Stablecoin: The Rise of the Next Trillion-Dollar Market

Introduction

Stablecoins, as an extension of blockchain payment scenarios, are playing an increasingly important role in global payments and cross-border settlement. Currently, centralized stablecoins still account for over 90% of the market share, with USDT taking the lead. Although the total market value of stablecoins has exceeded $150 billion, it only accounts for 0.75% compared to the $20 trillion M1 money supply reported by the Federal Reserve. This indicates that there is still significant growth potential for stablecoins in the payment sector. The launch of the Taproot Assets protocol opens up new possibilities for the application of stablecoins in high-frequency small payment scenarios, signaling that large-scale adoption of stablecoins as a regular payment method is on the horizon.

1. Stablecoin: The Future Trillion-Dollar Market

The booming development of the stablecoin market shows its potential to become the next trillion-dollar financial sector. Currently, the market capitalization of stablecoins has exceeded $160 billion, with a daily trading volume of over $100 billion. Major countries are introducing relevant policies and regulations, and various institutions predict that stablecoins will bring about a new trillion-dollar market, with the main growth coming from global payment applications.

Stablecoins can be divided into two main categories: centralized and decentralized. Currently, centralized stablecoins dominate the market, with USDT and USDC issuing 114.46 billion and 34.15 billion stablecoins, respectively. Despite having only 125 employees, Tether has managed to generate an annual gross profit of 4.5 billion dollars, attracting numerous large institutions to invest.

Centralized stablecoins have been widely used in trading and settlement within the crypto ecosystem. Decentralized stablecoins are primarily used for lending, with their collateral mainly consisting of crypto assets. Although stablecoins play a significant role in cryptocurrency trading and DeFi, their integration with traditional business is still in the early stages. In the long run, the most promising application scenario for stablecoins lies in the payment sector, especially in cross-border payments.

Current cross-border payments involve multiple intermediaries, making the process complex, costly, and time-consuming. Stablecoins are not only a better choice but also an important channel for economic participation. As regulation trends towards compliance, the role of stablecoins in global payments will become increasingly important. The future widespread adoption of stablecoins in payment scenarios is expected to integrate with DeFi to give rise to PayFi, achieving interoperability, programmability, and composability in payments, thereby creating a new financial paradigm and product experience that traditional finance cannot achieve.

2. Taproot Assets Protocol + Lightning Network: The Infrastructure of a Global Payment Network

Currently, stablecoins mainly circulate on the ETH and TRON networks, but these networks have high transaction fees and long confirmation times. In contrast, the Lightning Network offers advantages of faster, lower-cost, and higher scalability.

2.1 Introduction to the Lightning Network

The Lightning Network is the first mature Layer 2 scaling solution for Bitcoin. Multiple teams have independently developed implementations of the Lightning Network, including Lightning Labs, Blockstream, and ACINQ, among others. Taproot Assets is the asset issuance protocol developed by Lightning Labs.

The Lightning Network achieves off-chain transactions by establishing bi-directional payment channels. Both parties create a multi-signature address for transactions, which are only broadcast on-chain at the final settlement. This mechanism allows for unlimited off-chain transactions, avoiding congestion on the Bitcoin network while maintaining the security of the Bitcoin network.

2.2 Advantages of the Lightning Network

The Lightning Network has been operating for 9 years, built on top of the Bitcoin network, and offers a high level of security. Currently, there are over 5000 Bitcoin capacity, more than 18000 nodes, and over 50000 channels. It enables instant low-cost transactions through bi-directional payment channels, and is widely adopted by global payment providers and merchants, becoming a consensus solution for globalization of payments.

The Importance of Taproot Assets Protocol 2.3

Before the emergence of the Taproot Assets protocol, the Lightning Network only supported Bitcoin payments, and the application scenarios were limited. This protocol allows anyone or any institution to issue tokens, including stablecoins corresponding to fiat currencies.

The assets of the Taproot Assets protocol are fully compatible with the Lightning Network, making it possible to use stablecoin payments on the Lightning Network. This means that a large number of new assets issued based on the Bitcoin network, especially stablecoins, will circulate on the Lightning Network, further enhancing the influence of the Lightning Network in the global payment space.

3. Detailed Explanation of Taproot Assets Protocol

3.1 UTXO model vs Account model

The Taproot Assets protocol is based on Bitcoin's UTXO model. Compared to the Account model, the UTXO model inherently avoids double-spending problems and offers greater security guarantees. The TA protocol adopts a one-time sealing concept, ensuring that assets move with the UTXO, thereby enhancing transaction security.

3.2 The Impact of the Taproot Upgrade

The Taproot upgrade in 2021 introduced simple smart contract features, such as multi-signature, to the Bitcoin network. This provided institutional users with a more secure way to transact while enhancing privacy protection.

3.3 TA Technical Principles

The TA protocol utilizes the Taproot upgrade to record asset state transition logs on the Taproot Merkle tree. It employs a sparse Merkle summation tree to manage asset states, writing only the Merkle tree root hash to the Bitcoin chain, thereby avoiding on-chain data bloat.

The relationship between the 3.4 TA protocol and the Lightning Network

The TA protocol allows for the issuance of assets on the Bitcoin main chain, which then circulate in the Lightning Network. The implementation principle of TA channels is similar to that of state channels, based on hash time-locked contracts, supporting the circulation of TA assets on the Lightning Network.

3.5 User Costs and Centralized Custody Issues

The TA protocol requires asset data to be stored in an off-chain client, which needs to verify the validity of the assets. Currently, most Lightning Network wallet services adopt a custodial approach, which poses challenges for the decentralized storage and management of large assets.

4. Self-Custody Solutions

Decentralized solutions for the circulation of TA assets on the Lightning Network have emerged in the market. For example, LnFi offers a cloud hosting solution that lowers the participation threshold for users. The BitTap team has developed a decentralized browser extension wallet for TA, providing users with self-custody options.

The innovative wallet protocol (Bittapd of BitTap allows users to have complete control over their private keys, providing a decentralized experience and security similar to Metamask. Users can store and transfer stablecoin assets on the Bitcoin mainnet using the BitTap wallet, and freely transfer small amounts to the Lightning Network.

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5. Summary

Stablecoins are expanding from cryptocurrency trading to the field of global payments. The Lightning Network, with its low fees and fast transactions, has become an ideal global payment infrastructure, while the launch of the Taproot Assets protocol further enhances its capabilities. Decentralized wallet solutions developed by teams like BitTap complement the final piece of the puzzle, providing users with a safer and more decentralized way to manage their assets.

Compared to traditional payment systems, the payment infrastructure composed of the TA protocol and the Lightning Network is not only comparable in terms of immediacy but also achieves trustlessness through code design. The self-custodial solutions within the ecosystem guarantee users' autonomy over their assets, supporting unrestricted and free transfers, elevating the freedom of payment to unprecedented heights.

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