Community Banks Improve Bitcoin Adoption – Bitcoin Magazine
This is an opinion editorial by Leo Weese, co-founder of the Bitcoin Association of Hong Kong, where he has been organizing Bitcoin meetups since 2012.
Over the years, Bitcoin has continuously proven itself as a robust resource with a predictable supply that can be quickly transferred instantly for a low fee over the Lightning Network.
Despite its inflationary shortcomings, the US dollar remains in strong demand. Having lost 90% of its purchasing power since the 1950s, it remains an attractive store of value and unit of account. In times of thin profit margins, living paycheck to paycheck in a world where goods, rent and wages are priced in dollars, going 100% into bitcoin is risky.
The world has currently chosen the dollar as the global reserve currency. As long as bitcoin remains highly volatile, it is less attractive than the dollar to businesses and individuals in many cases, especially in places where instant conversion is cumbersome and expensive.
Despite its attraction, the US dollar has noticeable disadvantages in practice. In El Salvador, where only a third of the population has access to bank accounts, receiving, storing and trading digital US dollars can be difficult. In Nigeria or Argentina, official exchange rates are set unfavorably, pushing savers into gray markets. Conflict areas such as Ukraine are partially cut off from international settlement systems. Fortunately, Bitcoinizing the dollar with Taro provides an alternative.
Bitcoin Dollars On Taro
Taro is a new protocol for assets on Bitcoin and Lightning proposed in April 2022 by Olaoluwa Osuntokun, CTO of Lightning Labs. The company explained a mechanism by which anyone can create arbitrary assets on the Bitcoin blockchain, and shared their vision for a stablecoin use case that can be instantly transacted over the Lightning network and held non-custodial in Lightning nodes and wallets.
Analogous to Eurodollars or offshore dollars, we can refer to dollars held on the Bitcoin blockchain as bitcoindollars.
Such bitcoin dollars are currently issued by large, often opaque institutions, some of them associated with cryptocurrency exchanges. While the first widely used stablecoin was anchored to the Bitcoin blockchain, stablecoins today often reside on alternative blockchains and are used to enter and exit trading positions in bitcoin or cryptocurrencies, or to settle arbitrage trades. In some contexts, they function as means of saving and payment.
With the Taro protocol, so-called bitcoin dollars can be introduced into a Lightning Network payment channel without an additional blockchain footprint. This results in two or more parallel channels, one with BTC and the other with Taro assets, anchored in the same UTXO.
Alongside bitcoin dollars in the form of bank deposits or stablecoins, we can also see other types of assets issued on Taro, primarily local fiat currencies. It may seem attractive to issue bonds, coupons, debt instruments or claims on raw materials such as oil and gold.
This allows the owner of a Lightning wallet to choose whether to receive payments in BTC or a Taro asset, while issuing a regular Lightning invoice. The Payer is not required to hold the same Taro Asset, or any Taro Asset at all. The payer also does not know at any time which asset the payee ultimately chooses to keep in the wallet.
This works through edge nodes that “trade” an incoming Bitcoin HTLC (hash time-lock contract) for an outgoing Taro HTLC, or vice versa. These marginal notes, like all other routing nodes in the Lightning Network, require a routing fee that covers capital costs, routing costs and expected volatility. They will agree their benchmark rates for such swaps with their peers and may be willing to lock in rates for short invoice expiry windows. This happens immediately and without anyone taking counterparty risk or custody at any time.
Strengthening network effects
Today we see strong network effects in the payment and settlement systems. We’re only willing to accept something as payment that we can easily use, so it’s no surprise that cryptocurrency exchanges primarily offer only two stablecoins: tether and USDC.
By exchanging assets for bitcoin via HTLCs, Taro removes friction and counterparty risk while retaining access to the general Lightning network, enabling smaller stablecoins to be used for savings and payments. At the same time, Taro strengthens the network effects of the Lightning Network by increasing routing activity, creating demand for routing nodes and capital, while at the same time bootstrapping existing liquidity on the network to enable users to not only pay with all assets, but also have payment routed through Bitcoin.
In the example above, Alice has L-USD in a channel with Bob, who is connected to the wider Lightning network and willing to exchange L-USD for BTC on demand, and for a fee. Alice can now scan any Lightning Network invoice with her wallet. If Alice also has BTC in her wallet, she can choose to pay the invoice with satoshis. Once Alice confirms the payment, she will build a route through Bob to the final destination of the payment. Bob will receive L-USD and forward BTC with the same HTLC. Yana will receive BTC and forward L-USD to Zane. He releases the preview image and the payment is final. These mechanisms allow anyone to use the assets in the wallet to pay a Lightning invoice, or anyone to receive the asset of their choice by issuing a generic Lightning invoice.
The rise of community banks
Inspired by the success of Bitcoin Beach in El Salvador, community banks are starting to pop up around the world in an effort to connect remote and underbanked communities to the world of digital finance via the Lightning Network. In some cases, these community banks are attractive because they provide access to dollars, while in others they allow people to shop online without friction.
Taro has the potential to significantly reduce the technological and logistical barrier for such community banks to operate, while enabling their community to instantly connect with suppliers, customers and financial services from around the world.
Step One: Transparent Bank Deposits as Taro Assets
Instead of using internal ledgers to keep track of clients’ deposits and withdrawals, a community bank may choose to issue its own stablecoin for each deposit and destroy it upon redemption for cash or bitcoin. By building the core of their banking infrastructure on open source and battle-tested software, deposits remain more easily controllable and difficult to tamper with.
Step Two: Use Common Bank Deposits for Lightning Network Channels
By choosing an open protocol, community banks are able to piggyback on existing software infrastructure, such as nodes, wallets, payment processors or liquidity markets. A community bank does not need to develop its own wallet, it can simply open channels with Taro-enabled wallets that are readily available on Google and Apple’s app stores. It does not need to provide merchants with custom-built tools, as long as payment processors hosted by their own provider such as BTCPay Server or LNBits are configured to handle Taro assets.
Some community banks may not even open such channels to their customers themselves, or instead rely on non-custodial liquidity markets or Lightning service providers to do so.
Step Three: Connect your community to the world
When an individual or business has a channel open to their wallet or node with enough incoming capacity in the Taro asset of their choice, they can bill others for their work, services or goods. Anyone worldwide can instantly pay this invoice from their own wallet, have it routed through Bitcoin to the edge node, which exchanges the payment amount to the desired destination asset. All this happens immediately and without anyone taking custody of the funds.
Conversely, community banking clients can pay any Lightning invoice directly from their mobile wallet dollar balance. They do not need to take on volatility risk or rely on a custodian counterparty beyond the stablecoin issuer: their mutual bank.
Such a common bank does not need to maintain Lightning nodes themselves. Anyone can act as an edge node for their local or remote community and compete for customers and transaction volume the same way they can run a Lightning Network routing node today.
Bitcoinization of the dollar
The vision of being able to receive any currency or asset while transacting using the global, open source and permissionless Bitcoin network is appealing. It will make it easy to digitize, or bitcoinize, local dollar reserves, enabling billions to hold the asset of their choice while trading it digitally and cheaply. As Taro routes transactions through Bitcoin, it allows small players in the stablecoin market to benefit from and strengthen the network effects of the Lightning Network.
This gives people access to Bitcoin as a payment network and long-term savings tool without the risk of exposing users to short-term volatility. It greatly increases the number of potential sellers and users on the Lightning Network and establishes bitcoin as the backbone and medium of exchange for a truly global and accessible reserve currency.
This is a guest post by Leo Weese. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.
