The Bitcoin Beach. Image from the website of galoy.io
Galoy, the startup behind the popular BitcoinBeach wallet in El Salvador, is introducing Stablesats: a method to get the dollar value of bitcoins in a Lightning wallet – without using stablecoins or a bank account. Is a new paradigm of value preservation just emerging?
Most of us love the volatility of Bitcoin. Without it, the price could not rise over time.
However, those who use Bitcoin in trading will be less happy about the fact that the value of Bitcoin can change significantly within hours. This stands in the way of the spread of Bitcoin as a means of payment and is probably one of the reasons why stablecoins such as USDT and USDC have now become a powerful pillar of the crypto market.
Even in El Salvador, the Bitcoin model country, volatility is inhibiting the acceptance of Bitcoin. Galoy.io , a startup that brings Bitcoin to developing countries such as El Salvador through Lightning, for example with the Bitcoin Beach Wallet, now wants to change this. The so-called stablesats are designed to allow people to use Lightning without exposing themselves to the price fluctuations of Bitcoin.
Interestingly, stablesats are not based on either stablecoins or a bank account. But then what are they?
Stability due to derivatives
Galoy introduces a new method to keep the dollar value stable in a wallet: “Stablesats use derivatives contracts to form a synthetic dollar backed by Bitcoin that is pegged to US dollars.“
A video shows the procedure using an example: Alice has 1m sats in her Bitcoin account on a Lightning wallet. She can now transfer some or all of the sats to a USD account. For example, 400,000 sats. Now she has 600,000 Satoshi and – in this example – 120 US dollars, which are covered by 400,000 satoshi. When the Bitcoin price changes, the purchasing power of the 600,000 Satoshi rises or falls. The dollar, on the other hand, remains stable.
Stablesats uses so-called “perpetual inverse swaps” or “shorts” for this purpose. These are hedge positions that the Bitcoin Bank, which works in the background, uses to hedge against the volatility of the Bitcoin price. They are almost short sales, such as those that protect commodity traders against price fluctuations on commodity exchanges.
So if the price of Bitcoin changes now, the number of satoshi by which the dollars are covered will change. If he doubles, 400,000 sats become 200,000 because the short position loses; if he halves, the short position wins, and there are 800,000 satoshi. The dollar purchasing power, one way or another, is preserved.
In the background, Galoy uses a software for “dealers”, which is open source. It allows everyone to create their own synthetic dollar within the framework of the Galoy stack. So far, however, derivatives from one provider are available for selection: the “Bitcoin Inverse Futures” of the OKEx exchange.
Stablecoins with a different flavor
So users can denominate a part of the bitcoins in dollars in a Lightning wallet, so that they hold the dollar value without actually having dollars in play. A Bitcoin bank works in the background, which uses derivatives to ensure that the bitcoins in its wallets always correspond to a certain dollar value.
Of course, this is attractive because neither a stablecoin nor a bank are involved. A stablecoin token would make integration into Lightning infinitely more difficult, and a dollar bank does not want to be allowed into a wallet for understandable regulatory reasons.
Nevertheless, there are some risks, as Galoy also admits: there could be problems with the stock exchange; a position could be closed by the so-called “auto-deleveraging”, although it is in the plus, which would lead to the USD being sub-collateralized in the account; the funding, i.e. the offers of the derivatives, could decline over a longer period of time.
With the Stablesats, the world of stablecoins gets a new kind of game. Conceptually, it uses the same mechanism as the original Maker DAO, which covers dollar tokens through ether; in detail, however, other mechanisms work with their own advantages and disadvantages.
Thus, thanks to the derivatives, stablesats are less prone to losing parity in massive kiss falls, since they pass the risk on to an exchange. This is an advantage.
The coin needs new middlemen!
At the same time, however, they introduce risks through intermediaries. This is a disadvantage. While a user of the DAI dollar does not need a real intermediary – the Maker DAO is a set of smart contracts – the user of Stablesats has to trust two intermediaries at once: the Bitcoin Bank and the stock exchange. In addition, the current setup makes it impossible to keep the private keys for the dollars, but allows the formation of a partial reserve.
However, keeping your own private key does not matter with Galoy’s Lightning wallets anyway. The website “Wallet Scrutiny” therefore also warns that it is a fiduciary wallet. There is also a lack of transparency about who is actually entrusted with the Bitcoins. Galoy or the Bitcoin Beach Wallet team? Why is the trust system not explicitly mentioned? And does Galoy have a license to act as a crypto custodian?
Galoy, on the other hand, defends himself by saying that thanks to Multisig there is a “shared trust” and a “Bitcoin Community Bank” is being set up.
So, one way or another, you have to trust Galoy. However, the startup has to admit that it has so far established itself as a committed and trustworthy provider. Gelay has not only established itself as an integral part of the Bitcoin Beach scene in El Salvador, but is also integrating other Latin American countries into a Lightning ecosystem with the Bitcoin Jungle app in Costa Rica and soon the Guatt Wallet in Panama. With the stablesats, there is hardly any obstacle to Lightning becoming a cross-border payment system in the region. This promises great things!
For these ambitions, Galoy recently received a $4 million investment from Hivemind Ventures, among others. With this investment, the startup wants to expand its open source software for a Bitcoin bank. It pursues the honorable goal of not only being a provider of financial services – as with the escrow wallets and the stablesats – but also to make it easy for other organizations to become their own bank.