Category: Lightning Network

Bitcoin’s volatility is the most frequently cited criticism of El Salvador’s adoption of bitcoin as legal tender. To address this legitimate concern, Bitcoin Beach wallet developer Galoy has released a new feature called “Stablesats”, enabling users to send synthetic US dollars over the Lightning Network.

Game-Changer for Developing Nations

Developing nations are often argued to be those that stand to benefit most from bitcoin adoption. The harsh reality, however, is that the asset’s volatility presents a material obstruction to adoption as a medium of exchange, simply because the majority of potential users don’t have the financial legroom to withstand its unpredictable price moves.

In response, Galoy has created “Stablesats” to enable users to save in BTC and spend in USD, all through the Lightning Network:

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.

Nicolas Burtey, chief executive officer, Galoy

Importantly, what makes it different from other stablecoins such as Tether (USDT) is that there is no token; it is simply bitcoin stabilised into a dollar balance:

See how users send and receive to the USD Account and convert sats to (synthetic) USD. pic.twitter.com/TzBB8SyABc

— Galoy (@GaloyMoney) August 3, 2022

The company also announced that it had raised US$4 million to develop GaloyMoney, an open-source Bitcoin banking platform, a versatile application programming interface (API) and an enterprise-ready Lightning gateway offering organisations access to Lightning payments.

Mechanics and Risks

Stablesats is able to offer a US dollar balance underpinned by bitcoin through a mechanism know as inverse perpetual swaps. It works by pledging the user’s bitcoin as collateral to an exchange to purchase derivative contracts that are used to hedge the BTC underlying the US dollar value.

Inverse perpetual swaps are denominated in fiat, with any gain or profit priced in bitcoin. Accordingly, the user’s dollar account incurs unrealised BTC gains if the bitcoin price drops, or unrealised BTC losses if the bitcoin price increases. At a high-level, this is what enables Stablesats to retain a stable dollar balance without interfacing with the traditional banking sector.

Galoy provides a basic video to outline the mechanics behind its synthetic USD:

The current Stablesats implementation uses the bitcoin derivatives market, specifically an instrument called perpetual inverse swap to create synthetic USD.

The video below outlines the basic mechanics of this strategy. pic.twitter.com/IZ7aqGy1u6

— Galoy (@GaloyMoney) August 3, 2022

From a risk perspective, the main concern is naturally a counterparty risk, since the derivatives trade necessarily takes place with a centralised exchange, which also retains custody of the bitcoin. In recent times, it’s become all too familiar to see exchanges hacked, or otherwise freeze user withdrawals.

Assuming the risks can be properly contained, this exciting innovation by Galoy has the possibility to facilitate widespread bitcoin adoption. Simple, user-friendly consumer applications drove the adoption of mobile applications, and there’s no reason to believe it will be different in the case of bitcoin.

In a report released this week, global investment bank giant Morgan Stanley argued that bitcoin had reached a point where it is “more practical” for small payments than a debit card:

1/ New @MorganStanley report released today focuses on the prospects of using the Lightning Network for retail purchases and on “the long-term transition towards payments and settlements using digital and cryptocurrencies instead of fiat currencies like the US dollar” ⚡️

— Alex Gladstein 🌋 ⚡ (@gladstein) April 21, 2022

In outlining the reasons for its bold assertion, the report notes that bitcoin is progressing towards becoming a medium of exchange following an integration between Lightning Network-enabled Strike and BlackHawk Network, the world’s largest point-of-sale payment processor.

The integration, announced by Strike chief executive Jack Mallers at the 2022 Bitcoin Conference, allows consumers to pay in bitcoin using the Bitcoin network, and for merchants to receive US dollars without having to touch the asset.

Put differently, if a consumer pays in bitcoin, the merchant can elect to receive either US dollars or bitcoin in real time with instant final settlement at virtually zero cost.

By contrast, traditional payment processors such as Visa or Mastercard charge merchants a transaction fee of 1-3 percent, in addition to imposing a 45-60 day settlement period in which charge-backs are possible.

