The emergence of stablecoins and the hurdles for Bitcoin
A prospective answer to this issue lies in the concept of synthetic USD, which has been gaining traction within the Bitcoin circle. The notion of synthetic dollars is not novel—Arthur Hayes, co-founder of BitMEX, initially introduced the idea back in 2015. His strategy involved utilising futures contracts to create a synthetic US dollar, allowing traders to guard against Bitcoin’s volatility without needing to liquidate their Bitcoin assets. Although this method did not see widespread uptake initially, it has since carved out a niche among traders aiming to shield their investments without transitioning to fiat.
Another method of crafting synthetic USD involves utilising stable channels on the Lightning Network. This idea, advocated by Bitcoin developer Tony Klaus, allows two parties to create a shared Bitcoin balance that can be adjusted in real-time to maintain a consistent value. By exploiting the rapid settlement features of the Lightning Network, stable channels enable users to mitigate their Bitcoin exposure without depending on centralised exchanges or third-party intermediaries.
However, this arrangement brings about a significant compromise. By utilising Stablesats or similar services, users essentially hand over control of their assets to the wallet operator. The operator must appropriately manage the hedging procedure and uphold the necessary contracts to sustain the synthetic peg. This introduces a level of trust and centralisation that some Bitcoin purists may find troubling, conflicting with the ethos of self-custody and decentralisation that underpin Bitcoin’s foundation.
Essentially, a synthetic USD is produced when two entities engage in a contract to speculate on Bitcoin’s price movement. By adopting opposing positions in a futures agreement, they can effectively secure a dollar-equivalent valuation without directly handling actual US dollars. This permits Bitcoin holders to mitigate against volatility while retaining exposure to Bitcoin, which is particularly appealing for those confident in Bitcoin’s long-term potential but seeking to sidestep short-term price fluctuations.
Investigating synthetic USD and stable channels
Despite these risks, stable channels provide a promising avenue for those wishing to guard against Bitcoin’s volatility without relying on centralised exchanges or third-party facilitators. In Australia, where the Lightning Network has been gaining favour among Bitcoin fans, stable channels could offer a decentralised alternative to conventional stablecoins, empowering users to retain control over their assets while still reaping the benefits of price stability.
While this strategy offers a more decentralised alternative compared to synthetic USD solutions like Stablesats, it also comes with its own challenges. Stability providers, who take on the risk of Bitcoin’s price changes, are exposed to significant downside if Bitcoin’s price drops sharply. Additionally, if the reserves of the stability provider are depleted, the stability receiver may find it impossible to maintain their peg, making them vulnerable to volatility.
More recently, platforms like Blink Wallet have embraced this concept via the Stablesats protocol. Stablesats enables users to link a portion of their Bitcoin balance to a fiat currency, such as the US dollar, without converting it into conventional currency. In this framework, the wallet operator assumes the role of a “dealer” by hedging the user’s pegged balance through futures contracts on centralised exchanges. The operator then monitors the respective liabilities, ensuring that the user’s pegged balance maintains its value in relation to the selected currency.
In Australia, where cryptocurrency adoption has been progressively on the rise, stablecoins like Tether (USDT) and USD Coin (USDC) have gained traction among both traders and enterprises. Their allure resides in their capacity to provide a reliable store of value in a marketplace infamous for its fluctuations. For vendors, stablecoins offer a means to accept crypto payments without the peril of abrupt price movements, rendering them a compelling choice for everyday transactions.
Nonetheless, this prevalence of stablecoins poses a dilemma for Bitcoin. As the largest digital asset globally, Bitcoin was initially conceived as a decentralised substitute for conventional financial frameworks, liberated from the oversight of central banks and governmental bodies. Yet, the ascent of stablecoins—many of which are supported by traditional fiat currencies like the US dollar—seems to counter this objective. Instead of steering clear of fiat, the crypto payments arena seems to be doubling down on it, with stablecoins bolstering the very systems Bitcoin sought to circumvent.
Stablecoins have swiftly dominated the crypto payments landscape, spurred by an increasing appetite for stable currency alternatives, notably US dollars. This influx has left numerous Bitcoin supporters confronting the fact that these dollar-linked assets may fortify the very system Bitcoin aimed to overturn—the supremacy of the US dollar. For many within the Bitcoin ecosystem, this transition appears regressive, as stablecoins seem to favour predictability over the decentralisation and financial autonomy that Bitcoin proponents have consistently promoted.
In Australia, where self-custody and decentralisation are held in high regard by the local crypto community, this trade-off could present an issue. While synthetic USD solutions like Stablesats provide a hedge against volatility, they also necessitate that users place their trust in a third party with their funds—something that many Australian Bitcoin enthusiasts may hesitate to do. Nevertheless, for those who value stability over full control, synthetic USD might present a viable substitute for traditional stablecoins.
For Bitcoin advocates, this creates a conundrum. How can they sustain Bitcoin’s foundational principles of decentralisation and financial liberty in a marketplace that increasingly leans towards stability and fiat-pegged assets? This challenge is particularly pronounced in Australia, where the regulatory landscape surrounding cryptocurrency is continuously shaping, and the demand for dependable, stable payment avenues remains high. As stablecoins forge ahead, the position of Bitcoin within the payments sector is under scrutiny, prompting many to question whether it can still hold its ground in a market that prioritises stability over autonomy.
Source: bitcoinmagazine.com
In a stable channel, one participant acts as the “stability provider,” assuming the risk of Bitcoin’s price volatility, while the other party—the “stability receiver”—locks in a dollar-equivalent value. As Bitcoin’s price fluctuates, the balance within the channel is routinely adjusted, with sats shifting between both parties to preserve the agreed distribution. This format allows the stability receiver to effectively link their Bitcoin to a fiat currency, such as the US dollar, without converting it to actual fiat.
