Tether Brings USDt to Bitcoin’s Lightning Network via Taproot Assets
Tether & Taproot Assets
Tether, the largest company in the digital assets industry, announced the integration of USDt into Bitcoin’s ecosystem, including both its base layer and the Lightning Network. Supported by a new Taproot-powered protocol, Taproot Assets, and developed by Lightning Labs, this integration combines Bitcoin’s unmatched decentralization and security with the speed and scalability of the Lightning Network, redefining how stablecoins can function within the Bitcoin ecosystem.
Once fully integrated, USDt will operate seamlessly on Bitcoin’s base layer and its layer 2 Lightning Network. This will enable high-speed, low-cost transactions while combining Bitcoin’s robust security and scalability. With USDt— the world’s largest stablecoin, serving over 350 million users—developers and users will enjoy Bitcoin’s unparalleled reliability alongside the efficiency and versatility of Lightning-enabled payments.
With Bitcoin in high demand among both institutions and retail traders, this integration positions USDt as an essential component of Bitcoin-based financial systems. Taproot Assets enhances Bitcoin’s functionality by enabling support for tokenized assets like USDt while maintaining the blockchain’s decentralized nature. This integration delivers a scalable, seamless payment solution, powering the AI economy and unlocking new use cases, including microtransactions, remittances, and efficient cross-border settlements.
“Tether is committed to driving innovation in the Bitcoin ecosystem,” said Paolo Ardoino, CEO of Tether. “By enabling USDt on the Lightning Network, we are not only reinforcing Bitcoin’s foundational principles of decentralization and security but also creating practical solutions for remittances, payments, and other financial applications that demand both speed and reliability.”
Elizabeth Stark, CEO of Lightning Labs, stated “Today marks a new era for stablecoins. Bringing USDt to Bitcoin combines the security and decentralization of Bitcoin with the speed and scalability of Lightning. Millions of people will now be able to use the most open, secure blockchain to send dollars globally. It all comes back to Bitcoin.”
Tether and Lightning Labs will continue to collaborate to enhance the ecosystem to ensure seamless adoption and robust support for developers and users. As USDt becomes operational on the Lightning Network, this integration is expected to open up new opportunities for Bitcoin’s broader adoption in everyday financial systems.
Tether (USDT) On Lightning
At the end of last month, Lightning Labs announced that it’s bringing USDT to Bitcoin and the Lightning Network via the Taproot Assets protocol.
This upgrade enables Bitcoin service providers to integrate and accept USDT more easily, which Shrader believes will be a boon for Lightning.
“One thing that’s very clear is Tether has product market fit,” said Shrader.
“Last year, it served $10 trillion in payments, which exceeds Visa and MasterCard,” he added.
“It’s very clear that the world wants U.S. dollars.”
Shrader, a pragmatist, acknowledged the fact that many hardline Bitcoiners have issues with USDT running on Bitcoin and Lightning, and he sympathizes with them, as he appreciates that bitcoin’s sound money qualities.
At the same time, he thinks the benefits of having USDT on Lightning clearly outweigh the cons, as many still don’t understand what bitcoin is, nor are they willing to stomach its volatility.
“Many haven’t yet taken the orange pill and come to understand the advantages of bitcoin,” he explained.
“I think bitcoin is an incredible tool, and I want to bring that to as many people as possible. With that said, there are a lot of problems with traditional payments, and Bitcoin has this very secure, auditable system, which is something that I want to bring to the world at scale,” he added.
“While bitcoin’s price action is great for me, a lot of people are afraid of volatility. If you have an asset with very low volatility like USDT, now on very secure, trustless rails, that’s a huge win.”
The Problem That USDT On Lightning Solves
Shrader recounted how the first Bitcoin-related conference MicroStrategy hosted was actually called “Lightning for Corporations.” At the conference, companies were encouraged to start paying employees in bitcoin over Lightning — without fully realizing the troubles this would cause at the time.
“What employers realized was that all of the 1099s that needed to be submitted to employees was a hassle,” said Shrader. “And there was a whole bunch of regulatory overhead that they had to contend with, as well.”
Shrader pointed out that not only can paying employees in USDT over Lightning reduce accounting and regulatory headaches, but it also reduces some of the counterparty risk associated with using banks — a reality with which Shrader is quite familiar.
“Our payroll used to go through Silicon Valley Bank,” said Shrader.
“And, at one point, the payroll provider contacted me to resend my mid-month payroll after I had attempted to pay the staff. I lost half a month’s runway. This was all because of Silicon Valley Bank being insolvent,” he added.
“So, if I can avoid the counterparty risk in the financial system by moving to Bitcoin and Lightning, then that means that I’m in a much better place.”
Author’s note: Some counterparty risk still exists when using USDT, as you have to trust that Tether holds actual U.S. dollars to back the tokenized ones it issues.
The Risks
Shrader noted some of the risks of USDT on Bitcoin and Lightning, but didn’t seem too concerned about them.