Lightning Network ‘More Practical’

Morgan Stanley noted that the “evolution of bitcoin usage as a medium of payment” will likely be driven by the ability of consumers to choose whether to pay for goods and services in physical locations with bitcoin through the Lightning Network.

This was largely because sending small payments was “more practical” with Lightning than debit cards, as Bitcoin’s layer-two solution can route transactions with next to zero fees. Furthermore, the banking giant expects that low transaction costs and merchant adoption will likely lead to less volatility in the asset over time.

In the US, where 85 percent of retail sales are still done in brick and mortar stores, this innovation is a potential game-changer for traditional retailers – a “superior payments experience”, as Jack Mallers would put it.

Many Twitter users found it astonishing that a Wall Street giant was effectively admitting that the Lightning Network was an improvement on the existing payments infrastructure:

doesn't get better than a Morgan Stanley reporting on the superiority of the lightning network https://t.co/Lti915onAH

— Nicolas Burtey 🇸🇻⚡️ (@nicolasburtey) April 21, 2022

It’s been more than a year since macro superstar Lyn Alden commented that people were “sleeping on the potential importance of Lightning”:

I think people are sleeping on the potential importance of the lightning network over the next 5 years for the payments industry.

As BTC base layer fees climb, lightning becomes more important, apps/utility are starting to reach a critical mass, and liquidity can grow.

— Lyn Alden (@LynAldenContact) January 14, 2021

Based on available evidence, it appears that Alden’s comments were not only prescient but are playing out quicker than she could have anticipated.

A recent report by Arcane Research suggests that Bitcoin’s layer two micropayments rail, the Lightning Network, is hitting an inflection point and is at the cusp of bringing Bitcoin to billions by solving real world problems. Between August and September, personal transfers and merchant payments went up 122 percent.

Instantaneous P2P Bitcoin Payments

The Lightning Network is a layer-2 solution built on top of Bitcoin designed to overcome the intentional design limitations of the Bitcoin mainnet. Bitcoin prioritises decentralisation and security over speed, and Lightning is the solution that enables bitcoin micropayments at near-instantaneous speed. In some ways, it can be likened to Visa, which is the centralised, high-speed payment rail sitting on top of the traditional banking sector.

Lightning Soars in 2021

Public statistics such as total channel capacity and the number of nodes show that the Lightning Network is growing rapidly.

In particular, growth in 2021 has been exceptional.

Public Lightning Network capacity broke 1,000 BTC on Aug 14, 2020.

304 days later, it broke 1,500 BTC
42 days later, it broke 2,000 BTC
52 days later, it broke 2,500 BTC
17 days later, it broke 3,000 BTC

I’m seeing a pattern here…

🚀 pic.twitter.com/o0gjOtt7WL

— Kevin Rooke (@kerooke) October 4, 2021

According to Arcane Research, much of the recent network growth can be attributed to bitcoin being rolled out as legal tender in El Salvador, in addition to Twitter launching its bitcoin tips functionality.

Future Possibilities

Looking forward, Arcane Research highlighted how Lightning could be used to “stream money” and revolutionise three main sectors – gaming, video and audio.

The possibility of streaming money can disrupt the business models we know today. Why shouldn’t you be able to pay per minute when you listen to songs on Spotify or per second when you watch a movie on Netflix? Why should you give away your credit card details to a content service if you could pay directly from your Lightning wallet without giving away any information about yourself?

Arcane Research

Aside from the benefits of being cheaper, offering greater privacy and less reliance on third parties, the market potential is enormous, as illustrated in the image below:

Conservative modelling based on the figures above suggests there could be upwards of 700 million users on the Lightning Network by 2030.

 

We now use the conservative estimate of one hour used per day on these services and that, on average, 25 percent of this time is spent on services with Lightning payments. With streaming of Lightning payments through these services, we assume one microtransaction per second. Our estimate then equals no less than 364 trillion Lightning transactions per year.

Arcane Research

If these figures prove to be correct, by 2030 there may be as many as one trillion micropayments a day on the Lightning Network. No doubt, unexpected use cases are likely to arise between now and then, suggesting that one shouldn’t overly rely on these projections. Still, the technology and possibilities are exciting enough to warrant speculation.