Thank you to Darius, Romain, Theo, Slava, Patrick, & Ryan for the review and feedback.
Bitcoin’s evolution into a multi-asset platform is accelerating with the advent of Taproot Assets and Lightning Network. The integration of these technologies combines Bitcoin’s decentralization and security with the speed and scalability of the Lightning Network. Tether recently announced that they are bringing native USDT to Lightning via Taproot Assets – which is likely to propel adoption. This report examines how Taproot Assets enable asset issuance, transfers, and swaps on Bitcoin’s base layer, and how the Lightning Network facilitates fast, low-cost transfers of those assets. We compare this approach to earlier attempts at Bitcoin asset issuance and analyze its market potential against other blockchains and traditional payment networks.
From Colored Coins to Taproot Assets
Early Bitcoin asset protocols
Bitcoin has long attracted efforts to represent other assets on its blockchain (so-called “colored coins”). Omni Layer (formerly Mastercoin) and Counterparty were notable colored coins that encoded asset data in Bitcoin transactions. They pioneered onchain stablecoins but had major tradeoffs. Initially, colored coins were implemented by creating fake Bitcoin addresses to encode data, which bloated the UTXO set with unspendable outputs. OP_RETURN was later introduced as a solution, allowing token data to be stored onchain without creating unspendable UTXOs. While OP_RETURN outputs could be pruned, they still added data to the blockchain, requiring nodes or specialized parsers to process each asset. This led to inefficiencies: each asset transaction consumed Bitcoin block space, and nodes had to validate or ignore these extra payloads. There were also fungibility issues – these protocols publicly “colored” specific UTXOs as asset containers meaning that some random denominations of Bitcoin could dramatically exceed the value of other equal denominations. Additionally, their fungibility could make these Bitcoin outputs identifiable by malicious miners that single them out for discrimination, censorship, or neglect.
Taproot Assets
Bitcoin’s Taproot upgrade in November 2021 opened the doors to a more elegant solution. Taproot improved Bitcoin’s scripting and privacy capabilities, allowing new ways to hide complex conditions in single outputs. Lightning Labs seized this opportunity with the Taproot Assets protocol, announced in late April 2022, which draws inspiration from RGB, Omni, and Counterparty but upgrades them with advanced scripting and offchain data commitments within Bitcoin UTXOs. In essence, Taproot Assets issues tokens in a way that looks like ordinary Bitcoin transactions onchain, avoiding the overt footprints of earlier systems. Taproot Assets launched on mainnet in October 2023 and quickly gained traction among developers, with over 150,000 assets minted in the first few months.
Taproot Assets’ technical advancements in Bitcoin asset issuance
Taproot enables a new type of UTXO that links a Taproot address to a Taproot root hash which contains a tree-like structure of Taproot Assets. Those Taproot Assets are recorded on distributed offchain databases called “Universes.” Subsequent spends of this bitcoin bind new and updated versions of these Universes to the Bitcoin blockchain.
This design, alongside various other Taproot updates to the Bitcoin protocol, helps solve prior limitations and make issuing and using assets on Bitcoin practical.
Reducing bloat & increasing scalability: Taproot Assets is designed to minimize onchain data. It uses Taproot’s capability to commit asset metadata in a transaction output without adding weight to the blockchain. Detailed token information (e.g., names, amounts, histories) is kept offchain in local repositories called “Universes” or within user proofs, rather than bloating the Bitcoin ledger (client-side validation inspired by RGB). Onchain, a Taproot Asset transfer appears as just a normal Taproot output with a hash (“cryptographic commitment”) of arbitrary hidden data. Therefore, Bitcoin nodes only see a normal Taproot output and aren’t forced to validate arbitrary asset scripts. Rather, the client-side “velvet fork” approach allows nodes to simply ignore the asset-specific data, preserving Bitcoin’s decentralization.
