The use case of bitcoin as digital gold is more than a decade old. As a payments network, it has gained a lot of traction after the Lightning Network took off in 2021. What if this near-instant and cheap payment technology could be combined with… stablecoins? We all know that other networks have large amounts of stablecoins as we discussed here, but often the conversation misses out on Bitcoin, and this is what could bring Bitcoin to the masses. Currently, there are two projects working on bringing stablecoins on Lightning Network and in this article we’ll tell you more about both!

Why do we Need Fast & Cheap Electronic Payments with Lightning?

Well, in many places in the world people don’t have access to digital banking services. Cash is king. Sure, the big international retail chains accept credit cards everywhere, but these transactions come with a hefty fee. 

So Lightning transactions are a godsend to every underbanked person on earth with a mobile phone. Especially since borders don’t exist on this network. Globally, some 800 million people are financially dependent on the 200 million family members who work abroad and send money home. The fees of the legacy system are crippling.

The State of the Lightning network

Lightning has grown explosively in 2021. The payment volume has quadrupled year-over-year. In spring 2022, an estimated 80 million people worldwide had access to Lightning payments. And they did not only use Lightning for sending bitcoin. Payment apps like Strike and Chivo are already accomplishing sending dollars through Lightning. 

But are they, really? Here’s how they operate. Users in, for example El Salvador, can choose to receive their payment in either dollars or bitcoin. Let’s say they choose to receive dollars. What the app does in the background, is:

1. Swap dollars for bitcoin.
2. Send the bitcoin over Lightning.
3. Convert the bitcoin back to dollars at the point of arrival. 

It is of course nice that apps like Strike or El Salvador’s Chivo app have ‘bitcoinized’ the dollar (or should we say ‘enlightened’ the dollar). And the payments work fine. But as a user, you still rely on companies and their stash of dollars. That’s not the spirit of crypto.

Also, depending on which country you live in, you might not have access to these apps.

Fast & Cheap Stablecoin Payments: Bitcoin’s Killer App?

Enter: stablecoins on Lightning.

Whenever stablecoins will be ready to be sent ‘on top of’ Lightning, users won’t have to trust the builder of the app managing their dollar reserves properly. Not only will users benefit from Lightning’s speed and low cost (in comparison, sending stablecoins on Ethereum comes with a hefty price tag). They will also benefit from the reliability of an on-chain asset that is a stablecoin. It’s a much cleaner and more transparent process than swapping greenbacks at the entry and exit point of transactions.

But let’s not get too high on the hopium bong yet.

Stablecoins on Lightning are not here yet, by any stretch. Although, two companies are currently working on this:

• Lightning Labs – Taro: The first is Lightning Labs. Its protocol will be called Taro. It is made possible by bitcoin’s recent Taproot upgrade. To be clear, Taro is not a stablecoin but a technology for sending stablecoins. To fund the project, Lightning Labs has raised $70 million in april 2022. The company is backed by Jack Dorsey, Bitcoin evangelist and former Twitter CEO.
• OmniBOLT: The second protocol is OmniBOLT. It is a protocol to set up Lightning networks for other assets, such as a stablecoins. These assets are released on OmniLayer, a Layer 2 on bitcoin supporting smart contracts and issuing tokens. The company behind it is Synonym, launched in november 2021. It is owned by Tether Holdings.

The development of these stablecoins-on-Lightning projects will no doubt take a few years to materialize into something reliable and consumer-friendly. But let’s assume they will succeed. Could this become bitcoin’s killer app? A killer app is a use case that catapults a platform to something people simply have to use. For example, e-mail was the killer app for the early internet.

But Will the Price of Bitcoin Benefit?

There is something to be said for the mutually reinforcing success of ‘bitcoin the asset’ and ‘bitcoin the fast payments network’. ‘Bitcoin the asset’ (the savings account with number go up properties) doesn’t have the network effect that Bitcoin/Lightning the payments network will have. Elizabeth Stark, CEO of Lightning Labs, is very vocal about this in an interview with Alex Gladstein: “What I’m passionate about with Lightning is: number of people go up. Let’s bring the technology to billions of people, provide them access and provide them with opportunities and use cases they previously wouldn’t have had.”

If this scenario plays out, many more people will be exposed to bitcoin. They will hold a wallet with bitcoin and stablecoins. By being exposed to Bitcoin the payment network, they will also learn about Bitcoin the store of value. They might get a hardware wallet for their savings and might want to try on-chain payments.

As Lyn Alden argues in Arcane’s recent report on the state of Lightning: “Successful financial systems of history have been layered approaches. [..] What we are witnessing is a payment layer with a network effect built on top of a settlement layer with a network effect, and that’s a truly powerful combination.”

Will Regulators Allow It?

Setting aside for a second the countries that are hostile toward crypto – like China – the emerging consensus in Western countries is that they will not ban bitcoin nor (at least some) stablecoins. The United States and the UK have recently hinted at creating a legal framework for stablecoins. Policy makers in the US might even view dollar stablecoins as a new instrument to keep worldwide dollar adoption high.

So, Will Stablecoins on Lightning be Bitcoin’s Killer App?

Yes, this just could be the killer app. It’s likely that there will be huge demand for fast, cheap, borderless payments on the one hand and stable, dollar equivalence of those payments on the other hand. Lightning and stablecoins saw the light of day in roughly the same crypto era (2015-2017). It would be interesting to see that they will join forces now that both have come of age. We still have a way to go but we are witnessing promising developments.