Stablecoin Sector: The Growth Point of the Next Trillion-Dollar Market

The development of blockchain technology has made stablecoins an indispensable part of the cryptocurrency market, playing an increasingly important role in global payments and cross-border settlements. Currently, the market capitalization of stablecoins has exceeded $160 billion, but compared to the $20 trillion M1 money supply reported by the Federal Reserve in 2024, the market capitalization of stablecoins only accounts for 0.75%. This indicates that there is still significant growth potential for stablecoins in the payment sector. The launch of the Taproot Assets protocol has created broad prospects for the application of stablecoins in high-frequency small payment scenarios, which is expected to promote stablecoins as a conventional means of payment.

1. Stablecoin: The future trillion-dollar track

The booming development of the stablecoin market indicates that it is expected to become a trillion-dollar market in the future financial sector. Currently, the market value of stablecoins has exceeded 160 billion dollars, with a daily trading volume exceeding 100 billion dollars. Countries are introducing relevant policies and regulations regarding stablecoins, and various institutions predict that stablecoins will lead a new trillion-dollar market, with the main growth coming from the widespread application of stablecoins in the global payment field.

Stablecoins can be divided into two main categories: centralized and decentralized. Currently, centralized stablecoins dominate the market, with USDT and USDC issuing stablecoins worth $114.46 billion and $34.15 billion, respectively. Tether has only 125 employees, yet it boasts an annual gross profit of $4.5 billion. This enticing opportunity has attracted numerous institutions to position themselves:

• BlackRock issues tokenized fund BUIDL on Ethereum, providing stable value and earning returns, with a market capitalization of $384 million.
• JD Coin Chain Technology ( plans to issue a stablecoin in Hong Kong that is pegged 1:1 to the Hong Kong dollar.

Although stablecoins play an important role in cryptocurrency trading and DeFi, the exploration of their integration with the real economy is still in the early stages. In the long run, the most promising application scenario for stablecoins lies in the payment field, especially in cross-border payments. Traditional cross-border payments involve multiple intermediaries, are costly, and take a long time to settle. Stablecoins are not only a better choice but also an important channel for economic participation. As regulations gradually improve, the status of stablecoins in global payments will become increasingly important. In the future, the integration of stablecoins with DeFi may give rise to Pay Fi, achieving interoperability, programmability, and composability in payment scenarios, forming a new financial paradigm and product experience that traditional finance finds difficult to reach.

2. Taproot Assets Protocol + Lightning Network: Infrastructure for Global Payment Networks

Currently, stablecoins are mainly circulated on the ETH and TRON networks, but the transaction fees on these networks usually exceed 1U, and the on-chain transfer time is more than 1 minute. In contrast, the Lightning Network offers advantages of faster speed, lower costs, and higher scalability.

) 2.1 Introduction to the Lightning Network

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

The Lightning Network achieves transactions by establishing a bi-directional state channel. The two parties create a 2-of-2 multi-signature address on-chain, allowing them to transfer Bitcoin in and out within a limit. Both parties can make multiple payments back and forth, and at the final settlement, the Bitcoin in the new address is transferred to both parties according to the settlement amount. Only the latest version of the transaction is valid, enforced by the Hash Time Locked Contract ###HTLC(. Either party can broadcast the latest version to the blockchain at any time to close the channel, without the need for trust or custody.

Therefore, both parties can conduct off-chain transactions without restrictions, using the Bitcoin chain as an arbitrator. Only when the transaction is completed or an error occurs will the smart contract intervene and execute on the blockchain. This is similar to signing multiple legal contracts, but the court's intervention is only required when final confirmation is made or a dispute arises.

) 2.2 Lightning Network: the ideal infrastructure for global stablecoin payments

The Lightning Network allows users to conduct unlimited transactions off-chain without causing congestion on the Bitcoin network, while relying on the security of the Bitcoin network. Theoretically, the scalability of the Lightning Network has no upper limit.