“There are some MEV risks when you have assets other than a blockchain’s native asset being traded on-chain,” said Shrader. “But Bitcoin already has Ordinal inscriptions that create other assets, so that problem already exists.”
He also didn’t seem flustered when I brought up the risk of a Bitcoin fork resulting in the USDT on one of the chains becoming worthless, nor did he feel that there’s notable risk of larger economic nodes in the Bitcoin network, like Coinbase, which custodies the bitcoin for the U.S. spot bitcoin ETFs, opting to support a “Tether fork” of Bitcoin, which could also include other upgrades that could hurt Bitcoin in the long run.
“Bitcoin consensus is not determined by custody of bitcoin, so while an important business like Coinbase may support various changes or initiatives, that doesn’t guarantee that protocol changes would be effected,” Shrader said.
Instead of focusing on the risks associated with USDT on Bitcoin, Shrader is doing the opposite.
“What’s more interesting is probably the opportunities that that unlocks where you have actual arbitrage ability on Bitcoin itself,” said Shrader.
“Since every node is capable of transacting in both USDT and bitcoin is also capable of exchanging between them natively on Lightning, you can send bitcoin out of one Lightning channel and receive USDT in another of your Lightning channels,” he added.
“That can be as simple as generating a USDT invoice and paying it with BTC, instantly rebalancing holdings.”
More on Taproot Assets
How It Works
WHAT IS TAPROOT ASSETS?
Taproot Assets relies on Bitcoin’s most recent upgrade, Schnoor-Taproot, to issue assets on top of Bitcoin. It leverages Taproot to create a new tree-like structure that allows developers to embed asset data into a UTXO. It also uses Schnorr signatures to make the protocol simpler, scalable, and Lightning compatible. This means that assets issued with this protocol can be deposited into Lightning Network channels, allowing Lightning nodes to offer atomic conversions from Bitcoin to Taproot Assets, benefiting from its network effects and instant, high-volume, low-fee transactions.
Taproot Assets uses a special digital tree structure to quickly and privately access and update transaction information. It also uses another kind of tree to confirm that no extra assets are being created out of thin air. People who use Taproot Assets must take care of the verification and storage costs by keeping the transaction information, or “witness data,” either on their personal storage devices or with external storage services called “Universes.”
To ensure an asset is legitimate, they trace its entire history to its creation. This is done by receiving a file containing all the transaction information through a communication system called the “gossip layer”. Users can compare this information with their copy of the transaction history and update it with their proofs when they transfer the asset.
The main difference between Taproot transactions and usual Bitcoin transactions is the difference between a secret diary and a public billboard. With Bitcoin, all the instructions (or scripts) that control the coins are fully revealed on the public billboard (the blockchain) for everyone to see. With Taproot, these instructions are kept in a special private structure, like hidden notes in a secret diary, called the ‘tapScript branch’, which is only shown to specific parties in a transaction.
These hidden instructions don’t need to be shown if you use a special spending mechanism called the ‘KeySpend’ to move the coins. It’s like having a secret key to a safe – if you have the key, you don’t need to know or show the safe’s combination. If the KeySpend path is not an option, only the part of the instructions used is shown on the blockchain, while all other possible instructions stay private.
This allows for more complex instructions without the extra burden of putting more data on the public billboard when using the KeySpend path. It also enables easier checking of the pruned instruction data. In the context of Taproot Assets, it’s like being able to attach extra secret notes to a transaction without showing these notes to the public.
TAPROOT ASSETS ON LIGHTNING
As discussed, Taproot Assets can be deposited and transacted in the Lightning Network. This means that LN users can hold, send and receive payments using other assets besides BTC, such as a stablecoin. These payments can be routed over the Lightning Network without intermediary nodes needing to upgrade or opt-in.
Taproot Assets-enabled channels can be created similarly to how Bitcoin channels are currently created. HTLCs for these Taproot Assets-aware payment channels are nested HTLCs that can be claimed by the recipient by revealing a preimage or by the sender after a timeout, just like a regular HTLC works.
Usually, payment networks face a “chicken and egg” problem. Each time a new asset is created a new payment network is needed. It’s like building a new road system to accommodate a specific type of car. Taproot Assets presents a solution: It allows the Lightning Network to accommodate all types of assets in its channels, even finding routes across different assets. In the case of the Lightning Network and Taproot Assets, if all parties along a route are connected regarding liquidity, they can charge transaction fees in BTC or in the respective Taproot Assets being transferred.
Interestingly, even if there’s no direct Taproot Assets route, a BTC route can substitute if the first node agrees to forward the Taproot Assets value in satoshis. This allows the LN to function as a platform for exchange between Bitcoin and Taproot Assets over the Lightning Network.
This feature enables one to receive a Taproot Asset but issue the corresponding invoice to any other Lightning wallet – even to those wallets that have not adopted the Taproot Assets Protocol – which could settle the invoice using BTC. This preserves the Lightning invoice as the universal standard for invoice schemes. An invoice-settled Taproot Assets could be paid by BTC or any other asset, enabling anyone with a Taproot Assets balance to settle any Lightning invoice.
