Galoy Introduces Synthetic U.S. Dollars to BTC’s Lightning Network
August 5, 2022 at 12:00 pm
by Ifeanyi Egede
Galoy Inc., the creators of El Salvador’s BTC Beach wallet, is expanding that system with a new feature: BTC-backed synthetic USDs. According to the firm, a digital representation of the USD backed by BTC would allow users to bypass the volatility problem of BTC.
Galoy Introduces Stablesats To Solve Bitcoin’s Volatility Issue
According to Nicolas Burtey, Galoy’s CEO, Lightning wallets that are Stablesats-enabled would allow users to send, receive, and hold funds in a USD and Bitcoin account. Additionally, he said fluctuation in the value of their Bitcoin account would not affect that of the USD account.
This means that $1 would remain the same despite BTC’s exchange rate changes. However, this new product, dubbed Stablesats, differs from Stablecoins like the USDT.
In the case of Stablesats, there is actually no token. Basically, the Stablesats is Bitcoin that is stabilized with the Dollar.
Additionally, the CEO said the firm raised over $4 million in a funding round. The aim is to enhance its open source BTC banking system, GaloyMoney, and develop its Lightning gateway, mobile wallet, and a versatile API.
These advancements would allow firms to access Lightning payments. Some firms participating in the fundraising round include Hivemind Ventures, Kingsway Capital, Timechain, and Valor Equity Partners.
The Working Mechanism Of The Stablesats
Stablesats can offer users a steady Dollar balance that is backed by BTC using inverse perpetual swaps. The wallet would use the BTC of the user as collateral in a centralized exchange to buy derivatives contracts. In turn, these derivatives will be used to back the Bitcoin supporting the USD account.
Although inverse perpetual swaps are valued in Bitcoin, all gains or profits, as well as the margin (collateral), are valued in fiat money. Meanwhile, the user’s USD will maintain a consistent USD balance.
However, the user’s USD account would experience unrealized BTC profits if the BTC price decreases or unrecognized BTC losses if the BTC price climbs.
Using this approach, Galoy may “stabilize” the customer’s BTC in an account with U.S. Dollars. It’s vital to remember that Stablesats does not connect with the conventional financial system; rather, this Dollar amount would be utilized to conduct transactions on the BTC network.
The Possible Risks In Galoy’s New Product
Meanwhile, the biggest risk in using Galoy’s new product is counterparty risk. This is because users risk losing their funds due to certain external issues.
This can occur when a trade is going on with a centralized exchange. Meanwhile, the centralized exchange is also the custodian of the users’ BTC.
Lenders and exchange firms have faced serious liquidity issues in the past months. This has led to the freezing of the funds of users on the platform.
The issues of centralized custody started from the exchange, Mt. Gox. Therefore, users might have to weigh the merits and demerits of using such a product.
Other risks highlighted include the issue of funds becoming negative for a certain period and auto-deleveraging (ADL). ADL can occur under fluctuating market situations where profitable positions are terminated as a result of liquidations, which results in an under-hedging scenario in the framework of Stablesats.