Stablecoins have so far dominated the crypto payments market, but some Bitcoin developers believe there is a proposal that could offer a legitimate alternative.
Seven years ago, Dorier, a veteran developer, set out to democratize Bitcoin payment processing by launching a free, open-source alternative to the then-dominant BitPay software: BTCPay Server. Today, while the project has enjoyed strong success among Bitcoin enthusiasts and online merchants, the cryptocurrency payments landscape has evolved significantly since Dorier first began his journey. The rapid rise of stablecoins has dominated the space, pushing Bitcoin—the world’s largest digital asset—to the sidelines of the payment processing arena.
Driven by the growing demand for stablecoin options, particularly the US dollar, stablecoins have quickly taken over the crypto payments market. This surge has left many Bitcoin enthusiasts struggling to come to terms with the fact that these dollar-pegged assets could further bolster the very system Bitcoin was designed to challenge — the dominance of the US dollar. As stablecoins continue to gain momentum, Bitcoin advocates find themselves at a crossroads, wondering how to maintain Bitcoin’s vision of financial sovereignty in a market increasingly moving toward stability over decentralization.
A new proposal emerging from the Lightning system has caught Dorier’s attention, and the veteran developer believes it could address this hurdle. Speaking to a packed audience at the recent annual BTCPay Server community meetup in Riga, Dorier introduced the concept of “fiat currency without fiat” — a native Bitcoin alternative to treasury-backed stablecoins like Tether and USDC.
artificial us dollar
In 2015, BitMEX co-founder and then-CEO Arthur Hayes explained in Blog post How to use futures contracts to create synthetic US dollars. Although this idea has not gained widespread popularity, it has become a popular strategy among traders looking to hedge against Bitcoin volatility without having to sell their underlying Bitcoin positions.
For readers less familiar with derivatives, a synthetic dollar (or synthetic position) can be created by two parties entering into a contract to speculate on the price movement of an underlying asset — in this case, Bitcoin. Essentially, by taking an opposite position to their Bitcoin holdings in a futures contract, traders can protect themselves from price fluctuations without having to sell Bitcoin or rely on the US dollar instrument.
More recently, services like Blink Wallet have embraced this concept with the Stablesats protocol. Stablesats allow users to peg a portion of their Bitcoin balance to a fiat currency, such as the US dollar, without converting it to traditional currency. In this model, the wallet operator acts as a “merchant” by hedging the user’s pegged balance using futures contracts on centralized exchanges. The operator then tracks the relevant commitments, ensuring that the user’s pegged balance maintains its value relative to the chosen currency. (More detailed information about the mechanism can be found on Stablesats.) Website.)
Obviously, this setup comes with a significant trade-off. By using stablesats or similar services, users are effectively giving up custody of their funds to the wallet operator. The operator must then manage the hedging process and maintain the contracts necessary to maintain the artificial peg.
Stable channels and virtual balances
In Riga, Dorier noted that a similar effect could be achieved between two parties using a different type of contract: Lightning channels. The idea follows recent work by Bitcoin developer Tony Klaus on a mechanism called Stable channels.
Instead of relying on centralized exchanges, stable channels connect users seeking to hedge their Bitcoin exposure with “stability providers” via the Lightning Network. A stable channel essentially acts as a shared balance for Bitcoin, with funds allocated according to desired exposure to the “stable future.” By leveraging Lightning’s fast settlement capabilities, the balance can be continually adjusted in response to price fluctuations, with the stable channel shifting to either side of the channel as needed to maintain the agreed-upon distribution.
Here’s a simple chart to illustrate what the fund’s breakdown might look like over time:
This strategy clearly carries significant risks. As noted above, stability providers who take long-term leveraged positions on the exchange are exposed to significant price swings. Furthermore, once these stability providers’ reserves are exhausted, users who aim to secure their dollar-denominated value will be unable to absorb further price declines. While these types of rapid declines are becoming increasingly rare, Bitcoin volatility is always unpredictable and it is reasonable for stability providers to look to hedge their risks in various ways.
