In 2021, the bitcoin asset (BTC) advanced through its monetization cycle to establish itself as a global store of value. In 2022, the second stage of monetization is coming into focus: BTC is maturing as a medium of exchange. This is made possible by the fundamental stability and security of the Bitcoin blockchain and by virtue of the advancement of the Lightning Network, a second-layer Bitcoin payment technology. The implications are far reaching and include new potential for the financial inclusion of the world’s unbanked population.
On April 5, 2022, Lightning Labs, a Lightning Network-focused infrastructure technology company led by Elizabeth Stark (CE) and Olaoluwa Osuntokun (CTO), announced the novel ability to issue and transfer assets, including stablecoins like Tether (USDT), on-chain. of Bitcoin blocks. Issued assets can be traded on the Lightning Network, and by the end of 2022, Lightning Labs’ Pool product will support the liquidity of issued assets in the same way it does now with Bitcoin.
This utility is enabled by a new protocol called Taro, which is designed by Osuntokun. Ultimately, Taro enables all Lightning Network participants to benefit from Lightning’s near-free and near-instantaneous global transaction capability, without needing to tolerate the current volatility of BTC. BTC volatility is now optional, even for those using Bitcoin’s Lightning Network, for example all 3 million Salvadorans reported transacting on Lightning in 2021.
The activation of Taproot on Bitcoin Core in November 2021, the last major update to the Bitcoin protocol, made Taro possible. Taproot increased the security, privacy, and transaction performance of the Bitcoin blockchain, which also led to the power of more sophisticated smart contracts in Bitcoin.
In particular, Taro is a testament to how Bitcoin evolves over time. While protocol development is focused on maintaining and optimizing the technology’s core values for network security and scalability, “conservative” changes can greatly open up the design space of what can be built on Bitcoin and Lightning, as evidenced by Taro’s relationship with Taproot. It is important to note, and fundamental to Bitcoin, that the usefulness of Bitcoin expands without any change or threat to the promises (also known as “rules”) imposed by the software. These rules include the total number of BTC to be put into circulation, the issuance schedule, the compensation scheme for miners, and more.
The Use Case for Taro in Emerging Markets
The new protocol will significantly diversify the populations that Lightning Network applications and infrastructure can serve. Taro will make Lightning a useful payment rail for populations that have a lower tolerance for BTC volatility, including populations of low socioeconomic status or those living paycheck to paycheck.
With this development, BTC volatility can be accessed as each user sees fit and can be avoided when losses would be intolerable. In other words, users can increase or decrease their exposure to volatility. Using Lightning and Taro to earn in USDT and/or BTC, for example, a recipient can decide whether to keep the funds in BTC for longer-term savings or in USDT for immediate or short-term spending. In this way, Taro shows Bitcoin and the Bitcoin Lightning Network as a competitor to the SWIFT financial messaging system and commercial banking.
Lightning Labs writes: “One of our core principles at Lightning Labs is solving real problems for real people, and we’ve talked to countless community members in emerging markets who have told us what a difference bitcoin and Lightning stablecoins would make in their economies.” As the cycle of infrastructure => adoption => infrastructure => adoption continues, Bitcoin’s potential as an open global financial platform may continue to unfold.
Emerging markets, where access to the global economy and financial tools have historically been limited, can lead the way.