Taproot Assets Protocol: A New Growth Point for Stablecoins Breaking Through a Market Capitalization of One Trillion

Introduction

The essence of blockchain is an extension of payment scenarios. Stablecoins occupy an important position in the cryptocurrency market and play an increasingly significant role in global payments and cross-border settlements. Currently, centralized stablecoins still hold over 90% of the market share, with USDT holding an absolute dominant position. Although the total market capitalization 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 in 2024. There is still great potential for the application of stablecoins in the payment field. The launch of the Taproot Assets protocol brings broad prospects for the application of stablecoins in high-frequency small payment scenarios, making the large-scale adoption of stablecoins as a regular payment method possible.

1. Stablecoin: The trillion-dollar track of the future

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 capitalization of stablecoins has exceeded 160 billion USD, with a daily trading volume of over 100 billion USD. Major countries are gradually introducing relevant policies and regulations, and multiple institutions predict that stablecoins will bring 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 US dollars worth of stablecoins, respectively. Tether's annual gross profit reaches as high as 4.5 billion US dollars. This enticing opportunity has attracted many large institutions to make strategic moves.

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

Centralized stablecoins have been widely adopted in the crypto ecosystem for trading and settlement on DEX or CEX. Decentralized stablecoins are primarily used for lending, with collateral often being crypto assets.

In the long run, the most promising application scenario for stablecoins is in the payment field, especially cross-border payments. Currently, the cross-border payment process is complex, costly, and has long settlement times. Stablecoins are not only a better choice but also an important channel for economic participation. As regulation becomes compliant, the role of stablecoins in global payments will become increasingly important. In the future, after the large-scale adoption of stablecoins in payment scenarios, they are expected to integrate with DeFi to give rise to PayFi, achieving interoperability, programmability, and composability in payment scenarios, forming new financial models and product experiences that traditional finance cannot achieve.

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

Currently, stablecoins mainly circulate on the ETH and TRON networks, with transaction fees generally exceeding 1U and on-chain transfer times exceeding 1 minute. In contrast, the lightning network has the advantages of faster speed, lower costs, and higher scalability.

2.1 Introduction to the Lightning Network

The Lightning Network is the first mature layer two scaling solution for Bitcoin. Multiple teams have independently developed the Lightning Network, including Lightning Labs, Blockstream, and ACINQ. Taproot Assets is the asset issuance protocol developed by Lightning Labs.

The Lightning Network is realized by establishing a bidirectional state channel. Both parties create a multi-signature address on-chain and can transfer Bitcoin in and out within a limit. After multiple transactions between both parties, settlement is made, and only the latest version of the transaction is valid. Either party can broadcast the latest version to the blockchain at any time to conclude the transaction.

Therefore, both parties can conduct off-chain transactions without restrictions, using the Bitcoin chain as an arbitrator. The smart contract will only intervene and execute on the blockchain when the transaction is completed or if there is an error. This is similar to signing multiple contracts but only resorting to the court in the event of final confirmation or disputes.

2.2 Lightning Network: the best infrastructure for global stablecoin payments

The Lightning Network allows users to conduct an unlimited number of 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 has been running for 9 years, built on the Bitcoin network with ###57000+ nodes and the PoW mechanism (, which maximizes security. Currently, the Lightning Network capacity exceeds 5000 bitcoins, with over 18000 nodes and more than 50000 channels worldwide. By establishing bi-directional payment channels, it enables instant low-cost transactions and is widely used by global payment providers and merchants, gradually becoming a consensus solution for global payments.

Bitcoin assets account for half of the cryptocurrency market capitalization. The Lightning Network, as the first Bitcoin Layer 2 scaling solution, truly realizes Satoshi Nakamoto's vision of peer-to-peer global payments. It has become the most orthodox and strongly consensus-driven Bitcoin community, and is the best solution for ideal global payments.

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

Previously, the Lightning Network only supported Bitcoin payments, with limited application scenarios. The Taproot Assets protocol solves this problem. It is an asset issuance protocol based on the Bitcoin network, supporting the issuance of tokens and stablecoins corresponding to fiat currency.

The advantages of Taproot Assets lie in their complete compatibility with the Lightning Network, making it possible to use stablecoin payments on the Lightning Network. This means that there will be a large number of new assets issued based on the Bitcoin network in the future, especially stablecoins ### circulating on the Lightning Network, which in turn enhances the influence of the Lightning Network in the global payment space.

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

( 3. Taproot Assets protocol detailed explanation

The operation principle of the Taproot Assets protocol ), referred to as TA###, is based on the Bitcoin UTXO model and relies on the Taproot upgrade for implementation. These two core elements drive the effective functioning of the protocol.

