BRC-20 arrives on Lightning Network!

Lightning Network (LN) in recent years was solving the problem related to frequent congestion in the Bitcoin network. 

Specifically, by enabling off-chain BTC transactions, it avoided having to go through the mempool, which was precisely the one that frequently became congested. 

Lately, however, the problem has resurfaced thanks to Ordinals and BRC-20 tokens, which are crypto assets that can be mined on Bitcoin’s blockchain. 

In fact, these assets were minable and exchangeable only on-chain, thus necessarily having to go through both the mempool and the Bitcoin blockchain. 

Once again, Lightning Network could be used to solve the problem. 

The announcement by Lightning Labs

A couple of days ago Lightning Labs announced the launch of the new version of Taproot Assets, which allows assets to be issued on both Bitcoin and Lightning Network.

Thanks to this new protocol, it will also be possible to move tokens mined on the Bitcoin network to LN, specifically using LN to send them, as has been done for some time for BTC. 

The official Lightning Labs post with which it described the new protocol is not coincidentally titled “Mint the Future with Taproot Assets v0.2,” because moving crypto assets from the Bitcoin network to LN literally opens the door wide to a new future. 

Just think of what incredible success the tokens minted on Ethereum have had over time. 

While in this particular case they are not actual tokens, as technically they are inscriptions, the functionality is the same. 

Ethereum without USDT and the other stablecoins would probably still be little, whereas on the Bitcoin network it is simply not possible to issue any more tokens. 

In theory, many DeFi protocols could move to LN now that there is Taproot Assets v0.2, particularly those that allow the creation of decentralized stablecoins and exchanges. 

Taproot Assets v0.2

The Taproot Assets v0.2 protocol can be used thanks to the Taproot Assets Protocol (TAP) daemon, formerly called Taro.  

This daemon provides a feature set for developers who want to issue, send, receive and discover assets on the Bitcoin blockchain.

Currently TAP is still only on the testnet, but support for the mainnet is coming soon. 

Previously, the problem was that existing protocols for issuing assets on the Bitcoin blockchain wrote metadata directly into the block space, i.e., in a particularly inefficient way. 

The inevitable consequence was an overfilling of the blocks, and more importantly, a boom in transaction fee costs on the Bitcoin blockchain. 

This made it clear that these protocols were not designed at all to support large numbers of transactions. 

Taproot Assets, on the other hand, was designed to efficiently handle the arbitrary issuance of assets and their transfer onto the Bitcoin blockchain in large quantities.

In fact, it is designed to work mostly off-chain, where the problem of congestion and high fees is simply not there. 

The main solution is to allow an unlimited number of assets to be minted and/or transferred in a single on-chain transaction. In other words, the bulk of transactions take place off-chain, thus without any burden on the blockchain and with negligible fees, whereas on-chain only the bare minimum takes place. 

Thus it remains possible to enjoy the permissionless nature of Bitcoin’s blockchain, while at the same time allowing for scalable asset creation and transfer without incurring the constraints and limitations of the blockchain itself. 

Lightning Labs writes: 

“Users will soon be able to integrate their assets into the Lightning Network for instant, high volume, low-fee transactions. This leverages existing network effects and the install base of wallets, exchanges, and merchants, instead of needing to bootstrap a new ecosystem from scratch.”

DeFi on Lightning Network (LN)

With this new protocol, many of the major DeFi protocols could be recreated on LN. 

In addition to this, many of the stablecoin issuers could release their tokens on LN as well. 

It is worth noting that the first and most important stablecoin, USDT from Tether, was born back in 2014, when Ethereum did not yet exist, and was born precisely on the Bitcoin blockchain.

More accurately, the first USDT tokens were issued on Omni (Omni Layer Protocol), a platform for the creation and exchange of crypto assets built on top of Bitcoin’s blockchain. 

Even today there are nearly 900 million USDT tokens in circulation on Omni, although the vast majority are on Ethereum and Tron. 

Given the historical support offered by the iFinex group to LN, it is easy to imagine that sooner or later USDT will also be issued on Taproot Assets or similar. 

Once stablecoins are present on LN, thanks to solutions like this, it is easy to imagine that someone will also launch DEXs on LN, and at that point Lightning Network would be ready to become a widely usable network for decentralized finance as well. 

To date, the Bitcoin network ranks only fourteenth in TVL in the DeFi industry, surpassed even by DefiChain, Kava, and Mixin, partly because there is virtually only one protocol on Bitcoin that has a relevant TVL: Lightning Network. 

But with the addition of freely minable assets by anyone on LN its TVL could explode. 

Bitcoin’s congestion

Until mid-April, approximately an average of 300,000 transactions were recorded on Bitcoin’s blockchain every day. 

With the boom in Ordinals and BRC-20 tokens this average has exploded, rising above 600,000 transactions in just a few days. Now almost every day there are 500,000 transactions on the Bitcoin blockchain, peaking at over 650,000. 

The fact is that there is a physical limit to the number of transactions that can be recorded per day on Bitcoin’s blockchain, so this boom has clogged the queue of transactions waiting to be validated on the mempool. 

The result has been a sharp increase in fees, as the miners who validate transactions by entering them on the blockchain choose the ones that make them the most money, i.e. the ones with the most fees paid by those who create them. 

The average fee per transaction has risen from $2 in mid-April to about $4 now, but with an incredible spike above $31 on 8 May. 

The only possible solution, which fortunately already exists, are layer-2s that allow individual transactions not to have to be recorded on the blockchain, and among these LN is by far the main one. 

It is no coincidence that even for Ordinals and BRC-20 eventually the solution is precisely Lightning Network. 

The benefits of the Lightning Network

LN offers two specific advantages to those who use it as an alternative to classic transactions on the Bitcoin blockchain. 

The first is that they do not have to go through the mempool queue, thus being able to be validated almost instantly. 

The second, even more important, is that they have insignificant fees, in some cases even neglectable. 

When moving Ordinals or BRC-20 tokens, it is not convenient to go through the blockchain by incurring relatively high costs, unless one is moving large quantities or large values. 

Thus, the solution introduced by Lightning Labs is beneficial to the users of these new assets on the Bitcoin blockchain, so much so that it is expected that it will be used en masse to make them easily transferable at low cost. 

Bitcoin’s future is primarily off-chain, although everything will continue to be based on its blockchain.