Galoy, a startup bridging a US dollar payment network to Lightning Network, has announced the introduction of Stablesats - a synthetic USD product backed by bitcoin.
Stablesats-enabled wallets on Lightning will allow users to send and receive money in a USD account alongside their default Bitcoin account.
Let’s break down how Stablesats works, and which other initiatives are bring stable payments to Lightning Network.
How does Stablesats work?
The Stablesats product differs from existing stablecoins like USDT or USDC in that it’s just a dollar balance representation through bitcoin. No actual stablecoin or fiat integration is required. As there is no token involved, this means better interoperability, lower fees for users and no liquidity concerns.
The goal of this synthetic US dollar product is to solve one of the biggest problems for people that live off Bitcoin - short-term exchange rate volatility. If someone tries to live off Bitcoin in a world dominated by fiat money, it’s inevitable they will have short term commitments in currencies like US dollars.
How Stablesats works
Galoy has developed this product through the use of inverse perpetual swaps. A user’s bitcoin is pledged as collateral via a cryptocurrency exchange. For example, with Galoy’s partners, OKX. The swap contract is denominated in USD but any unrealized gain or loss is priced in BTC.
Let’s say 1 BTC from the Lightning Network wallet is converted by the user to a USD balance. Behind the scenes, 1 BTC is pledged to purchase the corresponding amount of inverse perpetual swap contracts.
If 1 BTC is equivalent to $20,000, that would mean 20,000 contracts of $1 each. If the bitcoin price doubles or halves, the gain or loss is unrealized and the amount of $20,000 is still represented courtesy of the underlying inverse perpetual swap contracts.
Driving the Bitcoin use case
This approach by Galoy has the potential to be powerful for Bitcoin and the Bitcoin ecosystem. In essence, its Stablesats product is using BTC as a medium of exchange and store of value while USD remains the unit of account. The code is open source and so it’s inevitable that others will take this approach and maybe refine it or build upon it.
But this is not the only approach being explored where stablecoins on Lightning Network is concerned. Development firm Lightning Labs raised $70 million in April 2022 to develop the Taro Protocol with a view towards bringing stablecoin transfers to the Lightning Network.
Stablesats is interesting in that it should allow the Lightning Network to leverage the demand for synthetic US dollars to build itself up further. Lightning has been growing steadily but when compared with Ethereum-centric DeFi, that activity is only a drop in the ocean.
Centralization trade offs
Of course, there are always trade offs. Many have criticized Lightning Network for being centralized. And the perpetual swaps in Galoy’s synthetic stablecoin solution mean that there is a reliance on a centralized exchange.
Galoy’s Founder and CEO Nicolas Burtey told Exodus News & Insights that “future improvements on a future version will hedge across multiple derivatives exchanges simultaneously to reduce the risk”. He added that eventually, Discreet Log Contracts (DLCs) - a form of Bitcoin transaction that uses an oracle to execute a smart contract - “would remove the reliance on a centralized exchange, but DLC is not yet mature enough for production.”
Burtey also said that “dollars over lightning has been the most requested feature in El Salvador”.
The firm is the developer of the Bitcoin Beach Wallet which was first piloted in El Zonte, El Salvador. It has also developed the Bitcoin Jungle App which is centered around a community in Costa Rica that seeks to develop a circular Bitcoin economy.
Galoy has raised $4 million with a view towards developing Galoy Money, an open-source Bitcoin banking platform. Within the platform, Galoy offers point-of-sale apps and a secure backend API and mobile wallets, together with an accounting ledger with administrative controls.
Lightning support in Exodus
We hope you found value in this breakdown of how Stablesats work, and other stable payments on Lightning Network.
Exodus added support for Lightning Network back in December 2021. If you want to benefit from low cost, lightning fast payments and transfers, you can learn how to easily access LN via this simple step-by-step guide.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.