and explore what the offer is.

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Why do we need stablecoins over the Lightning Network?

According to Lightning Labs, Taro will drive “more demand for transfers, more demand for activity, more fee revenue.” By issuing and using other assets, “the network grows and becomes more useful.” They’re promoting their idea by saying it will expand bitcoin’s network effects, which constitute one of the main reasons that bitcoin’s proponents think that BTC has already won the race. 

For its part, Synonym doesn’t need or provide a reason for their developments. The company’s backed by Tether, and stablecoins over the Lightning Network, make sense to them. It’s as simple as that.

However, there’s a much more compelling reason. According to The Human Rights Foundation, stablecoins over bitcoin “are very important for journalists, dissidents, and activists.” The organization said that as it announced the three bounties they are offering this year. One of the problems they need to solve is enabling anyone,”: 

“to ‘peg’ an amount of bitcoin to U.S. dollars without needing an exchange or another token. The challenge will reward “1 BTC to a FOSS non-custodial wallet that enables their users to ‘peg’ their Lightning balance to the U.S. dollar.”

Are Synonym or Lightning Labs eligible to win this bounty? They would have to develop an open-source, non-custodial wallet first. Both seem to be close. Are all of these reasons enough to justify the issuance of stablecoins over the bitcoin network? Or are the bitcoin purists right about this strategy being an unnecessary risk? Whatever the answer, one thing seems to be certain. Nobody can stop this. It’s happening, one way or another.

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How does Synonym issue assets on the bitcoin blockchain?

The technology Synonym developed is called Omni Layer. According to the company’s website, it’s “a platform for creating custom digital tokens as bearer assets anchored to Bitcoin. Omni transactions are Bitcoin transactions that enable any business or entity to issue credit on their own reputation.”Which is iInteresting.

Synonym also developed OmniBOLT for the Lightening Network. They describe Omni transactions as Bitcoin transactions that enable next-generation features, including Lightning Network compatibility via OmniBOLT.” Taken together, Synonym accomplished “the first Tether / stablecoin transaction in a Lightning channel.”

Comparing their solution to the Taro protocol, Synonym’s John Carvalho tweeted, “Taro is a set of alternative designs for issuing tokens on Bitcoin & then adding compatibility for those tokens to a Lightning node. Similar to Omni Layer & OmniBOLT in use case, except Omni is already implemented and mostly usable, whereas Taro will need more time to ship code.”

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How does Lightning Labs issue stablecoins over the Lightning Networks?

The code name Taro stands for Taproot Asset Representation Overlay, and according to Lighting Lab’s Olaoluwa Osuntokun’s talk during the Bitcoin 2022 conference, they’re “using bitcoin as a publication system.” About five months ago, the bitcoin network got its first update in years when the Taproot soft fork was approved. 

Besides improvements in privacy and decreasing in some transactions’ data requirements, the new protocol offers new possibilities for bitcoin. Taro taps into bitcoin’s new superpowers. In their announcement, Lightning Labs explains:

“Taro enables bitcoin to serve as a protocol of value by allowing app developers to integrate assets alongside BTC in apps both on-chain and over Lightning. This expands the reach of Lightning Network as a whole, bringing more users to the network who will drive more volume and liquidity in bitcoin, and allowing people to easily transfer fiat for bitcoin in their apps. More network volume means more routing fees for node operators, who will see the benefits of a multi-asset Lightning Network without needing to support any additional assets.”

Related to that last point, it’s worth noting that the world will not need a new network for every new asset. It will all run over bitcoin, and that will make it “the global crossing layer for any value,” according to Osuntokun. Plus, Lightning Lab promises “no additional burden on full nodes, no burning of bitcoin via the OP_Return opcode, and that Taro assets inherit all the same double-spend protection of normal bitcoin transfers, along with additional functionality like transferability over the existing Lightning Network.”

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Questions, answers, and predictions

If the Bitcoin Improvement Proposal passes, and Taro does everything it’s supposed to do, what does this means for other stablecoins? Is it just a new competitor, or is it the killer app that will render them obsolete? And, what of altcoins? Does Taro pose an existential threat to them? Is it a direct competitor?

In any case, stablecoins are coming to bitcoin’s Lightning Network. And there’s a lot of money behind this move. With Taro, Lightning Labs announced a “$70M  Series B funding round. And Synonym is fully backed by Tether. In any case, it remains to be seen whether the development will forever change the current state of cryptocurrencies or if it’ll be inconsequential.