Taproot Assets are designed to manage data size on the base layer and increase throughput by leveraging Taproot’s key feature: embedding asset data within a single public key. Only a tweaked public key appears in the Taproot output on the blockchain, with no additional hashes visible unless specifically revealed during spending. This design allows for multiple asset transfers to be committed in a single Bitcoin output without adding extra onchain data (not adding to witness data like Ordinals and Runes). Assuming SegWit's ~4MB witness data, this means with Taproot Assets’ 32 bytes/root, the theoretical limit is in the range of 125K roots/block – many thousands of token transfers can be batch-settled in just a few Bitcoin outputs. Taproot Assets are also designed to be fully Lightning-compatable, which dramatically increases scalability (discussed in the next section). The result is a scalable tokenization protocol on Bitcoin in which adding assets does not linearly add load, as Taproot “hides” everything within the public key.
Preserving fungibility: By embedding asset data indirectly in Taproot outputs, Taproot Assets avoid the old colored-coin fungibility and container problem. Taproot uses the MS-SMT variant of Merkle Trees to track asset balances and ownership separate from the underlying BTC value. Multiple assets can even be committed to the same UTXO and multiple transfers aggregated as a single Merkle proof, so a single Bitcoin output can include several token movements at once, increasing the economic density of each Bitcoin output and reducing UTXO proliferation. All BTC remain fungible and identical onchain because the asset metadata is invisible to anyone not explicitly parsing the Taproot Asset datafile. In essence, Taproot Assets allow users to attach data to a UTXO without disclosing that information onchain, preserving Bitcoin’s fungibility and preventing censorship or discrimination by malicious miners.
Built-in privacy: Taproot was explicitly designed to be private by default, without the use of compute-intensive cryptography. Assets issued via Taproot benefit from uniformity: an asset transfer looks like any other Taproot spend and does not reveal the asset type or amount onchain. Only the parties involved can decode the details. This privacy is further enhanced when Taproot Assets are moved offchain to Lightning (discussed in the next section). For many institutions, confidentiality is a major benefit and lack of it is a major hindrance to adoption. With Taproot Assets, a bank or fintech could leverage Bitcoin to settle large volumes of stablecoin transactions without broadcasting sensitive financial information to the world, unlike on blockchains which are public by default. Even onchain, an institution or nation could manage a stablecoin or other RWA treasury in Bitcoin UTXOs without outsiders identifying which outputs hold stablecoin commitments.
Smart contracts: In Taproot, a Bitcoin address is associated with a tweaked public key that can commit to a Merkle root of various spending scripts. The design allows coins to be spent either by the holder of the private key, or by anyone who can satisfy one of the predefined scripts (i.e., smart contract). Taproot Assets validates asset transactions by constructing a virtual Bitcoin transaction that commits to the Merkle root representing asset states before and after each transaction. It leverages the existing Bitcoin Script virtual machine defined in BIP 341 (Taproot) and BIP 342 (Tapscript), enabling full compatibility with Bitcoin’s native smart contract capabilities, such as hashed timelocked contracts (HTLCs), timelocks, and discreet log contracts (DLCs) – provided DLC implementations transition from ECDSA signatures to Schnorr signatures. Additionally, because asset logic and metadata reside offchain within the MS-SMT structures (with only cryptographic commitments stored onchain), the virtual machine used by Taproot Assets can be upgraded or replaced in the future without significant backward compatibility concerns.
Lightning Network
While Taproot Assets enables asset issuance on Bitcoin’s base layer, the Lightning Network is what makes those assets useful for everyday transactions. Lightning is Bitcoin’s L2 network for offchain payments, known for near-instant speed, negligible fees, and added privacy. Taproot Assets were also designed from the ground up to be fully Lightning-compatible – their integration effectively turns Bitcoin into a global routing network where dollars, euros, or any other tokenized asset can flow through the network as easily as satoshi.
Global scalability
Lightning’s decentralized channel structure enables massive horizontal scalability, crucial for supporting widespread Taproot Assets usage. While Bitcoin’s main network cannot compete with fast centralized payment networks like Visa – which handles up to 65,000 TPS – Lightning can. Lightning can theoretically scale to over a million TPS, making it competitive even against centralized routing networks.
