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How To Take BTC From Reserve Asset To World Reserve Currency


Is the Lightning Network bitcoin’s killer app? It might be, but it still has a long road ahead. One of the stops on that road is the possible inclusion of stablecoins. Does bitcoin need them? Aren’t there inherent counterparty risks with those? The debate over those questions rages on. And in their latest post, The Bitcoin Layer makes the case for this development to be crucial in The Lightning Networks trajectory. 

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. However, the risks it brings forth are as big as the opportunities it presents.

Let’s explore what The Bitcoin Layer has to say before jumping to conclusions. They might surprise us.

Making Lightning Interoperable With Everything

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 article, Magma’s existence proves “a structural demand for secondary markets of liquidity”. In those markets, “participants can buy and sell collateral as needed—eventually blossoming into a deep and liquid capital market.” 

Not only that, The Bitcoin Layer also theorizes about:

“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.”

And this is where the Taro protocol comes in. When it was announced, our sister site Bitcoinist posed the following questions:

“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. And the bitcoin network underpins the whole thing. However, is this a positive development for bitcoin? How will this benefit the Lightning Network? Does a hyperbitcoinized world require tokens?”

And The Bitcoin Layer provides convincing enough answers to those questions. But first…

“Taro makes bitcoin and Lightning interoperable with everything. For the Lightning Network, this means more network volume, more network liquidity, and more routing fees for node operators, driving more innovation and capital into the space. 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 on Kraken | Source: BTC/USD on TradingView.com

A Bitcoin-Denominated Global Capital Market

“Using sats as the transmittal rails for transactions across every currency opens the door for a bitcoin-denominated global capital market”. No one would contest that. 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

Conceptual Future Bitcoin-Lightning Risk Curve | 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.” 

And they make the case that the introduction of Taro is a crucial step in the process of bitcoin fulfilling its destiny of becoming the world 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.

Does The Lightning Network Need Stablecoins, Though?

The answer to that question is still up in the air. The Bitcoin Layer acknowledges the inherent counterparty risk those present. It even puts them almost at the top of the risk curve. However, they consider them crucial and even welcome every other asset in the world to The Lightning Network. According to their theory, that’s how “a bitcoin-denominated capital market” emerges.

Of course, this is all speculation. The Taro protocol has not been approved. Bitcoin’s liquidity is far away from what it needs to be to become the global reserve currency. And, even though stablecoins on The Lightning Network might be closer than we think, the whole scenario takes place in a distant future.

Featured Image by WikimediaImages from Pixabay | Charts by TradingView and The Bitcoin Layer
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