Often seen as a need among citizens of developing countries, a representation of the US dollar backed by BTC promises to allow anyone to protect themselves from bitcoin’s daily volatility. While it can be argued that bitcoin is the best currency and could be used as such in day-to-day transactions, some see value in saving BTC and spending in USD – and Galoy’s new product feature, Stablesats, allows users to do all about Bitcoin.
“With Stablesats-enabled Lightning wallets, users can send, receive and hold money in a USD account in addition to their default BTC account,” said Nicolas Burtey, CEO of Galoy, in a statement sent to Bitcoin Magazine. “As 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 – it’s just bitcoin stabilized in a dollar balance.
Galoy also shared that he raised $ 4 million to further develop GaloyMoney, its open source Bitcoin banking platform, versatile API, and business-ready Lightning gateway that provides organizations with access to Lightning payments. The round was led by Hivemind Ventures, with the participation of Valor Equity Partners, Timechain, El Zonte Capital, Kingsway Capital, Trammell Venture Partners and AlphaPoint.
“The GaloyMoney open source core banking platform includes a secure back-end API, mobile wallets, point-of-sale apps, ledger ledger and administrative controls,” the company said in a statement.
How does Stablesats work?
Stablesats is able to offer a stable dollar balance backed by bitcoin via reverse perpetual swaps. The wallet commits the user’s bitcoin as collateral to a centralized exchange –– OKX in Galoy’s case –– for the purchase of these derivative contracts, which are used to hedge the BTC backing the dollar account in the wallet.
Reverse perpetual swaps are denominated in fiat currency but any gain or profit, as well as margin (guarantee), is priced in bitcoin. Therefore, the user’s dollar account experiences unrealized BTC gains if the bitcoin price falls or unrealized BTC losses if the bitcoin price rises, while maintaining a stable dollar balance.
Here is a simplified example: Assuming the user holds 1 BTC on their Stablesats-enabled Lightning wallet and wishes to convert it into a USD balance, that BTC would be pledged as collateral to purchase the corresponding amount of reverse perpetual swap contracts. Assuming a bitcoin price of $ 20,000 and a contract value of $ 1, the user’s synthetic balance of $ 20,000 would represent 20,000 contracts of $ 1 each and 1 BTC as collateral.
If the price of bitcoin went up to $ 40,000, the user would still hold $ 20,000 worth of contracts – since their dollar value does not change – but now with $ 20,000 worth only 0.5 BTC, this would result in an unrealized loss. half bitcoin. Conversely, if the price of bitcoin dropped to $ 10,000, the user would continue to hold $ 20,000 worth of contracts, but now that amount would be worth 2 BTC, resulting in an unrealized gain of 1 BTC.
Through this mechanism, Galoy is able to “stabilize” the user’s bitcoin in an account denominated in US dollars. It is important to note, however, that this dollar balance would be used to transact on the Bitcoin network; Stablesats does not interface with the traditional banking system.
What are the risks?
The first, and perhaps the largest, risk associated with Galoy’s implementation is counterparty risk. Since an exchange takes place in the background on behalf of the user with a centralized exchange, which also holds the user’s bitcoin collateral, the sentient risk of losing funds due to external problems is real.
As seen in recent events, exchanges and lenders facing liquidity problems that result in users’ funds freezing are not uncommon. Centralized custody issues date back to the infamous Mt. Gox exchange, and therefore users should weigh up the pros and cons of undertaking such arrangements early.
Other risks include self-deleveraging (ADL) and funding going negative over a long period of time. ADL can occur in volatile market conditions where liquidations trigger the closure of profit positions –– leading to an under-hedging situation in the context of Stablesats. Financing, on the other hand, causes the distortion of the market; if the funding is negative, the shorts pay the longs. This means that funding that remains negative for an extended period of time could consume the shorts, which could harm the implementation of Stablesats.
– Thanks to Dylan LeClair for feedback and information.