How does it do this? Instead of relying on a single chain to process every transaction, Lightning distributes actively across thousands of interconnected offchain nodes and channels, each capable of routing payments independently with near-instantaneous confirmation.
As more participants join, overall throughput grows because each new channel adds capacity and routing options. The result is a system where adding users and channels increases network robustness and available liquidity, unlike monolithic blockchains that slow down under heavy load. Consequently, Lightning can handle global-scale transaction demand for stablecoins or other Taproot Assets, while preserving near-instant speed and minimal fees – effectively turning Bitcoin’s base security layer into a flexible, high-capacity payment and settlement network.
This scalability opens the door to innovative payment models like payment streaming – transferring value in small amounts and high frequency. This could replace subscription models with pay-as-you-go models for industries like digital content, gaming, and cloud services. Contractors or creators could be streamed payments by the minute. It could enable machine-to-machine microtransactions in the AI and IoT economies, and open the door to new business models such as B2A (Business-to-Agent) software, where the customers are AI agents paying per API call or data query. Creating real-time economies like these would be impractical on most blockchains or legacy payment systems due to costs or scalability constraints.
Relevant project: Fewsats
Speed and cost efficiency
Lightning transactions settle in milliseconds to seconds and cost fractions of a cent in routing fees. This is one of the strong benefits of processing transactions offchain within payment channels that bypass the need for onchain block confirmations. Once a channel is established, participants can transact directly without waiting for Bitcoin’s base layer to validate each transaction.
This is in stark contrast to onchain transfers on Ethereum (which holds 55% of total stablecoin supply), which can take minutes and incur fees of several dollars (or much worse during congestion). Even Tron (holds 30% of total stablecoin supply), known for low fees, cannot match Lightning’s practically free, instant transfers, especially for high-frequency small payments. This makes Lightning practical for use cases like retail payment, micropayments, and remittances. On top of speed and cost efficiency, moving USDT to Lightning benefits from Bitcoin’s robust security and decentralization – a key reason Tether is bringing USDT to Lightning.
The Lightning Network’s capacity has grown to nearly 5,000 BTC (worth ~$400M+), providing a deep liquidity pool to route large payments as well. Unlike deploying assets on a new L1 or sidechain, using Lightning lets issuers tap into this existing liquidity network comprising ~15,000 nodes and ~50,000 channels. As Taproot Assets use BTC locked on Lightning as a universal bridge currency, this means tokenization projects can unlock network effects and liquidity from day one.
Atomic swaps and interoperability
By design, a Lightning payment is a chain of atomic swaps that is better than blockchains in terms of speed and interoperability. The key advantage lies in how Lightning handles multi-asset transfers using Bitcoin as the routing currency. As shown in the figure below, when Alice sends a USDT payment to Bob over Lightning, the network actually routes it as BTC internally.
Alice’s wallet hands off USDT to an edge node, which atomically swaps it for BTC. That BTC is sent through the Lightning hops to Bob’s edge node, which swaps it back to USDT for Bob. Crucially, the routing nodes in between only see a normal BTC payment, not a stablecoin transfer. This has two powerful implications – (a) it enhances privacy as intermediate nodes and outsiders can’t tell that the payment was a stablecoin; and (b) it means the Lightning Network as a whole can carry USDT (or another stablecoin) without each node needing to support USDT separately. BTC is the universal routing medium and every Lightning payment with a Taproot Asset is simultaneously a BTC exchange behind the scenes.
Compare this to traditional blockchain mechanics which require using multi-step DEXs or smart contracts to swap between assets which incurs latency and intermediate swap fees – Taproot Assets on Lightning can accomplish the swap as part of the payment itself. For instance, a user could pay in BTC and deposit collateral in USDT or vice versa into a Lightning exchange like LN Markets in a single transaction with atomic guarantees (full swap or the tx reverses) and instant settlement. Moreover, by using BTC as the “common language” underpinning all transfers, rather than many siloed pools for each asset, you get complete asset interoperability and a more capital efficient design.
