Galoy Inc., the company behind El Salvador’s Bitcoin circular economy wallet Bitcoin Beach, is adding a new element to that infrastructure: bitcoin-backed synthetic US dollars.
A representation of the US dollar backed by BTC, which is frequently perceived as a need among inhabitants of developing nations, promises to enable anyone to hedge against bitcoin’s daily volatility. While some say that bitcoin is the better currency and should be used as such in daily transactions, others see value in saving in BTC and spending in USD – and Stablesats, a new product feature from Galoy, allows users to do just that.
“With Stablesats-enabled Lightning wallets, users are able to send from, receive to and hold money in a USD account in addition to their default BTC account,” said Nicolas Burtey, CEO of Galoy, in a statement. “While the dollar value of their BTC account fluctuates, $1 in their USD account remains $1 regardless of the bitcoin exchange rate.”
Notably, Galoy’s implementation differs from a common “stablecoin” like Tether’s USDT in that there is no token; instead, it is simply bitcoin stabilized into a dollar balance.
Galoy also announced that it had secured $4 million to further develop GaloyMoney, an open-source Bitcoin banking platform, a versatile API, and an enterprise-ready Lightning gateway that gives businesses access to Lightning payments. Hivemind Ventures led the financing, with Valor Equity Partners, Timechain, El Zonte Capital, Kingsway Capital, Trammell Venture Partners, and AlphaPoint also participating.
“The GaloyMoney open-source core banking platform includes a secure backend API, mobile wallets, point-of-sale apps, an accounting ledger and administrative controls,” the company said in a statement.
HOW WORKS STABLESATS?
Through inverse perpetual swaps, Stablesats can provide a constant dollar balance backed by bitcoin. The wallet uses the user’s bitcoin as collateral to pay for these derivatives contracts, which are used to hedge the BTC backboning the USD account in the wallet.
Inverse perpetual swaps are priced in bitcoin but are denominated in fiat currency. As a result, the user’s dollar account experiences unrealized BTC gains when the bitcoin price falls and unrealized BTC losses when the bitcoin price rises — all while maintaining a consistent dollar balance.
Assuming the customer has 1 BTC in their Stablesats-enabled Lightning wallet and chooses to convert it to USD, that 1 BTC would be pledged as collateral to acquire the corresponding amount of inverse perpetual swap contracts. Assuming a $20,000 bitcoin price and a $1 contract value, the user’s synthetic $20,000 balance would reflect 20,000 contracts of $1 apiece and 1 BTC as collateral.
If the bitcoin price rose to $40,000, the user would still have $20,000 worth of contracts (since their dollar value does not change), but with $20,000 now worth just 0.5 BTC, the user would face an unrealized loss of half a bitcoin. If the bitcoin price fell to $10,000, the user would still be holding $20,000 in contracts, but that amount would now be worth 2 BTC, resulting in an unrealized gain of 1 BTC.
Galoy is able to “stabilize” the user’s bitcoin in a US dollar-denominated account via this approach. However, it should be noted that this dollar sum would only be utilized to transact on the Bitcoin network; Stablesats does not interact with the regular banking system.
WHAT ARE THE RISK?
The first – and possibly most significant – risk associated with Galoy’s deployment is counterparty risk. Because a deal is executed in the background on the user’s behalf with a centralized exchange, which also holds the user’s bitcoin collateral, the sentient risk of losing cash due to external difficulties exists.
As evidenced by recent events, exchanges and lenders experiencing liquidity challenges that result in the freezing of users’ cash is not unusual. Because centralized custody difficulties date back to the infamous Mt. Gox exchange, users should assess the benefits and drawbacks of such arrangements before proceeding.
Auto-deleveraging (ADL) and funding becoming negative for an extended period of time are two more dangers. ADL can occur in volatile market conditions when liquidations cause profitable positions to be terminated, resulting in an under-hedging situation in the context of Stablesats. In contrast, funding determines market bias; if funding is negative, shorts pay longs. That means that if funding is negative for an extended length of time, it might eat away at the shorts, hindering Stablesats’ implementation.