Galoy Launches Synthetic Dollars Backed by BTC, No Stablecoins Needed
After the successful launch of Bitcoin Beach Wallet in El Salvador two years ago, Galoy is further tokenizing the nation’s economy. Galoy’s latest financial innovation is a Bitcoin-backed dollar, dubbed Stablesats.
This synthetic dollar will integrate into the Bitcoin-centric GaloyMoney infrastructure in El Salvador. Having pioneered Bitcoin integration as legal tender, El Salvador currently holds 2,381 BTC. In aggregate, according to President Nayib Bukele’s Twitter timeline, they are now worth half as much as when they were purchased.
Nonetheless, the country’s finance minister Alejandro Zelaya views the Bitcoinization of El Salvador’s economy as a long-term game.
“I think making that transition is vital and it would be wrong of us to not pursue financial innovation that could benefit El Salvador.”Zelaya to Bloomberg News
To penetrate the psychological barrier between the dollar familiarity and the novelty of Bitcoin, Galoy is deploying a clever solution to speed up El Salvador’s tokenization.
Stablesats: Stable USD but Without Stablecoins
Just as Bitcoin Beach Wallet takes advantage of the Lightning Network for instant daily payments, so will Stablesats. By some accounts, such a payment system is not only on par with traditional Visa/MasterCard, but it exceeds them.
In other words, what Polygon does for Ethereum, Lightning Network does for Bitcoin, as a mass adoption scalability solution. On the back of this tech, Beach Wallet users will now be able to hold BTC-backed synthetic dollars, in addition to regular bitcoins. However, this should not be confused with a stablecoin.
Stablesats is not a token like USDT or USDC stablecoins. Instead, it is just a stabilized Bitcoin, displayed in USD value. This is made possible through the use of inverse perpetual swaps.
How Does Stablesats Work?
Inverse perpetual swaps are themselves a relatively recent financial innovation, becoming very popular in crypto trading. Having the same meaning as futures, swap contracts allow traders to buy/sell an underlying asset’s value at a set date, making them derivatives. However, perpetual futures lack an expiry date, so people can hold a derivative asset (in this case for Bitcoin) perpetually.
Moreover, the underlying asset—Bitcoin—is not traded, so custodial/fee issues don’t pop up. Because of this, such financial instruments are popular for shorting. For example, if the perpetual swap trades above the price of the underlying asset (BTC), long traders pay short traders to stabilize the price. Vice versa if the perpetual swap contract goes under the price.
This balancing act between short and long traders is called a funding rate. Therefore, Stablesats is stabilized without being a stablecoin because:
- The perpetual futures, for the BTC underlying asset, are set in USD.
- The funding rate between long and short futures balances Stablesats after BTC is used for spending.
The “inverse” part comes at settlement time. Meaning, that the settlement is done in BTC instead of USD. Cryptocurrency exchanges, such as BitMEX, love the inverse feature of perpetual swaps because they don’t have to deal with the fiat system.
Likewise, GaloyMoney infrastructure avoids having either a stablecoin, backed by cash reserves in a bank, or dealing directly with a traditional bank. In turn, Stablesats use the familiarity of the dollar, but without interacting with the banking system.
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Could Stablesats Destabilize?
As we have seen with the failure of Terra’s algorithmic UST stablecoin, nothing should be taken for granted. While Stablesats is backed by Bitcoin as the underlying asset, they are still derivative-driven. Meaning, that if there is an imbalance between short and long traders, the funding rate could touch negative territory, as short traders would pay long traders.
If that transpires for a long period of time, auto-deleveraging could happen, leading to automated liquidations and under-hedging. This would create volatility as futures traders would have under-funded market positions. However, auto-deleveraging typically occurs in extreme market conditions.
Case in point, when it became apparent that the Fed rate hikes will ramp up over a prolonged period, there was a wide, double-digit market selloff. This eventually suppressed LUNA token’s price, which then toppled the TerraUSD (UST) stablecoin itself.
How Will Stablesats Be Implemented
Although still in beta, Stablesats will use the same hedging strategy implemented on the OKEx (now OKX) exchange for perpetual BTC inverse futures. Galoy further raised $4 million to upgrade its GaloyMoney platform. Specifically, to create a flexible API to interface with enterprises as a Lightning-backed payment rail.
“The GaloyMoney open-source core banking platform includes a secure backend API, mobile wallets, point-of-sale apps, an accounting ledger and administrative controls,”
Galoy’s plan is to integrate more exchanges and hedging strategies in the future. However, this also means that Bitcoin Beach Wallet will use BTC holdings as collateral to buy these perpetual inverse futures.
As we’ve seen for the last few months, even crypto exchanges can go down in an extreme volatility environment. On the upside, Galoy’s innovation doesn’t offer Ponzi-like 20% APY that Terra’s Anchor Protocol enticed for growth.
Do you think the risks involved will counter the expected increased adoption rate, as Stablesats make it look as if USD is used? Let us know in the comments below.