Relevant projects: LN Markets, Lnfi, Flashnet, Spark
Privacy
Privacy is another area where Lightning excels, complementing Taproot’s onchain privacy mechanics. Onchain stablecoin transactions (whether on Ethereum, Tron, or others) are publicly recorded, linking addresses and amounts. In contrast, Lightning keeps transactions off the public ledger – only channel open and close transactions touch the blockchain, and individual payments inside channels remain private between participants. Additionally, Lightning utilizes onion routing (like Tor), such that each node in a route knows only its immediate predecessor and successor in a payment route, not the entire path or the sender/recipient. This provides strong privacy for users. This applies regardless of whether it is satoshis, stablecoins, or any other asset flowing through Lightning. Neither competitors nor malicious actors can easily trace large movements if they are split across multiple channels (active probing takes significant work and is likely detectable by nodes in the network), which is valuable for both individuals and institutions concerned with financial surveillance.
Compared to other L2s, Lightning’s privacy stands out: rollups and sidechains publicly broadcast transaction details and publish compressed transaction data on the base chain that can be reconstructed, whereas Lightning reveals virtually nothing as long as the channels remain open. For businesses transacting in RWAs, this added privacy can mask treasury operations or customer payment flows from prying eyes – a substantive advantage over using fully transparent stablecoin rails on public blockchains or slow and computationally demanding shielded pools.
Adoption so far
In crypto, adoption is often not steady but comes in bursts driven by new asset use cases. After its activation in late 2021, Taproot saw little activity until early 2023, when experimental applications like Ordinals and BRC-20 tokens ignited a surge in usage. After the initial hype, Taproot’s share of transactions cooled somewhat, however it established a new baseline of significantly higher utilization, regularly accounting for 20-30% of Bitcoin outputs.
Some dismiss these (and any other non-BTC transaction) as spam, but I see them as a speculative form of adoption. I expect the next big inflection of Taproot adoption to be driven by stablecoins and real-world assets, which are less speculative with consistent demand and utility. Since launching on mainnet in late 2023, initial developer interest in Taproot Assets has been strong with over a hundred thousand mints on the protocol within the first few months, but the real inflection will come with major asset issuers going live. That moment is on the horizon: In January 2025, Tether announced native USDT issuance on Taproot Assets, including Lightning support. Given Tether’s scale (over $142B USDT in circulation and a self-reported 350 million users), even a partial migration of USDT activity to Bitcoin could dramatically boost Taproot usage. Not only that, but with major exchanges like Binance (250+ million users) and Coinbase (100+ million users) rolling out Lightning support recently (August 2023 and August 2024, respectively), we are likely to see an inflection in Lightning usage as well. Already, through integrations with major exchanges and popular fintech platforms like Cash App and Nubank, Lightning now reaches around ~650 million potential users.
As adoption snowballs, more wallets and exchanges will be incentivized to support Taproot addresses to handle customer demand for Bitcoin-based stablecoins. We may see Taproot activity overtake SegWit, which currently dominates, accounting for ~50% of Bitcoin outputs. Accelerating Taproot adoption would have positive side effects for Bitcoin as a whole: better privacy, greater scalability of the base layer, and more flexibility for smart contract functionality. As developers start noticing the new functionalities, they’d be more likely to explore building dapps that utilize them.
Market Potential
Stablecoins today largely live on other blockchains, so any Bitcoin-based stablecoin must prove its value against the incumbents: Ethereum, Tron, Solana, etc. Currently, total USD-pegged stablecoin supply is split primarily between Ethereum and Tron, with those two chains carrying ~85% of supply. Solana is the runner-up, carrying ~5% of the supply.
Ethereum and Tron’s dominance is telling: Ethereum offers a rich DeFi ecosystem for stablecoins and Tron offers speed and low fees (usually).
While Bitcoin will not displace Ethereum’s DeFi ecosystem anytime soon due to its restrictive smart contract functionality, Bitcoin + Lightning + Taproot Assets (BLT) offers several advantages for payments that could make Bitcoin a strong competitor – particularly in taking market share from Tron, whose primary stablecoin use case is payments and transfers.
