Galoy – an open-source Bitcoin banking platform – has introduced a new feature allowing individuals to hold U.S. dollar balances over Bitcoin’s lightning network.
However, unlike other attempts to bring dollars to the blockchain, the feature uses neither stablecoins nor a direct fiat payment integration.
Backing Dollars With Bitcoin
As explained in a video shared by Galoy on Tuesday, the new feature – known as “Stablesats” – lets users stabilize the value of their Bitcoin holdings at a specific USD denomination. This is achieved by utilizing Bitcoin derivative products called “perpetual inverse swaps.” on Galoy’s backend.
Firstly, a user of Galoy’s Bitcoin Beach wallet may choose to store their “sats”, inside a USD-denominated account, rather than a BTC account. If they do, Galoy uses that Bitcoin as collateral to open short positions as a hedge against Bitcoin’s falling price.
The shorts create an effect whereby the bank suffers no net profit or loss on the users’ behalf if Bitcoin’s value fluctuates in any given direction. If the value of the Bitcoin collateral falls, the bank reaps profit on its short position to compensate for it.
Likewise, if Bitcoin’s value rises, the bank incurs a loss on its short position, canceling out any potential upside for the customer.
“We chose ‘Stablesats’ because it’s fulfilling the same high-in-demand function that stablecoins are prevalently used for but without introducing new assets or tokens,” said Galoy in a tweet on Wednesday.
Alongside the new service, Galoy also announced the completion of a $4 million funding round led by Hivemind Ventures. The funds will be used to further develop GaloyMoney, its Bitcoin banking platform and API.
Stablesats or Stablecoins?
The current most common crypto-native method of gaining exposure to dollars is through stablecoins – blockchain tokens pegged 1:1 to fiat currencies. However, stablecoins can only circulate on alternative blockchains and sidechains due to technical constraints of Bitcoin’s main chain.
Stablecoins also require credible reserve collateral to ensure tokens are always redeemable for a dollar. By comparison, Galoy said that its new method requires no issuer nor banking access, and involves lower fees than any other available method.
However, Galoy notes that its solution is not trustless. For instance, if the exchange Galoy is operating with to execute short positions goes bankrupt, users could lose access to their funds.