the stablecoin of Bitcoin (BTC) compatible with the Lightning Network

What if Bitcoin had its stablecoins?

Stablecoins have become an indispensable tool for the cryptocurrency ecosystem, whether to secure profits, temporarily protect against market volatility or generate returns in decentralized finance (DeFi).

Although many different stablecoins exist in the crypto market, approximately 65% of these are USDT from the Tether business. But is this the best representation of the US dollar on the blockchain?

The startup Galoy, behind the famous Bitcoin Beach Wallet in El Salvador (now called Blink), operates with stablesats a new peg mechanism allowing almost instantaneous exchanges via the Lightning Networkthe famous second layer of Bitcoin focused on scalability and low transaction costs.

What is a stablecoin? All about this type of cryptocurrency

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What are stablesats?

Stables are not strictly speaking stablecoins, but rather Bitcoin (BTC) derivatives that track the value of the US dollar.

Indeed, unlike centralized stablecoins like USDT or USDC, the anchoring of the stablesats to the US dollar rate is not ensured by dollars kept in a bank account.

In place, it is a short position on the BTC which serves as protection against price fluctuations. Hence the name stablesats, stable satoshis.

A short position, also known as a “short sale”, is an investment strategy where an investor sells an asset they have borrowed in the hope of buying it back later at a lower price to pocket the difference. Typically, the investor borrows the asset from a third party and sells it on the spot market.

Beyond serving in a peg mechanism or bearish speculation tool, the short can also serve as a hedge against volatility.

Indeed, investment funds can incur the wrath of their clients even from a few percent of unrealized losses. This is why, although a 5% drop in a week is very common with BTC, exposing yourself to it can be very dangerous for these fund managers.

Thus, opening a short position on 80% of their BTC holdings would allow them to reduce the volatility of their holdings by 80% and therefore avoid the wrath of their clients.

For stablesats, the goal is not just to reduce the volatility of BTC, but to stabilize their value to that of the dollar.

Typical example of how stablesats work

Suppose we believe that the price of BTC will go down by next week. To take advantage of this potential drop, we decide to set up a short position.

First of all, we are looking an individual with 1 BTC who is willing to lend it to us. In exchange, we offer a later refund with a 1% commission as a thank you for lending this asset. Once we have borrowed the BTC, we go to a marketplace (like a trading platform) and we sell it at the current pricesay $30,000 in this example.

Now we thus get $30,000 in exchange for selling the BTC. Then we look forward to a week, and to our great satisfaction, the price of BTC has indeed fallen to $25,000. Thanks to the $30,000 we got from the initial sale, we now buy 1.01 BTC (the amount borrowed plus 1% fee). And finally, we repay our debt by returning the BTC that we had borrowed, everything keeping the remaining $4,750.

In general, to carry out this type of operation, it is more common to call on a broker who will carry out the sale on our behalf. For that it is necessary to deposit funds beforehand, to set up collateralin order to cover the losses in the event of an excessive increase in the price.

For stablesats, this short position will be used to maintain parity between the value of the dollar and that of the satoshis linked to the short position.

Let’s say we own 1 million satoshis (or 0.01 BTC), the current price of BTC is $30,000, and we decide to spend half of our satoshis in stablesats in order to protect us from a potential devaluation of the BTC.

So 500,000 of our satoshis, worth $150, are going to be sent to what Galoy calls a “Bitcoin Bank.” This bank will then keep these satoshis for us and use them as collateral in order toopen a short position without any leverage at the current price.

In the case of stablesats on the Blink wallet, the Bitcoin Bank is the OKX crypto platform. So in our portfolio we now have 500,000 satoshis And $150 stablesats.

But what if the price of BTC falls to $15,000? How do we ensure that the 500,000 satoshis we turned into stablesats are still worth $150?

Here, it is the short position that will fill the gap. In effect, if the price of BTC loses 50% (a drop from $30,000 to $15,000) then the short position will be in unrealized capital gain and will be worth 50% of the value of the initial collateralor $75.

While the 500,000 satoshis kept by the Bitcoin Bank have lost 50% of their value and are only worth $75. This represents a total of $150 between the 500,000 satoshis of collateral and the gains generated by the short position.

In this case, if we want to recover our satoshis, the Bitcoin Bank will close position, pocket the $75 profit, redeem 500,000 satoshis And send us back $150 in satoshisor 1 million satoshis.

Conversely, if the price of BTC increases by 100% (i.e. an increase of $30,000 to $60,000) the short position will be in latent loss and will be worth -100% of the value of the initial collateral, or -$150. This short position subtracted from the 500,000 satoshis kept by the Bitcoin Bank, which are now worth $300, represents a total of $150.

In this case, if we want to recover our satoshis, the Bitcoin Bank will close the short position, pay the $150 loss with 250,000 of our satoshis coming from our collateral, to finally send us back $150 in satoshisor 250,000 satoshis.

