Galoy Brings US Dollars to Bitcoin – Bitcoin Magazine
Galoy Inc., the team behind the wallet of El Salvador’s Bitcoin circular economy Bitcoin Beach, is adding a new feature to that infrastructure: bitcoin-backed synthetic US dollars.
Often seen as a need among residents of developing countries, a representation of the US dollar backed by BTC promises to enable everyone to hedge against the daily volatility of bitcoin. While it can be argued that bitcoin is the better currency and can be used as such in day-to-day transactions, some see the value in saving in BTC and spending in USD – and Galoy’s new product feature, Stack Rate, allows users to do that on Bitcoin.
“With Stacksats-enabled Lightning wallets, users can send from, receive to, and hold funds in a USD account in addition to their standard BTC account,” Nicolas Burtey, CEO of Galoy, said in a statement sent to Bitcoin Magazine. “While the dollar value of their BTC account fluctuates, $1 in the USD account remains $1 regardless of the bitcoin exchange rate.”
In particular, Galoy’s implementation differs from a regular “stablecoin” like Tether’s USDT in that there is no token – it’s just bitcoin stabilized to a dollar balance.
Galoy also shared that they had raised $4 million to further develop GaloyMoney – its open source Bitcoin banking platform, a versatile API, and an enterprise-ready Lightning gateway that gives organizations access to Lightning payments. The round was led by Hivemind Ventures, with participation from Valor Equity Partners, Timechain, El Zonte Capital, Kingsway Capital, Trammell Venture Partners and AlphaPoint.
“GaloyMoney’s open source core banking platform includes a secure backend API, mobile wallets, point-of-sale apps, a ledger and administrative controls,” the company said in a statement.
How does Stacking Rate work?
Stackrate is able to offer a stable dollar balance backed by bitcoin through inverse perpetual swaps. The wallet pledges the user’s bitcoin as collateral to a centralized exchange – OKX in Galoy’s case –– to buy these derivative contracts, which are used to secure the BTC backing the dollar account in the wallet.
Inverse perpetual swaps are denominated in fiat currency, but any gain or profit, as well as the margin (collateral), is priced in bitcoin. As such, the user’s dollar account incurs unrealized BTC gains if the bitcoin price falls or unrealized BTC losses if the bitcoin price rises –– while maintaining a stable dollar balance.
Here’s a simplified example: assuming the user has 1 BTC on their Stackrate-enabled Lightning wallet and wants to convert it to a USD balance, that 1 BTC will be pledged to buy the corresponding amount of inverse perpetual swaps . Assuming a bitcoin price of $20,000 and a contract value of $1, the user’s synthetic $20,000 balance would represent 20,000 contracts of $1 each and 1 BTC as collateral.
If the bitcoin price climbed to $40,000, the user would still have $20,000 worth of contracts – as their dollar value does not change – but now with $20,000 worth only 0.5 BTC, that would mean an unrealized loss of half a bitcoin. Conversely, if the bitcoin price fell to $10,000, the user would again still have $20,000 worth of contracts – but now the amount would be worth 2 BTC, giving an unrealized gain of 1 BTC.
Through this mechanism, Galoy is able to “stabilize” the user’s bitcoin in a US dollar account. However, it is important to note that this dollar balance will be used to trade on the Bitcoin network; Stack rate does not interface with the traditional banking system.
What are the risks?
The first –– and perhaps the biggest –– risk involved in Galoy’s implementation is counterparty risk. As a trade takes place in the background on behalf of the user with a centralized exchange, which also takes care of the user’s bitcoin security, the perceived risk of losing funds due to external issues is real.
As seen in recent events, exchanges and lenders facing liquidity problems resulting in the locking of users’ funds are not uncommon. Centralized custody issues date back to the infamous Mt. Gox exchange, and therefore users should weigh the pros and cons of embarking on such arrangements in advance.
Other risks include auto-deleveraging (ADL) and financing going negative over an extended period. ADL can take place under volatile market conditions where liquidations trigger positions in surplus which are closed –– which leads to an under-hedging situation in connection with the Stack rate. Funding, on the other hand, determines market bias; if funding is negative, shorts pay longs. This means that funding that remains negative over an extended period can eat away at the shorts – which could damage the implementation of Stack Rate.
– Thanks to Dylan LeClair for feedback and information.
