The Bitcoin Lightning Network has enabled payment scalability, removing certain on-chain limitations on Satoshis. Once on Lightning, you do not need to worry about high fees, dust transaction limits, block confirmation times or securing space in the next block.
Lightning brought speedy microtransactions to Bitcoin —exclusively!
Despite the improvements Lightning brings, Bitcoin as a medium of exchange still has a way to go. Despite all the evangelising, circular-economy growth, and merchant adoption, HODLing is the modus operandi, and SPEDN Bitcoin lags far behind.
The world is still very much on a fiat standard, and swapping between Bitcoin on Lightning and fiat has its frictions. Unfortunately, other assets can’t keep up with Lightning’s pace.
One way for Lightning adoption to grow is to allow the incentives to play out. If people want cheaper, faster transactions, they’ll move over, but others don’t think that’s enough and bridging the gap through stablecoins has become quite the discussion in 2025.
Tether announced support for USDT on Lightning via Taproot Assets and said it will issue USDT as a native RGB-20 token on the RGB protocol. While a formal launch of Tether on Lightning has yet to provide a firm release date, other projects are beginning to wrap existing USDT from other blockchains and issue RGB-20 tokens.
Recently, KaleidoSwap, a Bitcoin and Lightning exchange that’s bringing stablecoin trading to the Lightning Network, conducted the first Bitcoin-to-stablecoin swap on the Lightning Network.
The transaction involved the tUSDT asset (bridged USD₮ via UTEXO.com into RGB), an RGB20 representation of the USDT stablecoin transferred into the RGB ecosystem via the UTEXO.com bridge.
The transaction numbers show:
- The swap of approximately 12,000 satoshis for 13 tUSDT;
- A LN channel with a capacity of 100,000 satoshis and 90 tUSDT;
- Each node ran on a Raspberry Pi 4 with 4GB RAM.
The execution was instant, private, and required only a few satoshis in fees.
The Foundation: What is RGB?
RGB is a smart contract and asset issuance protocol built on Bitcoin that enables the creation and transfer of digital assets, including stablecoins like USDT, without requiring any changes to Bitcoin’s base layer or the Lightning Network protocol itself.
The magic of RGB lies in its client-side validation paradigm.
Unlike traditional blockchain systems where all transaction data is published on-chain for global verification, RGB keeps smart contract data completely off-chain. The Bitcoin blockchain serves only as a commitment layer, anchoring state transitions through transaction outputs while maintaining a cryptographic proof of asset validity.
This design choice provides several critical advantages: enhanced privacy since observers cannot see asset transfers, improved scalability by reducing on-chain data bloat, and seamless compatibility with existing Lightning Network infrastructure.
RGB operates as a directed acyclic graph where each asset transfer creates a lineage of ownership that can be independently validated by participants. When you receive RGB assets, you receive not just the current state but the complete history necessary to verify that the assets are legitimate and haven’t been double-spent. This client-side validation means that only the parties involved in a transaction need to know about it, creating a level of privacy far beyond what’s possible with transparent blockchains.
KaleidoSwap’s Architecture: Bringing DEX Functionality to Lightning
KaleidoSwap functions as a peer-to-decentralised exchange built specifically for RGB assets on Lightning Network. Uncentralised exchanges that custody your funds, or even many DEXs that rely on smart contract escrows, KaleidoSwap enables truly self-custodial trading where users maintain control of their assets throughout the entire swap process.
The platform integrates directly with RGB Lightning Node wallets, allowing users to open Lightning channels that support multi-asset transfers. These channels can simultaneously handle both Bitcoin and various RGB assets like stablecoins, effectively turning Lightning Network into a multi-asset payment rail.
This integration happens at the node level, meaning the channels themselves are enhanced to track not just bitcoin balances but also RGB asset states.
KaleidoSwap leverages Lightning’s existing Hash Time-Locked Contract mechanism, the same cryptographic primitive that makes standard Lightning payments atomic, to ensure atomic swaps between different RGB assets. This means that a swap either completes in its entirety for both parties, or it fails completely with no party losing funds. There’s no possibility of one user sending their assets while the counterparty fails to deliver.
The Atomic Swap Protocol: Step-by-Step Execution
When a user initiates a stablecoin swap on KaleidoSwap, a sophisticated multi-step process unfolds that ensures trustless execution. Let’s walk through a concrete example where Alice wants to swap her RGB-based USDT for another user’s RGB-based stablecoin.
Step 1: Order Discovery and Price Agreement
The process begins with Alice querying available liquidity on the KaleidoSwap network. The platform operates with liquidity providers and swap gateways that maintain channels with multiple users and hold inventory of various RGB assets. When Alice finds a suitable counterparty or gateway offering the exchange rate she wants, she receives a Request for Quote ID that locks in the price and fee structure for a limited time window. This RFQ mechanism prevents price manipulation during the swap execution.