Security and decentralization: Bitcoin is unmatched in terms of security and decentralization. It is the most battle-tested blockchain with the highest cost to attack due to its enormous proof-of-work hash power. For users holding large amounts of value in stablecoins, the near-impossibility of rewriting its history should be a major draw.
Performance: Bitcoin plus Lightning solves performance issues with its low fees and speed. Lightning transactions settle faster than even Tron’s blocks (sub-second vs. Tron’s ~3 second block time, ~1 minute finality), and cheaper (fractions of a cent in routing fees vs. several dollars at current TRON prices). Tron, while usually cheap, has seen its fees spike during traffic spikes as well whereas Lightning can handle traffic spikes since channel liquidity is pre-allocated. Lightning’s horizontally scalable offchain payment channels means the base layer isn’t stressed by every single transaction, avoiding high fees due to congestion during peak times. This fee predictability is crucial for micropayment business models, where precise fee calculations are important for accounting.
Privacy: As discussed above, stablecoins or other RWAs built on Taproot Assets + Lightning have native privacy at both the base layer (via MS-SMT proof which conceals asset details) and Lightning layer (via onion routing where any given node only knows its immediate predecessor and successor). There isn’t the added complexity and costs associated with implementing an additional cryptographic privacy layer.
Overall, Bitcoin-based stablecoins have the potential to capture a share of the massive stablecoin market by playing to the combined strengths of BLT. The market is huge – stablecoin transaction volume reached $15.6 trillion in 2024, surpassing Visa’s by ~19% and fintechs like PayPal.
Stablecoins now account for over half of onchain transaction value globally:
A 10% shift of stablecoin activity onto Bitcoin would mean over a trillion in value flowing through the Bitcoin ecosystem annually, bringing new users and potential fee revenue for Bitcoin infrastructure and apps.
Competing with Traditional Payment Networks
Bringing stablecoins onto Bitcoin isn’t just about competing with other crypto networks – it also challenges established payment systems like Visa, Mastercard, and SWIFT. Stablecoins themselves are already an alternative to correspondent banking and remittance services. Adding Lightning’s speed and low cost makes it even more of a threat to slow, costly wire transfers. For example, a cross-border payment can be settled in seconds for fractions of a penny via Lightning versus waiting 1-3 business days over SWIFT and charges 1-3% in fees. This applies even in cross-currency conversions if the edge nodes hold stablecoins denominated in the two currencies via BTC routing and atomic swaps at the edges. Visa and Mastercard are fast at point-of-sale, but they are primarily consumer payment networks with fees around 2-3% paid by merchants, and they don’t solve cross border settlement (that still relies on banks behind the scenes). Stablecoins on Lightning could allow merchants to accept dollar payments globally with nearly zero fees, undermining the credit card fee model – why pay 3% to Visa when there is a virtually costless alternative?
The incumbents aren’t standing still. Visa has piloted USDC for settling transactions and Mastercard is exploring CBDCs and blockchain interoperability. These centralized companies have the advantage of user trust and existing integrations, but they lack the openness and neutrality of Bitcoin’s network. A multi-asset Lightning would be analogous to an open-source, decentralized Visa network that anyone can join without permission and which can carry any asset. For individuals in countries with unstable currencies or under banking sanctions, Bitcoin is accessible when Visa or SWIFT may not be. This is why Strike and other Lightning payment apps have been focusing on remittances (e.g., USA-to-Mexico payments using Bitcoin under the hood).
That said, traditional networks have their strengths. Visa’s has demonstrated throughput in the order of thousands of transactions per second, which is higher than what Lightning has demonstrated so far (but lower than its theoretical capacity). Visa also offers consumer protections (chargebacks, fraud detection) that bare crypto transactions do not. To provide the same value, stablecoins in general would need to improve in consumer protections as well. Regulatory clarity and partnerships also matter – SWIFT is not just a technology, it is a regulated banking consortium. Stablecoins on Bitcoin or any blockchain have a far way to go in terms of regulatory clarity to define what sort of stablecoin packages are compliant for institutional use.
Challenges ahead
Despite the promising outlook, several challenges could hinder the adoption of stablecoins and other RWAs on Bitcoin.