(# 3.1 Comparison of UTXO Model and Account Model

The UTXO) unspent transaction output ### is the foundation implemented by Bitcoin Layer 2 and the Ordi, Runes protocols. Most public chains like Ethereum and Solana adopt the Account( account ) model.

The account model is similar to Alipay accounts, where each transaction directly reflects a change in the account balance.

The UTXO model can be likened to a wallet that holds checks authorized for exchange by others and checks authorized by oneself to others. The wallet balance equals the value of received checks minus the value of spent checks. The Bitcoin network is akin to a bank that redeems these checks, calculating each address's balance based on the latest status of user transactions.

The UTXO model inherently avoids the double-spending problem and provides higher security. The TA protocol fully 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, where each UTXO cannot be reused after the confirmation of expenditure, ensuring that assets move with the UTXO. Miners who mine the longest chain have the final interpretation rights of the UTXO. This enhances transaction security, avoiding the risks of double spending attacks and errors or malicious behaviors that may be caused by centralized institutions.

(# 3.2 Taproot upgrade enables more complex functionalities

The Taproot upgrade in 2021 brought 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, and the length of the multi-signature address is the same as that of private wallet addresses, which strengthens security and privacy protection. This provides a solid foundation for institutional and B2B transactions, promoting broader commercial applications.

Users' most intuitive feeling is that the wallet address format has changed, with addresses starting with "bc1p..." supporting the Taproot upgrade.

(# 3.3 Technical Principles of TA

Unlike Ordinal and BRC20, the TA protocol adopts a more efficient method. Assets are marked on each UTXO, with only the root hash of the script tree stored on-chain, while the scripts are kept off-chain. TA assets can be deposited into Lightning Network payment channels and transferred, enabling circulation on both the Bitcoin mainnet and the Lightning Network.

The TA protocol expands on the Taproot upgrade by recording asset state transition logs on the Taproot Merkle tree. Utilizing the "one-time seal" characteristic of Bitcoin UTXO, it achieves consensus on asset state transitions on-chain without the need to run off-chain indexers of other protocols.

The TA protocol uses a Sparse Merkle Summation Tree ) MS-SMT ### to manage asset states and defines the standards for asset state transitions. Only the root hash of the Merkle tree is written to the Bitcoin chain, without polluting the on-chain data.

(# 3.4 TA protocol and the relationship with the Lightning Network

Taproot Assets protocol assets can seamlessly enter the Lightning Network through TA channels. This expands the Lightning Network from a pure Bitcoin payment network to a network that supports the circulation of other crypto assets.

The TA channel principle is the same as that of the state channel, based on hash time-locked contracts. Since Taproot Assets are inherently within UTXO, the implementation mechanism of the TA channel remains unchanged, just supporting the circulation of TA assets.

The TA protocol enables the seamless transfer of assets such as stablecoins on the Lightning Network.

)# 3.5 User Costs and Centralized Custody Issues

Although the TA protocol only records the transaction root hash on the chain, asset data needs to be stored on each client. Users need the private key of the UTXO corresponding to the TA asset and the related data on the Merkle tree.

The official implementation of TA ### Tapd ### heavily relies on the Lightning node ( LND ) wallet service, which has no account management mechanism. Ordinary users find it difficult to participate in node construction, resulting in most wallet services on the Lightning Network being custodial solutions.

In the future, when a large amount of stablecoin circulates on the TA assets, large assets may be prioritized for storage on the Bitcoin mainnet, while small assets are deposited in the Lightning Network to meet payment needs. Therefore, it becomes important to adopt a more decentralized approach that allows users to fully own the stablecoin.

( 4. Self-custody Solutions: Improve the Lightning Payment Network

Various decentralized solutions for the circulation of TA assets on the Lightning Network have emerged in the market. For example, LnFi has proposed a cloud hosting solution to lower the threshold for users to deploy Lightning Network nodes.

The BitTap team focuses on developing decentralized infrastructure for the TA protocol ecosystem and has developed a decentralized browser plugin wallet for TA, providing users with self-custody options.

BitTap proposes an innovative wallet protocol )Bittapd###, allowing users to fully control their private keys. When signing transactions, Bittapd interacts with Tapd on behalf of the user, providing a decentralized experience and security similar to Metamask. Users can utilize the BitTap wallet to store and transfer stablecoin assets on the Bitcoin mainnet, and freely transfer small amounts to the Lightning Network.

The Bittapd protocol, as a decentralized agent of the TA protocol, transforms the Tapd native centralized custody account system into a decentralized solution, while also taking on the network communication and forwarding tasks for transaction requests from plugin wallet users.

( 5. Summary

Stablecoin applications are expanding from cryptocurrency trading to global payments. The Lightning Network, with its low fees,