So, no matter how much the BTC price fluctuates, stablesats peg is guaranteed and can be exchanged at any time for satoshis.

Here is a summary diagram of how stablesats work:

The particularities of stablesats

The stablesats code is open source and could be implemented in all Lightning Network compatible wallets, including at a network node allowing everyone to have their own synthetic dollar.

Note that it is possible to send stablesats to someone who wants to receive satoshis, just as it is possible to receive stablesats from someone who has sent you satoshis. To do this, you just need to have a compatible wallet and select the dollar or satoshi account for sending or receiving.

Nevertheless, certain risks in the use of stablesats are to be considered:

• In the same way as with an exchange platform, we can say that these are not “not your keys, not your cryptos”for the stablesat it’s not your keys not your shorts. Indeed, in the event of bankruptcy of the platform (Bitcoin Bank) the collateral and the short position risk being lost;
• Platforms could automatically close positions even if they are in latent profits;
• “Slippage” is the difference between the expected price of a financial transaction and the actual price at which it is executed. Although it is rarely very high, this could cause losses in value in the event of high volatility or insufficient liquidity in the market of the exchange platform;
• Fees for short positions may increase. Historically, there have been on average more long positions than short positions on derivatives exchanges. This environment allows short positions not to charge fees. But that might change in the future, and make stablesats pay to hold.

In summary, stablesats provide a way to hold and use dollars that are redeemable with anyone using the Lightning Network. The main risk comes from the exchange platform which holds the BTC as collateral and the short positions.

SO, Galoy is working on managing this risk to be based in the future on several market places simultaneously, they could be centralized like OKX or decentralized like dYdX.

What are the use cases for stablesats?

Unlike stablecoins such as Tether’s USDT, stablesats are not primarily designed as a means of retaining profits.

In fact, stablesats were introduced in the Blink wallet, which uses the Lightning Network and is designed specifically for everyday use. It particularly targets populations with little or no access to the traditional banking system. The first use of stablesats is therefore to carry out daily expenses.

Who is behind Galoy?

Co-founded and managed by Nicolas Burtey, the startup Galoy brings together a team of 16 people made up of engineers, designers, data scientists and educators whose objective is to develop financial solutions based on Bitcoin.

Galoy believes in the importance of the decentralized financial system Bitcoin can create, because it enables faster, simpler and more efficient financial inclusion than with the traditional banking system, which is still and always difficult to access for 2 billion unbanked people.

Galoy notably created the Blink wallet, which greatly popularized the adoption of Bitcoin in El Salvadorspecifically in El Zonte, a small pioneering town in the use of Bitcoin in the country.

The Blink Wallet was designed to be easy to use. Indeed, the creation of a wallet is done with a simple telephone number and this one allows:

1. Receiving and sending BTC via the Lightning Network;
2. The registration of contacts in order to exchange satoshis easily, a map listing the points of sale around the world accepting payments with the Blink wallet;
3. The possibility of earning a few satoshis by learning new things about Bitcoin and answering a few questions;
4. And finally the possibility of transferring dollars via the Lightning Network thanks to stablesats.

Blink is particularly widely used in what Galoy calls “circular economies”such as Bitcoin Beach in El Salvador, Bitcoin Lake in Guatemala, AmityAge in Honduras, MOTIV NGO in Peru, Praia Bitcoin in Brazil and EasySats in Namibia.

To acquire stablesats, follow these steps:

1. Follow the following link to buy Bitcoin or skip to the next step if you already have some;
2. Go to Blink, create a wallet and click “Receive”;
3. Then select ” Use an on-chain Bitcoin address » and copy the address by scanning or typing the QR code;
4. Use your wallet where you hold your BTCs to transfer them to the copied address;
5. Wait for the transaction to be validated and for you to receive your satoshis on your Blink wallet;
6. Once you have received your satoshis, click on “Send”, enter your username: ” [email protected] », and choose the amount you want to exchange in stablesats;
7. Confirm the exchange;
8. Congratulation ! You now have stablesats!

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Conclusion on Galoy stablesats

Stablesats offers an innovative approach to creating US dollars on Bitcoin’s Lightning Network. Based on a short BTC position, it has some interesting advantages, especially for those looking to reduce the volatility of BTC in order to guarantee their purchasing power.

The compatibility of stablesats with the Lightning Network makes them even better performing than a stablecoin or the dollar itselfdue to the speed of transaction execution and low fees of this network.

Their code being open source, stablesats change the paradigm of stablecoins. Indeed, stablesats are not just another token that is issued on a blockchain, but BTC. Stables are just a way for individuals to create their own protection against volatility.

However, it is important to remember that stablesats are not without risks. As with any system based on a trusted third party (here the “Bitcoin Bank”), there is a risk of default on its part.

Despite everything, stablesats offer an interesting solution to replicate the price of the American dollar, while being accessible and simple to use. In effect, the user experience of the Blink wallet has been designed for everyday use and it is particularly successful.