The Lightning Network, which has been running for 9 years, is built on the Bitcoin network, has over 57,000 nodes, and employs a PoW (Proof of Work) mechanism to maximize security.

Currently, the Lightning Network has a capacity of over 5000 bitcoins, with more than 18,000 nodes and over 50,000 channels worldwide. By establishing bidirectional payment channels, it enables instant low-cost transactions, which are being integrated and used by a large number of payment providers and merchants globally, gradually becoming a widely accepted consensus solution for global payments.

Bitcoin assets account for half of the cryptocurrency market value, and this cycle has refocused on the Bitcoin ecosystem. As the first layer two scaling solution for Bitcoin, the Lightning Network truly realizes Satoshi Nakamoto's vision of peer-to-peer global payments. The Lightning Network has become the most orthodox and consensus-driven Bitcoin community, making it the best solution for ideal global payments.

2.3 Taproot Assets protocol completes the last mile of the Lightning Network

Before the emergence of the Taproot Assets protocol, the Lightning Network only supported Bitcoin payments, and the application scenarios were limited. Now Bitcoin has become digital gold, and most people are reluctant to use Bitcoin for payments.

There have been some layer-one issuance protocols for Bitcoin, such as Atomical and the BRC20 based on Ordinals, but they do not support direct access to the Lightning Network. The launch of the Taproot Assets protocol addresses this issue. It is a Bitcoin network asset issuance protocol developed mainly by Lightning Labs. Similar to the Ordinals protocol, anyone or any institution can use the Taproot Assets protocol to issue tokens, including stablecoins corresponding to fiat currencies such as USD, AUD, CAD, HKD, etc.

The advantage of the Taproot Assets protocol lies in its complete compatibility with the Lightning Network, making it possible to use stablecoins for payments on the Lightning Network. This means that a large number of new assets issued on the Bitcoin network in the future, especially stablecoins ###, will flow into the Lightning Network, thereby enhancing the layout and influence of the Lightning Network in the global payment space.

Leveraging the security and decentralization of Bitcoin, Lightning Labs' advocacy of "bitcoinizing the dollar and global financial assets" is becoming a reality. The launch of the Taproot Assets mainnet protocol marks the official beginning of stablecoin applications in trillion-dollar payment scenarios.

3. Taproot Assets Protocol Explained

The operation principle of Taproot Assets(, abbreviated as TA), is based on Bitcoin's UTXO model and relies on the Taproot upgrade of the Bitcoin network. These two core elements drive the effective operation of the TA protocol.

( 3.1 Comparison of UTXO Model and Account Model

UTXO) unspent transaction output ### is the foundation implemented by Bitcoin layer two and protocols like Ordi, Runes, etc. Most public chains like Ethereum and Solana adopt the Account( account ) model.

The Account model is similar to an Alipay account, where each transaction directly reflects changes in the account balance.

The UTXO model can be likened to a wallet that holds checks authorized for exchange by others, as well as checks authorized by oneself for others. The wallet balance equals the value of the received checks minus the value of the issued checks. The Bitcoin network is equivalent to a bank that redeems these checks, calculating the latest balance for each address through user transactions of these checks.

The UTXO model inherently avoids the double-spending problem, providing higher security. The TA protocol inherits the security features of the Bitcoin network layer, avoiding the risks of erroneous transfers or missed transfers.

The TA protocol adopts a one-time sealing concept, ensuring that each UTXO can only be used once after confirmation of expenditure, thus ensuring asset movement with UTXO. The miner who mines the longest chain has the final interpretative rights to the UTXO. Unlike BRC20, which relies on off-chain indexing to identify assets, the TA protocol enhances transaction security, preventing double spending attacks and the risks of errors or malicious actions that may arise from centralized institutions. These features make the TA protocol + Lightning Network a reliable payment infrastructure.

( 3.2 Taproot upgrade enables more complex functions

In 2021, the Taproot protocol upgrade introduced simple smart contract functionality to the Bitcoin network. P2TR format wallet addresses can implement complex logic through Bitscript, making new complex transaction types possible on-chain.

