Back to bitcoin: how Taproot Assets brings USDT to the Lightning Network

By 2025, few remember that bitcoin was USDT’s first blockchain: Tether initially issued the stablecoin on Omni. Over time the company began minting on Ethereum, TRON and other networks, and Omni gradually lost relevance.

On January 31, Tether announced the issuance of USDT in the ecosystem of the first cryptocurrency via the Taproot Assets protocol from Lightning Labs. Together with the team behind the bitcoin mixer Mixer.Money, we explain how the system works and what it could mean for user privacy.

‘Nobody uses the Lightning Network’

Since the test version of the Lightning Network (LN) client launched in March 2018, the amount of bitcoin locked has steadily increased. According to mempool.space, that figure has been relatively stable since 2022, while the number of payment channels has declined.

The latter does not necessarily signal falling activity—it is more a sign of the network’s evolution. As Bitcoin Core developer Matt Corallo noted in his presentation Lightning Is Fixed Now, large nodes with high-liquidity channels have emerged, improving payment routing. As a result, less professional participants began closing smaller channels.

Back in 2023, Sam Wouters, marketing director at bitcoin firm River, published a detailed report on LN usage, charting the network’s growth and development. He argued that the phrase “Nobody is using Lightning” should be a “dead meme”, as the number of transactions had risen 1212% in two years.

“Nobody is using Lightning” should now be a dead meme.

Launching a new #Bitcoin report from @River: How the Lightning Network grew by 1212% in 2 years ⚡

It’s time to pay attention to the incredible work of so many people in the space ? Link below in the ? pic.twitter.com/FuGLwGHR4R

— Sam Wouters (@SDWouters) October 10, 2023

Since then, exchanges Coinbase and KuCoin have added Lightning Network support, joining Binance, OKX, Bitfinex and Kraken.

“Some altcoin supporters tried to portray the Lightning Network as a marginal technology for a narrow circle of bitcoin maximalists. But reality is different: LN is developing actively, and its support has become a standard for the largest exchanges. Now Tether joins them, finally destroying the narrative that the Lightning Network is unnecessary,” representatives of Mixer.Money comment.

What are Taproot Assets

Taproot Assets (formerly Taro) is a protocol for issuing digital assets on the bitcoin blockchain. Assets can be transferred either on the base layer or via the Lightning Network if they sit inside a payment channel. Developers at Lightning Labs introduced the first version of the protocol in September 2022.

The protocol became possible thanks to three key components:

• Taproot — a bitcoin soft fork activated in November 2021. It enabled embedding asset metadata in bitcoin transactions and simplified processing thanks to Schnorr signatures;
• A Merkle tree — a data structure that enables fast, private verification of assets and proves there has been no new issuance without revealing all information to observers;
• The Lightning Network — a second-layer solution that enables cheap, near-instant transfers of assets through a network of payment channels.

This is not the first attempt to create digital assets on bitcoin; back in 2016 the RGB protocol pursued similar goals. Lightning Labs chose to leverage Taproot to make the approach more elegant and scalable.

Taproot Assets are registered on the bitcoin blockchain as hashed metadata attached to an on-chain transaction. Storing this information directly on-chain would take more space and thus be costlier. Those costs can be avoided by using a hash— a one-way transformation of data that cannot be forged and is easy to verify.

Because a hash can represent any amount of information, a single on-chain transaction can encompass millions of others via a Merkle tree. The structure efficiently stores large datasets and allows quick proofs of inclusion. It also simplifies verification of changes: it is easy to determine whether balances have changed and where.

Taproot Assets use a special variant of a Merkle tree — the Merkle-Sum Sparse Merkle Tree (MS-SMT). This combines two types of trees: the Merkle Sum Tree and the Sparse Merkle Tree.

A Merkle Sum Tree is used for fast verification of values or their distribution in a tree. Each leaf in such a structure receives a numeric value, which makes it easy to confirm correctness. In the context of Taproot Assets, this speeds up checks that the total amount of assets remains unchanged.

A Sparse Merkle Tree is used to prove the absence of specific data in the structure. It enables fast, efficient proofs that particular data do not exist in a given Merkle tree.

Using MS-SMT gives Taproot Assets the following advantages:

• scalability — support for storing large numbers of assets;
• proof of ownership — confirmation that an asset is indeed present in the Merkle tree whose root is recorded in the metadata of a bitcoin transaction;
• proof of removal (proof of non-membership) — confirmation that a particular asset is no longer stored in the Merkle tree (it has been transferred to another owner);
• tamper-resistance — any change to the data in the tree instantly changes the Merkle root;
• transparent audit — the ability to verify the total number of assets without revealing all information;
• support for splitting and merging — the ability to split and merge fungible assets while keeping their total amount unchanged.

Taproot Assets can be transferred both on the bitcoin blockchain and via the Lightning Network. For users the difference is barely noticeable — their wallet simply shows additional assets and an off-chain data store.

The transfer of fungible assets (such as stablecoins) and non-fungible ones (NFTs) differs. NFTs are issued once via an on-chain transaction and then transferred off-chain. A unique asset identifier is passed along, containing a transaction history that proves authenticity.

Data on non-fungible Taproot Assets are stored in Universes — decentralised repositories akin to blockchain explorers. Anyone interested in tracking Taproot Assets can download one.

Fungible Taproot Assets can be split and merged. An owner transfers part or all of an asset to another user within an existing group in one Merkle tree, or rebinds it and moves it to another tree.

When assets are transferred, the Merkle tree’s structure is updated, but the total amount remains unchanged. The new version of the tree records changes in individual owners’ balances, ensuring data integrity.

Taproot Assets and privacy

The Taproot Assets protocol differs markedly from issuance mechanisms for stablecoins and other assets on blockchains such as Ethereum and TRON. Those use an accounts model rather than UTXO. That leads to the following differences:

• balance privacy. In the accounts model, information about user balances is open and easily accessible on-chain. In the UTXO model used by Taproot Assets, balances are not stored explicitly but reconstructed from transaction history, improving privacy;
• flexibility in asset management. Thanks to MS-SMT, assets can be split and merged without revealing their entire movement. In account-based blockchains, balance changes are visible to everyone.

Using USDT via Taproot Assets will improve user privacy, but the Mixer.Money team notes that it remains a centralized stablecoin.

“The new protocol improves privacy and allows bitcoin users to do without TRON or Ethereum. However, Tether retains control over issuance, management and freezing of assets. For those who strive for complete independence, bitcoin remains the only option. And those who want to maintain the maximum level of anonymity should pay attention to bitcoin mixers,” representatives of Mixer.Money comment.

In the “Full anonymity” mode, Mixer.Money sends users “clean” coins from large exchanges to eliminate the chance of receiving their own coins back or bitcoin of dubious origin.

Conclusions

“Everything comes back to bitcoin,” is how Lightning Labs CEO Elizabeth Stark described the USDT rollout on LN. The stablecoin that started with Omni on bitcoin is now returning to its ecosystem, with a market capitalisation above $140bn.

For now, Tether and Lightning Labs have not disclosed integration details, so users cannot yet try the stablecoin on LN. However, given Tether’s close ties with Bitfinex (one of the first exchanges to support Lightning), it is reasonable to expect USDT to be available for purchase on that platform soon.