Since the announcement of the Tarot protocol by Lightning Labs, the topic of stablecoins issued directly on the bitcoin blockchain has again become the focus of conversation. In reality this is nothing new. Tether, the first stablecoin, was originally issued on the bitcoin blockchain using the Mastercoin (now called Omni) protocol which enabled the issuance of other tokens on the bitcoin blockchain. Stablecoins literally started on the bitcoin network, but due to block size limits and the constraints of fee events in 2017, they have moved to other blockchains. It started with Ethereum, and then as time went on, more centralized and cheaper-fee blockchains spread. Ultimately, centrally-issued stablecoins are centralized, and no matter how decentralized the blockchain is that you issue them, their value ultimately derives from the ability to redeem them from a single centralized entity that does so. may refuse to do so. That is, issuing them on a decentralized blockchain is full theater in the sense that it does nothing to decentralize stablecoins itself; The only advantage in doing so is the ease of interactivity with native things on that blockchain.
I actually think the progress in other blockchains was a good thing, there is no real advantage in processing stablecoin transactions on the bitcoin blockchain in terms of censorship resistance. The issuer may refuse to redeem coins only on legal grounds for engaging in illegal activity, stolen coins, or taking action for any arbitrary reason. Issuing and transacting them on bitcoin only consumes block space which provides no real censorship resistance for stablecoins, and offers the slight advantage of making things like atomic swaps for bitcoin a little less complicated. does.
However this introduces new variables to the incentive structure of the bitcoin system as a whole. The impact of stablecoins on the consensus layer of the Ethereum network has been discussed in relation to the upcoming merge and the transition to proof-of-stake. USDC issuer Circle has announced that they will only support USDC and honor redemption on the PoS network. They will ignore and refuse redemption requests for USDC on any other forks of the Ethereum network post merge. It is perfectly logical to do so – USDC is a reserve-backed stablecoin pegged by Circle to the actual bank dollar in reserve. It is completely insane and impossible to honor redemption on more than one side of any fork, as they only have enough dollars to redeem a set of stablecoins issued on the network. When that network forks, it doesn’t magically double the dollars reserved on that network like USDC tokens.
However, this dynamic gives stablecoin issuers a major impact on the consensus of the network on which they issue their coins. USDC is a big driver of utility and transaction volume for Ethereum. Every Ethereum user who transacts with USDC will have no choice after the merge and fork other than to switch to that chain to use their UDSC, regardless of whether they have PoW versus PoS, or split in general. And have any feelings or attitudes about which series. they would like to use. Your USDC. to use they have to Interaction with PoS chain. This creates a sort of imperative demand for that token, as it is necessary to pay transaction fees in order to use USDC.
Stablecoins issued on bitcoin will create exactly that dynamic. If tarot, or even the original Omni Tether token, is making a resurgence, it leads to widespread issuance and trading of stablecoins on the bitcoin blockchain, with the issuers of those stablecoins in the event of a bitcoin fork. Throwing around has the exact same effect. If bitcoin becomes a widely adopted platform for issuing and using stablecoins, it becomes a major driver for bitcoin demand – as it is required to pay transaction fees – and miner revenues. Again, because it is paying transaction fees. All this demand for assets, and the generation of revenue for miners, becomes hostage to the whims of the stablecoin issuer.
In the event of a fork, all of that demand and miner revenue are transferred to the fork at which point the issuer decides to honor the redemption. This can happen during a chainsplit, hard fork, even a soft fork if the issuer decides that a feature is undesirable and they engage in a fork to prevent its activation. The more assets and blockspace demand for driver stablecoins, the greater their impact in an event like this. If 10% of the revenue for miners is to use stablecoins, then during a fork where the issuer chooses a different side than everyone else, 10% of the miners hash power into that fork to maintain that income stream. will have to be transferred. If it is 40%, then 40% of the hashpower has to be transferred.
The same is true for Lightning node operators in terms of their fee revenue for routing. If a large portion of the activity on the network is driven by exchanging BTC for stablecoins on the sidelines and routing dollar payments, all that revenue will dry up in favor of a fork, for the stablecoin issuer. Do not respect redemption. Those node operators would have to run and operate nodes on the second fork to earn the revenue derived from the use of the stablecoin.
Bitcoin is not magically immune to the issues that Ethereum has because of how effective it is to use stablecoins on the network, simply because of not having a complex and insecure scripting system, or the on-chain decentralized ones used every day. Because of no exchange. The issues Ethereum is facing in this regard are rooted in purely economic incentives, and apply exactly the same to the Bitcoin network.
Bitcoiners should think long and hard about whether they should encourage and use such systems built directly on bitcoin, and whether the risks of such systems are worth it in the long run, given that they are not part of the network. How do you interact with incentives? Other blockchains exist, even systems like Elements (based on the codebase Liquid) that can operate semi-centralized blockchains. Atomic exchange is not that difficult. Tools exist to create systems for stablecoins that can host them externally on the bitcoin network and allow easy interaction with it.
Do we really want to introduce a massive new centrally controlled variable to incentivize the whole network, because atomic swaps on one blockchain are slightly easier than atomic swaps in two blockchains? I can only speak for myself, but I can’t.
This is a guest post by Shinobi. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.