The most critical improvement is the implementation of multi-signature ) multi-sign ###. This enhances the transaction security for institutional users, as the multi-signature address has the same length as private wallet addresses, thereby increasing security and privacy protection. This provides a solid foundation for institutional and B2B transactions, promoting broader commercial applications.

The most intuitive feeling for users is the change in wallet address format, with addresses starting with "bc1p..." supporting the Taproot upgrade.

( 3.3 TA Technical Principles

The early Bitcoin ecosystem's Ordinals and BRC20 protocol are based on an account model, where balances are bound to addresses. Asset issuance is done through a specific identifier called "mark" on the smallest unit of Bitcoin, "satoshi," mapping "satoshi" to a certain asset. Asset state data is stored in JSON format within the block's segregated witness section. When assets are traded, the scripts recording the changes are "engraved" into the block and interpreted through off-chain indexers.

This method results in every transaction of Ordinals and BRC20 assets being recorded in blocks, increasing block size, accumulating invalid data, and being permanently stored on the Bitcoin chain, which puts pressure on full node storage. In contrast, the TA protocol marks assets on each UTXO and only stores the root hash of the script tree on-chain, while the scripts are kept off-chain.

TA assets can be deposited into Lightning Network payment channels and transferred through the existing Lightning Network, meaning TA assets can circulate on both the Bitcoin mainnet and the Lightning Network.

The TA protocol utilizes the Bitcoin Taproot upgrade )BIP 341### for development. The Taproot upgrade allows spent UTXOs to be accessed using either the original private key or scripts on the Merkle tree.

The TA protocol extends on the basis of the Taproot upgrade, recording asset state transition on the Taproot Merkle tree, utilizing the "one-time seal" characteristic of Bitcoin UTXO to achieve consensus on asset state transitions on-chain, without the need to run off-chain indexers of other protocols.

The TA protocol uses sparse Merkle sum trees ( MS-SMT ) to manage asset states and defines the standards for asset state transitions.

It should be noted that not all data from the Merkle tree is written into the Bitcoin chain, only the root hash is written. Regardless of the size of the asset data, the transaction length on the Bitcoin chain remains unchanged, and the TA protocol does not pollute the Bitcoin chain.

( 3.4 The relationship between TA protocol and Lightning Network

In Lightning Labs' latest product, TA protocol assets can seamlessly enter the Bitcoin Layer 2 Lightning Network through TA channels. Previously, the Lightning Network only supported the circulation of Bitcoin, but the TA protocol has changed this by allowing the issuance of assets on the Bitcoin main chain through the TA protocol, especially stablecoins ), which can then circulate on the Lightning Network.

The TA channel implementation principle is the same as that of the state channel, based on hash time-locked contracts. TA assets themselves are within UTXO, and the TA channel implementation mechanism has not changed, it has only expanded from supporting Bitcoin to supporting TA assets.

The TA protocol enables the circulation of assets other than Bitcoin on the Lightning Network, facilitating the seamless transfer of assets such as stablecoins on the Lightning Network.

3.5 The user cost is high, and the issues with centralized custody need to be resolved.

The TA protocol only records the transaction root hash on-chain to ensure the simplicity of the Bitcoin chain, but asset data needs to be stored off-chain on each client. Clients need to verify the validity of the assets with the private keys of the corresponding UTXO and the relevant data of the assets on the Merkle tree.

The official implementation of the TA protocol (Tapd) relies heavily on the Lightning Node ###LND( wallet service, which has no account management mechanism. The architecture of the Lightning Network determines that the decentralized approach requires users to build their own nodes, making it difficult for ordinary users to participate. This is one of the important reasons why the Lightning Network has not been widely adopted.

Currently, the Lightning Network wallet service is basically a custodial solution, which means that the new assets issued by TA will also be stored in a custodial wallet. In the future, TA assets will rise.