Stablecoins have transformed how money moves across the globe, offering the stability of traditional currencies combined with the permissionless nature of blockchains. Yet, as their popularity grows, the current dominant platforms—Ethereum and Tron—face significant challenges that hinder their broader adoption. I will share a few examples as well of these issues and challenges that need addressing to scale stablecoins to serve the world.
The major pain points are high fees, network congestion, security risks, and centralization concerns. In this piece, I want to discuss these issues in detail, highlighting real-world examples that illustrate the impact of these challenges.
We’ll also examine how Bitcoin and the Lightning Network, with innovations like the Taproot Assets Protocol, present a safer, more efficient alternative to stablecoin transactions.
The High Costs and Scalability Issues of Ethereum
High Gas Fees and Network Congestion
Ethereum, the second-largest blockchain network, hosts many stablecoins, including USDT, USDC, and DAI. However, Ethereum’s scalability issues often result in high gas fees, especially during periods of high demand. For instance, transaction fees skyrocketed during the 2021 DeFi boom and subsequent NFT craze, often costing users over $50 per transaction. These high fees make Ethereum unsuitable for small transactions, impacting everyday users and businesses.
A Practical Example:
In 2021, during a peak period of congestion, many hourly freelancers in South America attempted to receive payment in USDT on Ethereum. The transaction, intended to help cover immediate living expenses, was delayed and incurred a fee of $40—nearly half of the payment itself. This unexpected cost caused financial strain and delayed access to funds that were needed urgently, demonstrating the real-world impact of Ethereum’s scalability issues.
Scalability Challenges
Ethereum’s limited throughput, processing around 15-30 transactions per second, often leads to significant delays and higher costs during busy periods. This bottleneck restricts the growth of stablecoin usage on the platform, particularly for applications requiring fast and low-cost transactions.
Real-Life Example:
DeFi platforms built on Ethereum, like Uniswap and Compound, have become central to the crypto ecosystem. However, their success has also exposed Ethereum’s weaknesses. During periods of high activity, users face delays of several minutes or even hours, leading to missed trading opportunities and increased costs—turning what should be seamless financial services into a frustrating experience.
Security Risks and Complexity on Ethereum
Smart Contract Vulnerabilities
While impactful, Ethereum’s flexibility with smart contracts also opens the door to vulnerabilities. In 2020, the DeFi platform bZx was hacked twice within a week due to flaws in its smart contracts, leading to nearly $1 million losses. These incidents highlight the security risks that stablecoin users face when transacting on Ethereum-based platforms.
Real-Life Example:
In 2020, a user lost their savings in DAI due to a smart contract exploit on the DeFi lending platform bZx. The hacker manipulated the platform’s code to drain funds, and despite the platform's decentralized nature, the affected users had no recourse. The incident underscored the potential dangers of relying on complex smart contracts and the financial impact of these vulnerabilities.
List of Defi platform hacks + funds lost:
- bZx - Approximately $8 million was lost across multiple exploits in 2020.
- Compound - Approximately $150 million due to a bug in the protocol’s reward distribution system in 2021.
- Cream Finance - Over $130 million was lost in various attacks, including flash loan exploits in 2021.
- Yearn Finance - Approximately $11 million was lost in a vault exploit in 2021.
- SushiSwap - Around $3 million was lost during the Miso token launchpad exploit in 2021.
- Balancer - Approximately $500,000 was lost due to a liquidity pool vulnerability in 2020.
- Harvest Finance - About $24 million was lost in a flash loan attack in 2020.
- dForce (Lendf.me)—Nearly $25 million was lost in a reentrancy attack in 2020, though the hacker returned most of it.
- Alpha Finance - Around $37 million was lost in an exploit involving their Alpha Homora platform in 2021.
- PancakeBunny - Approximately $45 million was lost due to a flash loan attack in 2021.
- EasyFi - Around $80 million was lost in a private key compromise in 2021.
- Uranium Finance - Approximately $50 million was lost in an exploit during a migration to a new contract in 2021.
- BadgerDAO - Nearly $120 million was lost due to a front-end exploit targeting user funds in 2021.
- Rari Capital - Approximately $11 million lost in a smart contract vulnerability exploit in 2021.
- Poly Network - About $610 million lost in one of the largest DeFi hacks ever in 2021, though most of the funds were later returned.
The Centralization and Perception Issues of Tron
Centralization Concerns
Tron’s governance model, which relies on several super representatives, has been criticized for being overly centralized. This concentration of power raises questions about security and the potential for manipulation, making it less attractive for users who value the decentralized ethos of Bitcoin compared to cryptocurrency
Real-Life Example:
Tron’s centralization was highlighted during a controversial vote that saw one party gain significant control over the network’s governance. This event led to widespread concerns among the community about the platform’s long-term security and reliability, prompting some users to move their assets to more decentralized platforms.
Perception and Trust Issues
Tron’s reputation as a less decentralized network, combined with a smaller DeFi ecosystem compared to Ethereum, has affected its adoption. Many potential users and businesses remain skeptical of its long-term viability, particularly in financial services where trust is paramount.
Real-Life Example:
A handful of European fintech startups (Revolut, WireX, Bitwala (now Nuri) initially planned to integrate stablecoin payments via Tron due to its low fees. However, concerns over Tron’s centralization and the potential for censorship led the company to pivot to a different blockchain solution, illustrating the real business impact of perception and trust issues on the platform.
