There are already synthetic stablecoins on the #LightningNetwork today ⚡
A thread 🧵 on what they are, how they are created, and who uses them.
👇
The following is not investment advice, it's purely an educational overview. Do your own research.
A thread 🧵 on what they are, how they are created, and who uses them.
👇
The following is not investment advice, it's purely an educational overview. Do your own research.
What is a stablecoin?
A stablecoin is a cryptocurrency that aims to maintain 1:1 price parity with an external reference. USD stablecoins, for example, try to maintain the value near $1.
A stablecoin is a cryptocurrency that aims to maintain 1:1 price parity with an external reference. USD stablecoins, for example, try to maintain the value near $1.
Why do stablecoins matter?
Through their 1:1 peg, stablecoins are effectively low volatility cryptocurrencies that can be sent fast. They're especially useful for businesses or people with fiat-denominated costs or those who can't tolerate Bitcoin's volatility.
Through their 1:1 peg, stablecoins are effectively low volatility cryptocurrencies that can be sent fast. They're especially useful for businesses or people with fiat-denominated costs or those who can't tolerate Bitcoin's volatility.
So, who's bringing stablecoins to the Lightning Network?
@Synonym_to is working on bringing #tether onto the Lightning Network
There’s also @Liquid_BTC bringing liquid assets onto C-Lightning.
What native stablecoins are on LN now? None exist officially.
But synthetics do.
@Synonym_to is working on bringing #tether onto the Lightning Network
There’s also @Liquid_BTC bringing liquid assets onto C-Lightning.
What native stablecoins are on LN now? None exist officially.
But synthetics do.
Synthetic Stablecoins
Financial products that mimic another instrument without actually using it are synthetic.
One example of a synthetic is using BTC futures to represent $1 as much as possible w/o using actual dollars.
Financial products that mimic another instrument without actually using it are synthetic.
One example of a synthetic is using BTC futures to represent $1 as much as possible w/o using actual dollars.
On the #LightningNetwork, there are derivatives available on several Lightning-integrated exchanges such as @kollider_trade that can be used to create synthetic USD stablecoins.
But how exactly do you construct a synthetic stablecoin?
But how exactly do you construct a synthetic stablecoin?
In order to construct such a synthetic USD stablecoin, you need to “convert” your bitcoin to represent USD instead w/o selling it.
One way to do this is to short an inverse BTCUSD perpetual swap for the amount of USD you need hedged.
One way to do this is to short an inverse BTCUSD perpetual swap for the amount of USD you need hedged.
But before doing so, you should know that it's still synthetic and there are cases where the peg isn't always 1:1.
Two cases come to mind for us:
💸Funding
⏳Time Slippage
Two cases come to mind for us:
💸Funding
⏳Time Slippage
💸Funding
By shorting the perpetual, the position is likely to *earn* funding on average (sometimes you may pay funding). So, for each “$1” of the synthetic stablecoin you have, it might actually become worth slightly more or less than $1 over time due to the funding.
By shorting the perpetual, the position is likely to *earn* funding on average (sometimes you may pay funding). So, for each “$1” of the synthetic stablecoin you have, it might actually become worth slightly more or less than $1 over time due to the funding.
⏳Time Slippage Between Buying BTC and Hedging into the Perpetual Swap
If you think in USD, you might buy 1 BTC for $10k and then hedge it into an inverse perp. But if the price moves to $9.9k or $10.1k before the hedge, you are “unstable” by 1% of the $1 value.
If you think in USD, you might buy 1 BTC for $10k and then hedge it into an inverse perp. But if the price moves to $9.9k or $10.1k before the hedge, you are “unstable” by 1% of the $1 value.
Thankfully, with lightning, transfers between exchanges can be superfast, and you could probably avoid any time slippage.
Aside from Kollider, there are a few other exchanges connected to the #LightningNetwork now. See:
Aside from Kollider, there are a few other exchanges connected to the #LightningNetwork now. See:
https://twitter.com/kollider_trade/status/1490724060862500867
How do you create a synthetic stablecoin with only BTC?
You receive bitcoin payments, but need to keep $10k at the end of the month. You can take $10k worth of BTC (0.25 BTC if prices are currently $40k) and sell $10k of inverse perpetual swaps at 1x leverage.
You receive bitcoin payments, but need to keep $10k at the end of the month. You can take $10k worth of BTC (0.25 BTC if prices are currently $40k) and sell $10k of inverse perpetual swaps at 1x leverage.
You could go straight from your own LN node or wallet to short $10k on a lightning-enabled exchange such as Kollider.
When bitcoin is worth $40k, you’d need 0.25 BTC as margin for shorting $10k of BTCUSD inverse perp swaps at 1x leverage.
When bitcoin is worth $40k, you’d need 0.25 BTC as margin for shorting $10k of BTCUSD inverse perp swaps at 1x leverage.
When you want $10k back, go back to the exchange and close out your short $10K position. You should get back a BTC amount that is worth $10k (if BTC price has moved, this will be a different amount of sats from before). Sell the spot BTC for USD (e.g. on Bitfinex).
How Might It Work If You Have USD?
If you’re starting from USD and want a synthetic USD stablecoin on the #LightningNetwork, the steps above are the same, but you'll need to buy BTC first. Ideally, on a Lightning-connected exchange to reduce time slippage.
If you’re starting from USD and want a synthetic USD stablecoin on the #LightningNetwork, the steps above are the same, but you'll need to buy BTC first. Ideally, on a Lightning-connected exchange to reduce time slippage.
Who’s using synthetic stablecoins and why? 1/2
Standard Sats
devpost.com/software/stand…. @liber_liver is experimenting with synthetic stablecoins to allow for “hosted channels”, through which users can transact using a fiat value within a Lightning Channel that is backed by Sats.
Standard Sats
devpost.com/software/stand…. @liber_liver is experimenting with synthetic stablecoins to allow for “hosted channels”, through which users can transact using a fiat value within a Lightning Channel that is backed by Sats.
Who’s using synthetic stablecoins and why? 2/2
@GaloyMoney
Peg fiat values within their applications, using a similar trade to that above to allow USD exposure with Bitcoin rails.
@GaloyMoney
Peg fiat values within their applications, using a similar trade to that above to allow USD exposure with Bitcoin rails.
For another look at why synthetics are important, @nicolasburtey Of @GaloyMoney gives a great overview on the @stephanlivera podcast
stephanlivera.com/346
stephanlivera.com/346
It is entirely possible that the #LightningNetwork will have native stablecoins in the future, but synthetic stablecoins using #Bitcoin are already possible today.
Know anyone working on native or synthetic stablecoins on Lightning⚡️? We'd love to know.
Know anyone working on native or synthetic stablecoins on Lightning⚡️? We'd love to know.
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