Is the Lightning Network bitcoin’s killer app? It might be, but there’s a long road ahead. Stablecoins could be one stop on this road. Are they necessary for bitcoin? Aren’t there inherent counterparty risks with those? These questions continue to be debated. Their latest posting is here Bitcoin Layer is the perfect caseThis development is crucial.
According to The Bitcoin Layer, “a global capital market operating on top of bitcoin-denominated financial rails is inching closer with each new onramp.” And the Taro protocol and all of the assets it would bring to The Lightning Network is the mother of all onramps. The risks that it poses are just as great as the potential it offers. Let’s explore what The Bitcoin Layer has to say before jumping to conclusions. We might be surprised.
Lighting interoperable
The first part of the article is about Magma, “a Lightning liquidity marketplace that allows nodes to buy and sell liquidity by leasing other network participant’s channels for a minimum specified period of time.” According to the articles, Magma’s existence proves “a structural demand for secondary markets of liquidity, where participants can buy and sell collateral as needed—eventually blossoming into a deep and liquid capital market.”
The Bitcoin Layer is not content with just this:
“Through time, Lightning Banks will emerge. As market participants lack the technical wherewithal to efficiently operate Lightning channels, most Lightning Network channel management will be subsumed by these entities who specialize in it.”
Here is the Taro protocol. The Taro protocol was officially announced on September 1, 2005. our sister site BitcoinistThese questions were asked:
“So, the main idea is to create and transact stablecoins over the Lightning Network, but the technology allows users to create any asset including NFTs. This is all supported by bitcoin’s network. But is this positive for bitcoin? This will benefit the Lightning Network in many ways. Does a hyperbitcoinized world require tokens?”
The Bitcoin Layer offers convincing answers. But first…
“Taro makes bitcoin and Lightning interoperable with everything. The Lightning Network sees this as more network volume, greater network liquidity and higher routing fees. This will drive innovation and capital in the area. Any increase in demand for transactional capacity that will come from these new assets (think stablecoins) will correspond with increased liquidity on the bitcoin network to facilitate these transactions.”
BTC Price Chart for 08/09/2022 at Kraken. Source: BTC/USD, TradingView.com| Source: BTC/USD on TradingView.com
Global Capital Market with Bitcoin
“Using sats as the transmittal rails for transactions across every currency opens the door for a bitcoin-denominated global capital market”. This is something that nobody would dispute. Nor that “the Taro protocol opens the floodgates for this traditional finance liquidity to be subsumed by a faster, counterparty-free settlement network”. The network is counterparty-free, but, what about the assets’ inherent counterparty risk?
Conceptual Future Bitcoin Lightning Risk Curve Source: The Bitcoin Layer| Source: The Bitcoin Layer
According to The Bitcoin Layer, it’s all about risk and the barrier to entry:
“Higher tiers on the risk curve require less maintenance but incur more risk, whereas the lower levels on the risk curve incur less risk but have a higher barrier to entry for the average person who lacks the technical wherewithal for maintenance and security best practices.”
They argue that Taro’s introduction is an important step towards bitcoin becoming the global reserve currency.
“For bitcoin to become a world reserve currency, a deeply liquid capital market is an intrinsic requirement—and the Taro protocol is a promising step in making that happen. While bitcoin and LN are trillions of dollars away from becoming a legitimate alternative to other capital markets, they arguably maintain the lowest collective risk profile of any capital market in existence, as they are underwritten by an asset that when custodied incurs zero counterparty risk.”
Zero counterparty risk.
But, does The Lightning Network need stablecoins?
Answers to this question are still unknown. Bitcoin Layer recognises the potential counterparty risks that they present. They are almost at the very top of the risk spectrum. But they regard them as crucial, and will welcome all assets to The Lightning Network. According to their theory, that’s how “a bitcoin-denominated capital market” emerges.
This is speculation. Taro Protocol has yet to be approved. Bitcoin’s liquidity is far away from what it needs to be to become the global reserve currency. Even though there are stablecoins available through The Lightning Network, they do not have the liquidity that Bitcoin needs to become the global reserve currency. It might not be as far away as we imagineThe whole thing takes place in the distant future.
Featured image by WikimediaImages of Pixabay Charts by TradingView, and The Bitcoin Layer| Charts by TradingView and The Bitcoin Layer