On the other hand, the structure of this construction allows participants to gain exposure within the channel by linking to any asset. Provided that both parties independently agree on a price, this could facilitate the creation of virtual balances on Lightning, enabling users to gain synthetic exposure to a variety of traditional portfolio instruments, such as stocks and commodities, assuming those assets maintain sufficient liquidity. Researcher Dan Robinson Originally proposed An advanced version of this idea is called Rainbow Network.
Good, Evil and Ugly
The concept of “fiatless currencies” and stablecoins is compelling because of its simplicity. Unlike algorithmic stablecoins that rely on complex and unsustainable economic models involving external assets, Bitcoin Dollar, as envisioned by Dorier and others, is the pure result of a voluntary agreement between two parties.
This distinction is crucial. Stablecoins typically involve a central governing body overseeing a global network, whereas a stablecoin is a local arrangement where risk is contained to the participants involved. Interestingly, it doesn’t even have to rely on network effects: one user can choose to receive USD equivalent payments from another user, and then switch the stability contract to a different provider at their discretion. Providing stability has the potential to become a core service of different types of Lightning providers competing and offering different prices.
This focus on local interactions helps mitigate systemic risks and foster a more conducive environment for innovation, reflecting the original idea. Comprehensive principles From the internet.
The protocol allows for a range of applications and use cases, tailored to different user groups, while both the stablecoin provider and the receiver retain full control over their underlying Bitcoin. No third party – not even a fortune teller – can seize user funds. While some existing stablecoins offer a degree of self-custody, they are otherwise vulnerable to censorship, with operators able to blacklist addresses and render the funds associated with them effectively worthless.
Unfortunately, this approach also inherits many of the challenges and limitations inherent in self-custody systems. Building on Lightning and payment channels imposes online requirements, which have been cited as barriers to widespread adoption of these technologies. And because stable channels monitor price fluctuations through regular and frequent settlements, any party that goes offline can disrupt the maintenance of the link, leading to potential instability. condition In more detail about his thoughts on this idea, Dorrier offers various possible solutions for an off-grid party, essentially insisting that re-establishing the linkage of funds already allocated to a channel is a “cheap operation.”
Another possible viable solution to manage this complex interconnection is to create an electronic mint, which issues stablecoins to users and manages the relationship between the channel and the stability provider. This approach has already been implemented in the real world. Implementations This currency could see faster adoption due to the superior user experience it offers. The obvious trade-off here is reintroducing custody risk into a system designed to eliminate it. However, proponents of e-cash argue that its strong privacy and censorship-resistance properties make it a vastly superior alternative to popular stablecoins, which are vulnerable to surveillance and control.
Additionally, the complexity of the Lightning protocol and the inherent security challenges posed by keeping funds vulnerable in “hot” channels will require careful consideration when scaling operations.
Perhaps the most pressing challenge facing this technology is the dynamic nature of the peg, which can attract uncooperative actors seeking to exploit irregular price movements in the short term. Under what is referred to as the “free choice problem,” a malicious participant may stop honoring the peg, leaving counterparties exposed to volatility and the burden of re-establishing the peg with another provider. mail On the Delving Bitcoin developer forum, stable channel developer Tony Klaus outlines several strategies to mitigate this issue, and potentially provide safeguards against these types of opportunistic behaviors.
While there is no silver bullet, the emergence of a market for stability providers would foster respectable parties whose long-term commercial interests outweigh the short-term gains of defrauding users. As competition increases, these providers will have strong incentives to maintain trust and reliability, creating a more robust and reliable ecosystem for users seeking to stabilize their transactions.
At the end of his presentation in Riga, Dorier acknowledged the novelty of the experiment, but encouraged the audience to also consider its enticing potential.
“It’s a new and very far-fetched idea. It’s a new kind of money. You need new business models. You need new protocols and new infrastructure. It’s a much more long-term, much more forward-looking issue.”
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