Adoption barriers: Upgrading an entire ecosystem takes time. While Taproot adoption is growing, many Bitcoin users and services still use older address formats. Full support for Taproot Assets will require exchanges, wallets, and custodians to update their software. Significant improvements in wallet integration, interface design, and liquidity management are needed to drive broader adoption. And maturation of developer tooling and a friendlier DevEx is important for cultivating a bigger and stronger developer community. Lightning also faces a liquidity bootstrapping challenge – to support large stablecoin flows, enough channels with ample BTC liquidity must be established. Then, there’s a chicken-and-egg problem – consumers want to use payment methods that merchants accept, while merchants want to adopt payment methods that consumers already use. To get BLT on the menu, you need a killer app that requires it, getting everyone to come on board.
Onboarding constraints: While Lightning’s throughput is horizontally scalable, Bitcoin’s base layer throughput is limited, which can slow Lightning’s adoption at global scale (each new user’s channel competes for limited block space). Onboarding billions of users would take decades or more under current block size and frequency constraints. Each Lightning channel opening currently requires an onchain Bitcoin transactional, limiting non-custodial onboarding to ~500K new users per day at best. A potential solution is channel factories, which are multi-party smart contracts that allow multiple users (e.g., tens or even hundreds) to pool their funds into a single funding transaction onchain, subsequently creating numerous offchain payment channels among themselves. This drastically reduces the per-use onchain footprint by as much as 90% when onboarding large groups. Other improvements include batch channel openings (combining multiple channel setups into one transaction), splicing (adjusting channel capacity without opening new channels), and Ark’s pooled liquidity model.
Self-custody overhead: Taproot Assets requires running a separate Taproot Assets daemon (tapd) alongside a Lightning node to hold assets in self-custody, adding technical overhead. Emerging wallets like Joltz and BitTap aim to simplify this by handling the backend, but they still face challenges integrating full support of Lightning-based asset transfers. Possible alternatives include using Lightning-as-a-Service (LaaS) providers (e.g., Voltage or Lnfi’s hosted node) to avoid self-hosting the infrastructure.
Operator economics: Running a Lightning node must be economically viable to attract and retain liquidity providers. Node operators commit capital to channels and earn fees for routing payments, but in practice these fees are currently relatively low. Balancing low transaction fees for users and adequate returns for channel providers remains an ongoing challenge. However, more payment activity can improve yield for node operators who position their node strategically and set competitive fees. This requires complex management as nodes need to pre-deploy liquidity in channels and ensure there is sufficient liquidity to support these payments. New solutions like Stroom are improving returns by tokenizing staked BTC on EVM-based chains and funneling the liquidity staked into optimized Stroom routing nodes on Lightning to earn more fees and allow the user to also earn yield on their staked BTC. Lnfi has introduced “channel mining” that grants additional token rewards if you open a Lightning Node channel connected to Lnfi’s Lightning node network, calculated based on factors like node type, channel capacity, and the efficiency and active duration of your channel. Innovations like these can make liquidity provisioning on Lightning easier and more rewarding.
The “free call option” problem: Taproot Assets routed in Bitcoin introduces a specific economic complexity called the “free call option” problem. Edge nodes quoting asset swaps (e.g., BTC<>USDT) grant users implicit free call options: users can selectively finalize payments based on favorable price movements within the invoice time, leaving nodes exposed to potential losses. Currently, the HTLC timeout window is set to 60s by default to minimize this risk, but edge nodes can adjust this based on what works best for their hedging strategy – properly pricing and hedging against these implicit options requires sophisticated market-risk management skills like running an OTC trading desk. However, routing in Bitcoin also introduces new yield opportunities for edge nodes from the resulting market-making spreads beyond standard routing fees – hence introducing a new opportunity for LPs and market makers. These spreads should lessen through free market competition, but could result in centralization as larger entities are better suited with the liquidity and expertise to capitalize on this. One solution would be to route in the Taproot Asset itself (e.g., USDT), however, this introduces liquidity bootstrapping challenges. Addressing this challenge will be crucial for supporting decentralization and profitability within the Lightning ecosystem.