Step 2: Invoice Generation and Wrapping
The recipient of Alice’s swap creates a Lightning invoice denominated in the RGB asset they’re sending. This invoice contains a payment hash, which is simply the hash of a secret value called the preimage. Here’s where KaleidoSwap’s tech comes into play: when the swap involves cross-protocol or cross-asset transfers, the gateway creates a “wrapped invoice.”
The invoice maintains the same payment hash as the original invoice, ensuring cryptographic linkage, but encodes the different asset type that Alice will be paying. This wrapped invoice also includes the swap fee and specifies the RGB asset type Alice is sending. Critically, the payment hash remains identical across both legs of the swap, which is what enables atomicity.
Step 3: Conditional Payment Execution
When Alice pays the wrapped invoice, she’s creating a Hash Time-Locked Contract in her Lightning channel with the gateway. The HTLC locks her RGB stablecoin payment behind two conditions: either the correct preimage is revealed before the timeout expires, or the payment fails and her funds return. This is standard Lightning Network functionality, but adapted for RGB assets.
The gateway, having received Alice’s conditional payment, now forwards a payment to the final recipient using the same payment hash but denominated in the destination RGB asset. This creates a chain of conditional payments all locked by the same cryptographic secret.
Step 4: Atomic Settlement
When the final recipient receives the payment, they reveal the preimage to claim it. This is where the atomic magic happens. Once the preimage is revealed to the gateway, the gateway can immediately use that same preimage to claim Alice’s payment. The cryptographic properties of hash functions ensure that the preimage can only be revealed if the final recipient received their payment, and once revealed, it enables all upstream payments to settle.
If anything goes wrong at any stage—if the gateway goes offline, if the final recipient’s channel lacks capacity, or if timeouts expire—the entire chain of payments fails atomically. Alice’s funds are never at risk of being stuck or lost.
Client-Side Validation in Action
Throughout this entire process, the RGB protocol’s client-side validation ensures that asset authenticity is maintained. When Alice receives RGB assets in a swap, she doesn’t just trust that they’re legitimate. She receives cryptographic proofs containing the complete validation data necessary to verify the asset’s history from issuance through every transfer to the current transaction.
This validation happens entirely on her node, without broadcasting anything to the blockchain. Her node checks that the asset was properly issued, that each intermediate transfer was valid, that amounts add up correctly, and that there’s no double-spending. Only after successful validation does her wallet update its state to reflect the new asset ownership.
The Bitcoin blockchain itself sees only the commitment transaction outputs that anchor RGB state transitions. An observer looking at the blockchain would see normal-looking Bitcoin transactions without any indication that stablecoin swaps are occurring. This provides a privacy guarantee that’s impossible to achieve with token standards like ERC-20 where all transfers are globally visible.
While I have no interest in USDT on RGB or any other asset, RGB adoption could become a positive for the Bitcoin ecosystem. It provides a sandbox for secondary markets such as tokens and NFTs to migrate away from taking up space on the Bitcoin blockchain and free up space for economically dense transactions to fill up blocks instead.
Additionally, if you want to participate in these markets, you’re encouraged to run a Bitcoin full node, which helps decentralise the network.
Lastly, if new assets are issued on RGB, they’ll require liquidity for trading pairs. This means new channels or potentially larger Lightning channels will be needed to support the trade and transfer of these tokens, expanding the Lightning Network and potentially earning fees for Lightning node operators.
Real-World Performance and Benefits
KaleidoSwap’s atomic swap mechanism offers up some practical advantages that make it compelling for real-world stablecoin trading.
- Swaps execute near-instantaneously, typically settling within seconds rather than the minutes or hours required by on-chain atomic swap decentralised exchanges.
- Transaction fees are minimal, often just a few satoshis plus a small percentage-based swap fee, making even small-value trades economically viable.
- The privacy benefits are substantial.
- No MEV since there’s no global record for Bots to snipe. There’s no order book visible to front-runners, no transaction graph for chain analysis firms to examine, and no public record of your trading patterns.
- Unlike swapping on a traditional DEX where your trades are permanently recorded on a public blockchain, KaleidoSwap trades are known only to the direct participants.
Perhaps most importantly, the execution speed and nature mean users never give up custody.
Your keys control your funds from start to finish.
There’s no deposit process, no waiting for confirmations, no withdrawal limits, and no possibility of an exchange exit scam or hack affecting your assets. The cryptographic protocols ensure that either the swap completes fairly or it doesn’t happen at all.
Now that doesn’t mean these trades are completely trustless and riskless.
You still have to trust that the asset issuer — in this example, the UTEXO.com bridge wrapping the token and Tether, which issues the token — doesn’t depeg, rug pull, have liquidity issues, or fail.
And given the speed at which Lightning operates, a bank run can execute in seconds, leaving anyone who doesn’t swap out immediately holding the bag.
So beware and limit your exposure when trading other assets for Bitcoin and vice versa.
Do your own research.
If you want to learn more about the Kaleidoswap’s protocol and RGB assets, use this article as a starting point. Don’t trust what we say as the final word. Take the time to research other sources, and you can start by checking out the resources below.
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