Galoy Inc. is an open-source Bitcoin banking infrastructure company behind the development of El Salvador’s Bitcoin wallet. In a recent press release, Galoy announced that it is now adding Bitcoin-backed synthetic U.S. dollars as one of its features while also successfully raising $4 million in funding.
Known as “Stablesats,” is a completely new way for using U.S. dollars on Bitcoin. While representing a U.S. dollar on the Bitcoin network, there is no need for creating a new token.
Stablesats offers a stable dollar backed by Bitcoin because of inverse perpetual swaps.
The wallet will pledge a user’s Bitcoin as collateral to a centralized exchange like OKX. The exchange will then purchase derivatives contracts (inverse perpetual swaps) as a hedge to the BTC that is pledged.
An example of this would be if a user wants to convert 1 BTC within their Stablesats-enabled Lightning wallet into U.S. dollars. An equivalent amount of inverse perpetual swap contracts must then be purchased in order to pledge that 1 BTC. If the price of BTC is $20,000, then the holder receives 20,000 contracts worth $1 each.
However, if the price of BTC rises to $40,000, the user would make an unrealized loss of $20,000, since they are still holding $20,000 worth of contracts. This would mean that the holder now has 0.5 BTC worth of contracts rather than 1 BTC.
The same works the other way as well if the price falls to $10,000. The user will then have an unrealized gain of $10,000 and 2 BTC (or $20,000) worth of contracts.
By using this mechanism, Galoy is able to “stabilize” the user’s Bitcoin in a U.S. dollar-denominated account. It is important to remember that a user’s dollar balance would be transacted on the Bitcoin network and not within a traditional banking system.
Galoy’s CEO Nicolas Burtey states that:
With Stablesats-enabled Lightning wallets, users are able to send from, receive to and hold money in a USD account in addition to their default BTC account…While the dollar value of their BTC account fluctuates, $1 in their USD account remains $1 regardless of the Bitcoin exchange rate.
Galoy also raised $4 million thanks to companies such as Hivemind Ventures, Valor Equity Partners, Timechain, El Zonte Capital, and Kindsway Capital.
All of this capital is expected to be deployed to further the development of Galoy’s features, such as Stablesats itself. Funding will also be used for their API and an enterprise-ready Lightning gateway that provides organizations access to Lightning payments.