Stablecoins running on Bitcoin are drawing closer to becoming a reality, thanks to new functionality developed by Lightning Labs using the network’s Taproot upgrade, which was implemented in late 2021.
Elizabeth Stark, the CEO of Lightning Labs, discussed the latest development from the Bitcoin development firm at FT Live’s Crypto and Digital Assets summit in London. She also provided a comprehensive explanation of Bitcoin and the Lightning Network to a traditional finance audience.
Lightning Labs’ Taproot Assets protocol is creating functionality to bring stablecoins and tokenized assets to Bitcoin. Stark stated that developers have made significant progress towards this goal, including testing transactions on Lightning.
Stark highlighted that traditionally, these digital assets have been based on other blockchains that have suffered from high fees and other issues. She argued that Bitcoin’s network is the ideal platform for facilitating the use of stablecoins because it is the most secure and decentralized blockchain.
In addition, Stark discussed the advantages of Bitcoin and stablecoins as a store of value, particularly in countries grappling with inflation and depreciating fiat currencies. She noted that stablecoin adoption has grown significantly since the COVID-19 pandemic, with users primarily located in emerging markets.
“The most loyal users are those seeking a stable store of value. Some are using Bitcoin, others are using stablecoins, and some are using a combination of both,” explained Stark.
Tether (USDT) and Circle (USDC), the two largest stablecoin players, hold more United States Treasury bonds combined than major nations like Germany and South Korea. Stark found this fact intriguing, considering that end users do not benefit from the interest earned by holding stablecoins.
For individuals in countries experiencing hyperinflation or unstable economic conditions, the decision to hold a stablecoin is driven by the need for a reliable store of value.
Stark emphasized the need for infrastructure that enables the issuance of stablecoins and real-world assets on the Bitcoin blockchain, given the significant growth in the stablecoin market. She stated that Lightning Labs is building this protocol and technology to serve as the rails for asset issuers to issue tokenized real-world assets.
Financial institutions could use this technology to issue assets such as gold, stablecoins, and other fiat-backed assets on Bitcoin and then transact over the Lightning Network, according to Stark.
One notable advantage is the relatively lower cost compared to other blockchains and traditional financial systems, as highlighted by Stark. This competitive advantage could enable people to transact globally at significantly lower rates than through traditional networks.