Bitcoin and the Lightning Network: A Safer, More Efficient Alternative
Low Fees and High Scalability
Bitcoin’s Lightning Network offers near-instant transactions with minimal fees, addressing the cost and scalability issues that plague Ethereum and Tron. Lightning’s unique channel-based approach allows for off-chain transactions that settle on the Bitcoin blockchain only when necessary, making it ideal for micropayments and high-frequency transactions.
Real-Life Example:
In El Salvador, where Bitcoin has been adopted as legal tender, small businesses are increasingly using the Lightning Network to accept stablecoin payments for everyday transactions. One coffee shop owner shared that Lightning’s low fees and fast transaction times have enabled them to serve more customers efficiently compared to traditional payment methods that were slow and expensive.
Enhanced Privacy and Security
Bitcoin’s robust security, bolstered by its decentralized proof-of-work model, makes it the most secure blockchain. The Lightning Network adds an extra layer of privacy, as transactions occur off-chain and are only broadcast to the Bitcoin network when necessary.
Real-Life Example:
During the protests in Belarus in 2020, activists used Bitcoin’s Lightning Network to send donations quickly and privately, bypassing government surveillance and financial restrictions. This demonstrated how Bitcoin’s security and privacy features can be a lifeline in politically or economically unstable environments.
Taproot Assets Protocol: Bringing Stablecoins to Bitcoin
The Taproot Assets Protocol, developed by Lightning Labs, integrates stablecoins directly onto the Lightning Network, allowing them to benefit from Bitcoin’s unmatched security and scalability. This innovation opens up new possibilities for stablecoin transactions, enabling fast, private, and low-cost transfers fully compatible with Bitcoin’s decentralized ethos.
Real-Life Example:
In 2023, a major remittance company announced plans to pilot USDT transactions over the Lightning Network using the Taproot Assets Protocol. This move is expected to significantly lower costs and speed up transfers for millions of migrant workers sending money home, highlighting the real-world impact of Bitcoin and Lightning’s superior infrastructure for stablecoins.
State Independence in the Lightning Network
Unlike many other blockchain systems, Bitcoins Layer 2, the Lightning Network operates without a "global state" that needs to be constantly updated or confirmed by the entire network. This is a key differentiator for Lightning compared to the other cryptocurrencies that struggle to scale stablecoins.
Here’s a deeper explanation:
- Local State Management:
- In the Lightning Network, each payment channel operates independently, and the state of the channel (i.e., the balance between two parties) is managed locally between the participants. There is no need for a global network of validators to update or confirm the state of each individual transaction constantly. This approach contrasts sharply with traditional blockchain models like Ethereum, where all nodes must broadcast every transaction to the entire network and validate every transaction.
- In the Lightning Network, each payment channel operates independently, and the state of the channel (i.e., the balance between two parties) is managed locally between the participants. There is no need for a global network of validators to update or confirm the state of each individual transaction constantly. This approach contrasts sharply with traditional blockchain models like Ethereum, where all nodes must broadcast every transaction to the entire network and validate every transaction.
- Off-Chain State Updates:
- The Lightning Network uses off-chain state updates to handle transactions. This means that transactions occur directly between two parties in a private channel without involving the main blockchain unless there is a need to open or close the channel. Only the final state of the transaction (the net result) is recorded on the Bitcoin blockchain, which reduces congestion and transaction costs.
- The Lightning Network uses off-chain state updates to handle transactions. This means that transactions occur directly between two parties in a private channel without involving the main blockchain unless there is a need to open or close the channel. Only the final state of the transaction (the net result) is recorded on the Bitcoin blockchain, which reduces congestion and transaction costs.
- No Central Governor:
- Since the Lightning Network doesn’t rely on a central governor, coordinator, or global state, cryptographic mechanisms like multi-signature and hash time-locked contracts (HTLCs) enforce each transaction's validity. This design ensures that only the two parties involved in the transaction must agree on the state of their channel, making the process highly efficient and secure.
- Since the Lightning Network doesn’t rely on a central governor, coordinator, or global state, cryptographic mechanisms like multi-signature and hash time-locked contracts (HTLCs) enforce each transaction's validity. This design ensures that only the two parties involved in the transaction must agree on the state of their channel, making the process highly efficient and secure.
- Trustless Environment:
- The participants govern Each Lightning channel, making it a purely peer-to-peer system. Without a central governor or state, transactions can happen instantly and at scale, as long as the parties agree, without requiring network-wide validation.
Why This Matters:
This state independence allows the Lightning Network to achieve high throughput, minimal fees, and quick transaction times, positioning it as a highly scalable and decentralized solution ideal for micropayments and frequent transactions without the bottlenecks associated with other blockchain systems.
This structure makes the Lightning Network distinct and revolutionary, particularly compared to other platforms that rely on a central state or a global set of validators to confirm every transaction. Nice!
Conclusion
The risks associated with stablecoin networks like Ethereum and Tron, from high fees to security vulnerabilities and centralization, highlight the need for a safer, more efficient alternative. Bitcoin and the Lightning Network offer a compelling solution, providing a secure, decentralized, and scalable environment for stablecoin adoption. As innovations like the Taproot Assets Protocol continue to evolve, the future of stablecoins on Bitcoin looks brighter than ever, poised to redefine how we transact and interact with digital money globally.
If you are interested in stablecoins on Lighting Network, reach out. We build enterprise software that enables businesses to use this innovative technology. We would love to help you bring your product to market.
