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Stablesats: The Steady Bridge Between Bitcoin and Stability

By ⚡ Daniela ⚡ | Me and Bitcoin | 18 May 2023


Stablesats is a groundbreaking digital currency project that aims to address one of the major challenges in the cryptocurrency world: volatility. While cryptocurrencies like Bitcoin have gained popularity for their potential to revolutionize finance, their unpredictable price fluctuations have made them less practical for everyday use.

Stablesats seeks to solve this issue by introducing a stable and predictable form of value within the cryptocurrency ecosystem. The concept behind Stablesats is to create a digital currency that is tied to the value of Bitcoin, the most well-known and widely adopted cryptocurrency. Unlike Bitcoin, which can experience significant price swings in a short period, Stablesats are designed to maintain a stable value.

Stablesats are currently available in Blink Wallet, developed and maintained by Galoy. Any sats, standard or stable are held in their custody, not yours, so bear that in mind.

 

Galoy's approach to stabilizing users' Bitcoin involves the use of financial derivatives known as "perpetual inverse swaps," as explained in the company's video. These innovative instruments allow investors to gain exposure to the future value of Bitcoin through long or short positions.

Unlike traditional futures contracts, perpetual swaps do not have an expiration date. This means that holders have the flexibility to settle the contract with the counterparty exchange at any time they choose.

Within the Blink Wallet, users have the option to store their Bitcoin in either a BTC or USD-denominated account. If they choose the BTC account, their Bitcoin will remain stored with Galoy, similar to other custodial wallet providers.

However, when users transfer their sats to a USD account, Galoy will transfer those funds to its partner exchange, such as OKX. At the exchange, Galoy will open a short position using the customer's Bitcoin as collateral.

This short position serves as a hedge against Bitcoin's price fluctuations in dollar terms. In other words, any potential appreciation or depreciation of the collateral's value will be offset by the profit or loss on the contract.

By utilizing these mechanisms, Galoy ensures that the value of a user's BTC holdings remains relatively stable in terms of US dollars, reducing the impact of price volatility and providing users with a more predictable value for their Bitcoin.

 

 

 

Real-World Implementation: Stablesats in Practice

 

Let's say Ellie, a user of the Blink Wallet, decides to store 2,000,000 satoshis (sats) in her wallet's USD account. A satoshi represents a hundred millionth of a Bitcoin, making it the smallest divisible unit of Bitcoin.

At the time of the deposit, Bitcoin's price is $30,000, which means the value of Ellie's sats in her account is $600. However, let's imagine something really bad happen in the financial world (like March 2020), and the price of Bitcoin drops suddenly to $15,000.

With Bitcoin's price halved, the value of Ellie's sats decreases to $300. Now, the bank (Galoy) needs to secure double the number of sats to cover the full $600 worth of Bitcoin owed to Ellie.

Fortunately, by previously opening a short position, the bank anticipates the price fall and profits $300 from the decline in Bitcoin's price. This profit is then used to purchase the required amount of Bitcoin to fulfill its obligation to Ellie.

On the other hand, let's consider a scenario where Bitcoin's price doubles, soaring to $60,000. Now, Ellie's collateral is worth $1,200, but the bank incurs a $600 loss on its short position. Consequently, the bank needs to sell half of Ellie's sats to cover the loss.

In this way, regardless of Bitcoin's volatility, neither Ellie's account nor Galoy's balance sheet is significantly affected. The mechanism ensures that the value of Ellie's account remains relatively stable, providing her with a consistent USD equivalent for her Bitcoin holdings while mitigating the risks associated with price fluctuations.

 

Stablesats Pros & Cons

Pros:

  • Full Collateralization: Each dollar liability held by Galoy is fully backed by an equivalent value in Bitcoin. This approach distinguishes Stablesats from algorithmic stablecoin models, which have shown instability and unreliability, as exemplified by the collapse of Terra.
  • Financial Inclusion: Stablesats offer a solution for individuals in third-world countries who lack access to traditional banking systems. By leveraging Bitcoin instead of relying on real dollars or credit, Stablesats provide an opportunity for people to access dollars that would otherwise be impossible.
  • Unified Monetary Network: By using synthetic dollars on the lightning network, Stablesats contribute to the creation of a single monetary network around the world, centered on Bitcoin. This simplifies cross-border transactions and fosters financial integration across different economies.
  • Low Transaction Fees: Stablesats operate on the lightning network, which enables virtually costless transactions with immediate settlement. This makes lightning network a favorable choice for payment businesses and protocols like Taro. In contrast, using stablecoins on Ethereum often involves high fees for small payments, while international remittance transfers can be expensive.

Cons:

  • Counter-party Risk: Stablesats, like other existing methods, are not immune to counterparty risk. Trust is still required in centralized entities, whether it's a bank for traditional dollars, an issuer for stablecoins, or a centralized exchange for stablesats. If any of these institutions were to go bankrupt, customers could lose access to the USD they believed they owned. This contradicts one of Bitcoin's key advantages, which is the ability to hold and trade it without reliance on centralized entities.
  • Auto De-leveraging: While stablesats provide a hedge against volatility, there is a limit to this protection. Auto-deleveraging mechanisms can lead to the closure of profitable short positions at exchanges like OKX. As a result, both Galoy and its customers may find themselves under-hedged in a volatile market environment.
  • Sustained Negative Funding: In scenarios where there are more short positions than long positions at an exchange, shorts are required to pay longs. While historically the opposite has been the norm, there is a possibility that this could change in the future. Sustained negative funding could impact the stability and effectiveness of stablesats as a hedging tool.

 

In conclusion, Stablesats offer an innovative approach to creating a stable and predictable form of value within the cryptocurrency world. By utilizing financial derivatives and hedging strategies, Stablesats aim to mitigate the volatility of Bitcoin and provide users with a stable reference point tied to the value of the US dollar. This can be particularly beneficial for individuals in regions with limited banking access or high fees for traditional remittance services. However, it's essential to be aware of the counterparty risk associated with centralized exchanges and the potential limitations of auto-deleveraging mechanisms and sustained negative funding. Evaluating the risks and advantages is crucial for individuals considering the use of Stablesats in their financial transactions.

 


I kindly invite you to share your thoughts in the comments section regarding what you enjoyed or found lacking in this piece. As a novice writer, I highly value any constructive criticism that can help me improve my skills and deliver better content in the future. Your feedback is greatly appreciated.

Thank you all.

 

 

 

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⚡ Daniela ⚡
⚡ Daniela ⚡

As a passionate writer with a keen interest in exploring innovative technologies, I discovered the captivating world of Bitcoin. Here to write my thoughts.


Me and Bitcoin
Me and Bitcoin

This blog focuses exclusively on Bitcoin, covering various aspects related to the cryptocurrency. It explores Bitcoin's history, its economic principles, and its potential implications in the financial world. The blog also delves into the potential impact of Bitcoin adoption on economics, politics, and society as a whole.

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