Galoy Stablesats: synthetic dollars in your Lightning wallet

‘Synthetic dollars’ in a Lightning wallet, the value of which is covered and kept stable by hedging with bitcoin long and short positions. No banks and no fiat money, yet stable dollars based on Bitcoin. That is the innovation of Stablesats.

A common criticism is that bitcoin is unsuitable for daily payments due to price volatility. Some of the potential users, especially in poorer countries, would be interested in the low transaction costs and cross-border nature of bitcoin payments, but not in money whose value fluctuates.

There seems to be a need for a compromise that combines the desirable properties of bitcoin with the price stability of fiat money. That is what Galoy, the team behind the Salvadoran Bitcoin Beach wallet, is working on with the Stablesats project.

Stablesats

Stablesats offers wallet providers and other service providers the ability to integrate “synthetic dollars” into a bitcoin wallet. A video from Stablesats shows an example of such a wallet, with a balance in both bitcoin and dollars.

For the balance in dollars, no real dollars or tokens like stablecoins are used stablecoins A stablecoin is a token pegged to the price of $1 dollar, usually by backing through dollar reserves and in some cases through experimental algorithms. used. Synthetic dollars work on the basis of bitcoin: with Stablesats you do not have real dollars in your wallet, but ‘worth’ a certain amount of dollars in bitcoin.

Stablesats-integrated Lightning wallets allow users to send out, receive in, or hold funds in a USD account, in addition to their standard BTC account. Nicolas Burtey, CEO of Galoy (via Bitcoinmagazine.com)

Thanks to an innovative method, the displayed balance in dollars is stable and not volatile like the bitcoin price. For hedging, Stablesats uses perpetual swap contracts on a derivatives market. Perpetual swap contracts are somewhat similar to futures contracts. futures contracts With a futures contract, you enter into a trade agreement to buy a certain commodity at a certain price at an agreed time in the future. Futures are similar to options, but differ in that an option does not contain an obligation to buy, while a futures contract does. , with the difference that they do not have an expiration date and are continuously updated.

Operation

That works as follows. If the price is at $20,000 and a user with 1 BTC in a wallet converts a quarter of it to synthetic dollars, the wallet will contain 0.75 BTC plus ?ǣ$5,000 synthetic dollars worth of bitcoin.?ǥ The latter is then still worth 0.25 BTC.

At the same time, the wallet provider opens a short position for 0.25 BTC via a perpetual swap contract on a derivatives exchange, which forms the backing for the synthetic dollars.

If the price of that amount of bitcoin falls, the loss is offset by the profit from the short position, leaving the value of the balance in dollars intact. Should the price rise, the user loses part of the amount of bitcoin that forms the cover, but that loss of value is compensated by the fact that the remaining part has increased in value due to the price increase. This keeps the amount in dollars stable.

While the dollar value of their BTC account fluctuates, $1 dollar in their USD account will remain $1 regardless of the bitcoin rate. Nicolas Burtey, CEO of Galoy (via Bitcoinmagazine.com)

The special thing is that this creates the possibility to save or transact in dollars, while the cover of the dollar balance consists of bitcoin and the payments from the dollar balance are still bitcoin transactions. The receiving party therefore does not receive synthetic dollars, but bitcoin (unless, for example, the recipient cooperates with a service provider that automatically converts bitcoin payments into dollars).

It is an innovative solution to the problem of price volatility, but the hedging mechanism still has to prove itself.

Cons

There are also a number of drawbacks. Stablesats, for example, is difficult to reconcile with self custody , where you manage your own bitcoin wallet yourself.

After all, to cover the dollar balance, the wallet provider must conclude a perpetual swap contract, for which you will have to transfer the bitcoins to the wallet provider. They then transfer them back to the derivatives exchange on which the contract is concluded.

That reintroduces the old-fashioned counterparty risk. After all, wallet providers can prove unreliable, accounts can be frozen or closed and trading and derivatives exchanges can make mistakes, go bankrupt or be hacked.

Legislation can also throw a spanner in the works. In more and more countries, Bitcoin companies are obliged to verify the identity of their customers. Many possible users of Stablesats will therefore probably have to provide identity documents to the service provider. This makes adoption more difficult for the target group that would probably benefit the most: the 1.7 billion people in the world who do not have a bank account – often precisely because they do not have the necessary identity documents.

Outcome

Yet there are plenty of situations where Stablesats can be useful. For example, in countries with weak currencies, where it is difficult to get real dollars. Stablesats can then offer the possibility to save in dollars.

Or in El Salvador, the country that recognized bitcoin as legal tender last year. The team behind Stablesats, Galoy, is also the team behind the Salvadoran Bitcoin Beach wallet and it seems that the synthetic dollars will be the first to be added to this wallet application. For Salvadorans who simply want to receive cheap and fast transfers from family abroad without exchange rate volatility, this could be a godsend.

Quotes: Bitcoinmagazine.com

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