Ecosystem Incentives: Lightning startups struggle to attract venture capital at the same scale as tokenized blockchain protocols on chains like Ethereum and Solana. Unlike many projects that offer equity plus token warrants, Lightning relies on equity alone, limiting speculative appeal for VCs. Taproot Assets could change this by enabling tokenized incentives on Bitcoin (e.g., reward tokens for Lightning liquidity providers for protocols issued via Taproot Assets, as Lnfi does with its channel mining initiative. The idea is the same as for any blockchain-issued token – you can now incentivize participation to support infra or apps built on Lightning with native protocol tokens (issued as Taproot Assets). For instance, tokens can be used for incentivizing community participation in channel mining or channel factory operations, with rewards for contributions and revenue share for stakers. Developing sustainable tokenomics on the BLT stack can boost ecosystem funding and incentivize new infrastructure providers and community participation.
Compliance: Lightning and crypto payment networks in general face pressure to meet regulatory standards of traditional finance. Global regulators are evaluating how AML/KYC rules might apply to Lightning hubs or large routing nodes. Notably U.S. FinCen guidance has indicated that Lightning node operators are not money transmitters in themselves, but this could be reinterpreted as usage grows and different jurisdictions may enforce their own compliance requirements. The Travel Rule – which mandates sharing sender/receiver information for >$3000 transactions – presents another hurdle, as Lightning’s design prioritizes privacy and doesn’t natively carry user identity. To bridge these gaps, industry players are developing compliance layers – e.g., Lightspark’s Universal Money Address (UMA) protocol is built to support AML, sanctions screening, and other compliance messaging over Lightning transactions. Another option is for an institution to control their own Universe – as these are just local repositories of proofs and proof owners. For instance, Tether could run its own Universe and validate (or disvalidate) proof of ownership, which would effectively allow them to freeze funds if needed – USDT or any fiat-collateralized stablecoin is completely centralized anyway.
Conclusion
Bitcoin’s evolution is at an inflection point. The integration of Lightning and Taproot Assets into the Bitcoin ecosystem has positioned Bitcoin as a strong competitor to other blockchains and even traditional payment rails. Despite the abovementioned hurdles, the big picture is that Bitcoin’s network is becoming more capable and versatile for payments. The BLT stack offers a unique mix of strengths: Bitcoin’s security and decentralization of Bitcoin, Lightning’s scalability and privacy, and Taproot Assets’ multi-asset support. This all combines to deliver superior unit economics for payments – processing more payment volume with a sliver of the headcount and transaction time of legacy systems like PayPal and SWIFT. The stark advantage in cost and efficiency makes the case that Bitcoin’s payment stack can undercut and outperform the incumbent payment networks in the long run
From an investment perspective, the most obvious opportunities lie in payments applications, which represent a substantial market on its own capable of generating massive revenues through transaction and routing fees at scale. The emergence of Lightning-based payment apps could disrupt (or be adopted by) fintech and banking incumbents by operating more efficiently, openly, and globally. There are also promising opportunities in LaaS infrastructure providers and Taproot DeFi, which provide businesses with streamlined access to Lightning and Taproot Asset swaps and derivatives. Innovative models solving operational challenges like channel mining and channel factories present compelling ways to incentivize community participation and liquidity provisioning, potentially unlocking new revenue streams and fostering more of a “web3” ethos around Lightning, which has been lacking. RWA protocols built on Taproot Assets also present opportunities by servicing institutions that want to bring traditional assets onto Bitcoin (as Tether is spearheading with USDT).
Looking forward, Bitcoin is on track to transcend its image solely as “digital gold” and fulfill Satoshi’s original vision of Bitcoin as peer-to-peer electronic cash. With Lightning and Taproot Assets, Bitcoin is increasingly suited to function as a global financial settlement layer for all kinds of value, not just BTC. The ability to issue, transfer, and swap any tokenizable asset over Bitcoin and Lightning could mark the beginning of a new era for Bitcoin and attract new users who might have not been interested in Bitcoin purely as a store of value.
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