Stablecoins have dominated the crypto payments market so far, but some bitcoin developers believe a proposal exists that could offer a legitimate alternative.
Seven years ago, Dorier, a longtime developer, aimed to democratize bitcoin payment processing by launching a free and open-source alternative to the then-dominant BitPay: BTCPay Server. Today, despite the project’s strong grassroots success among bitcoin enthusiasts and online merchants, the cryptocurrency payments landscape has evolved dramatically since Dorier first began his journey. The rise of stablecoins has quickly dominated the sector, pushing bitcoin – the world’s largest digital asset – to the sidelines in the payment processing sector.
Driven by growing demand for stablecoin alternatives, particularly the US dollar, stablecoins have rapidly taken over the cryptocurrency payments market. This surge has left many Bitcoin enthusiasts struggling to deal with the reality that these dollar-pegged assets could reinforce the very system that Bitcoin was designed to challenge – the hegemony of the US dollar. As stablecoins continue to gain currency, Bitcoin promoters find themselves at a crossroads, questioning how to preserve Bitcoin’s vision of financial sovereignty in a market increasingly favoring stability over decentralization.
A new proposal emerging from the Lightning ecosystem has caught Dorier’s attention, and the veteran developer believes it could overcome this hurdle. Addressing a packed audience at the recent BTCPay Server annual community gathering in Riga, Dorier introduced the concept of “fiatless fiat” — a bitcoin-native alternative to treasury-backed stablecoins like Tether and USDC.
Synthetic USD
In 2015, BitMEX co-founder and then-CEO Arthur Hayes explained in an article blog post How to use futures contracts to create synthetic US dollars. Although the idea never gained widespread popularity, it became a popular strategy among traders who wanted to hedge against bitcoin volatility without selling their underlying bitcoin positions.
For readers less familiar with financial 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 a position opposite their Bitcoin holdings in a futures contract, traders can protect themselves from price fluctuations without having to sell their Bitcoin or rely on a US dollar instrument.
More recently, services such as the Blink wallet have adopted this concept through the StableAssets protocol. StableAssets allow users to peg a portion of their Bitcoin balance to a fiat currency, such as the US dollar, without converting it into a traditional currency. In this model, the wallet operator acts as a “dealer” by hedging the user’s pegged balance using futures contracts on centralized exchanges. The operator then tracks the associated liabilities, ensuring that the user’s pegged balance maintains its value relative to the chosen currency. (More detailed information on the mechanism can be found on StableAssets Website,
Obviously, this setup comes with a significant trade-off. By using Stablecoins or similar services, users effectively hand over custody of their funds to the wallet operator. The operator must then manage the hedging process and maintain the contracts needed to preserve the synthetic peg.
Static channel and virtual balance
In Riga, Dorier explained that a similar effect could be achieved between two parties using a different type of contract: lightning channels. This idea follows recent work by Bitcoin developer Tony Klaus on what he called lightning channels. Stable Channel,
Rather than relying on centralised exchanges, stable channels connect users wishing to hedge their Bitcoin risk with ‘stability providers’ on the Lightning Network. A stable channel essentially acts as a shared Bitcoin balance, where funds are allocated according to the desired risk of the ‘stability receiver’. Leveraging Lightning’s rapid settlement capabilities, the balance can be constantly adjusted in response to price fluctuations, with sats being moved to either side of the channel as needed to maintain the agreed distribution.
Here’s a simple chart to show how the fund split might look over time:
Clearly, there are considerable risks involved in this strategy. As explained above, stability providers taking leveraged long positions on the exchange are exposed to large downside price volatility. Furthermore, once these stability providers’ reserves are exhausted, users aiming to lock up their dollar-denominated value will no longer be able to absorb further price declines. While these types of sharp declines are becoming increasingly rare, Bitcoin’s volatility is always unpredictable and it is possible that stability providers may try to hedge their risks in different ways.
On the other hand, the structure of this structure allows the risk of participants within the channel to be linked to any asset. Provided both parties can freely agree on the price, this could facilitate the creation of virtual balances on Lightning, allowing users to gain synthetic exposure to many traditional portfolio instruments such as stocks and commodities, provided these assets maintain sufficient liquidity. Researcher Dan Robinson originally proposed An expanded version of this idea is called the Rainbow Network.
The good, the bad, the ugly
The concept of “fiatless fiat” and stablecoins is attractive because of its simplicity. Unlike algorithmic stablecoins that rely on complex and volatile economic models involving external assets, the Bitcoin dollar, as envisioned by Dorier and others, is purely the result of a voluntary, self-custodial agreement between two parties.
This distinction is important. Stablecoins typically involve a centralized governing body overseeing a global network, while a stable channel is a local arrangement where the risk is limited to the involved participants. Interestingly, it doesn’t even have to rely on network effects: one user can choose to receive a USD-equivalent payment from another, and later transfer the stability contract to another provider at their discretion. Stability provision has the potential to become a core service from various Lightning service provider type entities competing and offering different rates.
This focus on local interactions helps reduce systemic risk and fosters a more conducive environment for innovation, which echoes the core idea end-to-end principle Of the internet.
The protocol allows for a range of customized implementations and use cases for different user groups, while both the stablecoin provider and receiver retain full control over their underlying bitcoin. No third party – not even an oracle – can seize a user’s funds. Although some existing stablecoins offer some degree of self-preservation, they remain vulnerable to censorship, with operators able to blacklist addresses and effectively render the associated funds worthless.
Unfortunately, this approach also involves many of the challenges and limitations inherent in self-custodial systems. Building on Lightning and payment channels introduces online requirements, which have been cited as barriers to widespread adoption of these technologies. Since stablecoin channels monitor price fluctuations through regular and frequent settlement, any party going offline could disrupt the maintenance of the peg, leading to potential instability. Article Elaborating further on his thoughts on the idea, Dorier considered various potential solutions to a party going offline, primarily emphasizing that re-establishing the peg of funds already allocated to a channel “is a cheap operation.”
Another potentially viable solution to the complex management of the peg involves the creation of an eCash Mint, which would issue stablecoins to users and handle the channel relationship with the stability provider. This approach already exists in the real world execution And it may be adopted more quickly due to its improved user experience. The obvious compromise is that custodial risks are re-introduced into a system designed to eliminate them. Still, supporters of eCash argue that its strong privacy and censorship-resistant properties make it a vastly superior alternative to popular stablecoins, which are prone to surveillance and control.
Furthermore, the complexity of the Lightning protocol and the inherent security challenges posed by placing funds at risk in “hot” channels will need careful consideration when scaling up operations.
Perhaps the biggest challenge to this technology is the dynamic nature of the peg, which can attract non-cooperative actors seeking to exploit short-term, irregular price movements. Referred to as the “free-options problem,” a malicious participant can stop honoring the peg, leaving their counterparty exposed to volatility and the burden of reestablishing the peg with another provider. Post On the developer-focused Delving Bitcoin forum, stable channel developer Tony Klaus outlined several strategies for mitigating this problem, as well as potential safeguards against this type of opportunistic behavior.
While no silver bullet exists, the emergence of a market for stability providers could potentially promote reputable counterparties whose long-term business interests will outweigh the short-term benefits of defrauding users. As competition increases, these providers will have stronger incentives to maintain trust and reliability, creating a more robust and trustworthy ecosystem for users seeking stability in their transactions.
Concluding his presentation in Riga, Dorier acknowledged the novelty of the experiment, but encouraged attendees to also consider its lucrative potential.
“It’s very far-fetched, it’s a new idea. It’s a new type of money. You need new business models. You need new protocols and new infrastructure. It’s more long-term, more visionary.”
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