With the RGB protocol, users can map altcoins to Bitcoin UTXOs, allowing for stablecoin transfers on the Lightning Network and more.
The Lightning Network is possibly the most shocking and important innovation ever seen in Bitcoin. It enables fast and cheap transactions that do not take up space on the blockchain, while retaining all of the trustless and censorship-resistant features of Bitcoin. While Lightning still has room to grow and improve, both in terms of technological stability and adoption, it has already proven to be an irreplaceable solution for cheap and trustless payments, with over $100 million in network capacity and an increasing number of companies adopting it as a payment method.
Such innovations encourage Bitcoin adoption, but can also be beneficial for other types of digital assets. Currently, most blockchain-based digital assets are issued as altcoins, which do not offer the same security guarantees and censorship resistance as Bitcoin, as they aim to achieve cheap, low-latency transactions by sacrificing decentralization, which means that they operate as de facto semi-centralized systems. But with the ability to move digital assets through the Lightning Network, many use cases that require cheap and fast transactions could finally benefit from Bitcoin’s lack of trust as well.
An already popular use case that would certainly benefit would be stablecoins. Examples like USDT are already widely used for digital payments and remittances, especially in developing countries where legacy financial infrastructure is not always functional and local currencies are volatile.
With Lightning, more and more people could adopt stablecoins and use them for payments. This would be beneficial to improve financial stability for people who would otherwise be forced to use a local currency that is (even) more unstable than the US dollar, while bringing them one step closer to Bitcoin adoption. as they become more familiar with your technology, even while they are not yet comfortable with its volatility. Furthermore, additional digital assets on Lightning would not only benefit the spread of stablecoins and other tokenization use cases, but would simultaneously help Bitcoin as a more technologically compatible infrastructure would be built (for example, the payment terminal that accepts stablecoins on Lightning would very easily also accept bitcoin).
Also, once there are stablecoins and other assets on the Lightning Network, it’s possible to have decentralized exchange capabilities directly on top of Lightning, with two nodes that can atomically exchange bitcoin for other assets at the same speed and cost of a Lightning payment, risk-free. of counterpart. This represents a significant improvement on the current state of decentralized exchanges (DEXs), which means that more people will be able to move away from centralized exchanges and stop having to entrust their collateral to a third party.
Bringing More Digital Assets to the Lightning Network
So how can all this be achieved?
First, we need a way to issue and transfer assets on the Bitcoin blockchain, and this is possible with the RGB protocol, which allows users to create an off-chain contract that issues new assets and assigns them to a Bitcoin UTXO. Such assets can be moved via client-side validated transfers (you can read more about how RGB works in this previous article).
Once we have RGB assets on-chain, it is possible to add them to Lightning channels by sending them to the multisig UTXO used to open the channel, and once inside, they can be moved and routed between participants, similar to normal Bitcoin Lightning. Payments
To ensure the security of an RGB channel, on each channel update, assets are pushed from the multisig funding to the outputs created by the Lightning commit transaction, which means that if old channel state is passed, it is possible to activate an RGB. punishment transaction (along with the Bitcoin one) and takes all of the attacker’s RGB assets.
It’s worth noting that for a payment to complete successfully, it requires all channels it’s routed through to have sufficient liquidity in the specific asset being transferred. This means that each RGB asset must have its own lighting grid graph, and realistically only very popular assets can achieve this (eg stablecoins).
Beyond the popular stablecoins
However, for the less popular assets, there are still a couple of options available to take advantage of RGB’s Lightning Network support. The simplest is to start a fairly centralized network where everyone connects to a limited number of main nodes, thus relying on an almost hub-and-spoke style model. While this does not offer the same guarantees of censorship resistance of a more decentralized network, it can still serve many use cases (for example, in-game tokens).
A second available option is to use exchange nodes to exchange a low liquid asset for a more liquid one, using the latter to more easily route the payment closer to the destination, and then exchange again against the less liquid asset so it can be delivered. to the payee of the payment. However, this solution is also not without its problems, as exchange nodes will charge a spread to offer the exchange service, which for illiquid assets is likely to be significant and must be paid twice.
Regardless of the inevitable frictions that will exist for illiquid assets, having easily accessible liquidity bridges between assets is highly beneficial in creating a more interconnected ecosystem with multiple projects that can also contribute to the same technology infrastructure.
The building blocks are ready to be used
So what is the current stage of development for RGB in Lightning? Recently, the Bitfinex RGB team (of which this author is a part) released rgb-lighting, a fully functional Lightning node for RGB assets, which alone represents a great technological achievement. And at the same time, other Lightning implementations are also planning to support RGB, such as Maxim Orolvsky. LNP node. While not yet mature enough at the time of this writing (March 2023) to be used with big bucks, the full tech stack and building blocks needed to start building apps and use cases in RGB and Lightning they are there and ready to be used. used.
To better understand how RGB works and how assets move within Lightning channels, visit rgb.info to find more resources.
This is a guest post by Federico Tenga. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
