Bitcoin-Based Stablecoins Bringing Microtransaction Capacity to the Best-Known Blockchain

Stablecoins are coming to bitcoin, giving the original cryptocurrency a shot at reclaiming its original purpose of becoming a true alternative to fiat currencies like the dollar and euro.

Lightning Labs announced a $70 million funding round on Tuesday (April 7) to build a new protocol called Taro that will allow the use of stablecoins pegged to the dollar or other national currencies for fast, cost-effective mobile-to-mobile micropayments running on a bitcoin backbone.

“If I were Visa, I’d be scared, because there are a lot of people out there that have mobile phones, but now don’t need to tap into the traditional system, and then the merchants don’t need to pay the 3% fee plus 30 cents [transaction fee],” Lightning Labs CEO Elizabeth Stark told TechCrunch. “You can have fees that are dramatically lower than the legacy system.”

Most stablecoins are built on Ethereum or its competitors like Algorand, which has native versions of Tether’s USDT and Circle’s USDC, among others.

See also: Why Stablecoins Are Surging

Building on bitcoin lets developers at payments work on the best-known and most secure blockchain — potentially offering peace of mind to users unfamiliar with crypto.

Lightning Labs is a Layer 2 developer that allows the development of “sidechains,” which act as a separate blockchain micropayments channel using bitcoin as a foundation. That’s important because these sidechains don’t suffer from the extremely low scalability and high fees of Bitcoin because they essentially bypass it, writing large bundles of small transaction data onto the bitcoin blockchain.

Bitcoin can handle about five transactions per second (TPS) and has fees in the several dollar range. A Lightning Network sidechain can process 250 TPS, and the network has a theoretical maximum of 40 million TPS, with fees of fractions of a penny.

Jack Dorsey’s Block offers free Cash App transactions using Lightning, and major cryptocurrency exchange Kraken adopted it on April 1, calling it “an instant and inexpensive way to move bitcoin on and off the platform.”

Why it Matters

There are several advantages Taro brings, most notable the ability to send and receive dollar-denominated transactions on a bitcoin-based payments rail.

As a result, people sending and receiving payments won’t need to buy, hold, or off-ramp bitcoins directly, which means they won’t have to deal with bitcoin’s price volatility. And the low cost makes micropayments a real-world option.

In addition, Lightning Network transactions are settled effectively instantly, as opposed to the 10 minutes to several hours BTC requires. That said the transactions won’t be finalized until the Lightning transaction bundles are on the bitcoin blockchain.

Lightning Labs’ business development lead, Ryan Gentry, called the stablecoin capability “an important step in bitcoinizing the dollar.”

Taro offers “the best of both worlds by… issuing assets like stablecoins on the most decentralized and secure blockchain, Bitcoin,” as well as transact on what he said is the “fastest global payments network with the lowest fees.”

Gentry added that Lightning made big steps into the payments, and particularly remittance world over the last year.

For one thing, El Salvador uses Lightning to make its bitcoin-as-legal-tender experiment workable for day-to-day payments.

Gentry said there has been “an explosion of growth” in Lightning users, particularly in Latin America (notably Argentina, Brazil and Guatemala) and West Africa (where it is used in Nigeria and Ghana).

Another benefit of the Taro stablecoin capability is that Bitcoin-based projects will have a real ability to compete for decentral finance (DeFi) projects — which Lightning has supported since late 2020 via Lightning Pool.