Volatility… an ugly word, a word we dislike. Or do we? We prefer to think of volatility as more of an indicator rather than a bad word. Let us explain… where there is volatility, there is potential. When we look out over the crypto landscape, that’s what we see… a rumbling and a shaking that will raise some mountains and flatten others. May the best man win!

So, what’s our point? Well, this week we’d like to point out one of these potential rising mountains in the crypto space: synthetic dollars, which are being touted by some as viable stablecoin alternatives. Nice… an alternative to the Bitcoin alternative. See what we mean? Where there is a need, a hero will rise. Watching this struggle is one of our favorite parts of being involved in cryptocurrencies.

What It Is

First, let’s jog our memories a bit on stablecoins. Since elder cryptos like Bitcoin inherently have a high level of volatility, stablecoins have been created in an attempt to rectify this problem. Since stablecoins are fiat-pegged currencies, the thought here was that stablecoins could offer a stable store of value without having to exit to fiat currency. Not bad, but this too has its problems, namely collateralization.

See, as it turns out, sometimes stablecoins (think Terra Luna here) can have serious issues with inadequate collateralization. That’s where a synthetic dollar steps in to rectify, hypothetically. A perfect example is Galoy’s Stablesats, which is a Bitcoin-backed synthetic dollar… and it operates a little differently than stablecoins. With Galoy’s product, derivatives contracts placed to create Stablesats are fully collateralized with Bitcoin.

This means that, for every dollar liability, there is an equivalent dollar of value in Bitcoin. Galoy’s Stablesats demonstrates why some have high hopes that products like synthetic dollars stand a real chance at long-term success in the crypto space. Some are so confident that they are introducing synthetic dollars into their financial systems, like in El Salvador, where Galoy’s open-source banking platform powers the Bitcoin Beach Wallet.

The country announced the launch of Stablesats in August, which allows citizens with Bitcoin lightning wallets to hold, send, and receive USD without stablecoins or fiat currency by using derivatives contracts to create bitcoin-backed synthetic dollars pegged to U.S. dollar. This measure is meant to help fill remaining gaps for the still unbanked who find it difficult to use Bitcoin due to the drastic fluctuations its prone to on a regular basis.

The UK Moves To Synthetic Assets

When discussing “synthetic dollars”, the “synthetic” part of the name is referring to synthetic assets, which is simply a mix of assets that have the same value as another asset. Usually, they combine various derivative products, such as futures or options, to simulate an underlying asset, such as indexes, currencies, stocks, or bonds. In the crypto space, synthetic assets are attempting to offer users exposure to a variety of different assets without needing to hold the underlying asset, such as fiat currencies.

So far, it’s all sounding pretty amazing… synthetic assets offer crypto holders the ability to trade traditional assets and derivatives without leaving a digital ecosystem. Paired with decentralization, which opens the world of the global derivatives market up to just about anyone with a device, these synthetic dollars can be powerful investment vehicles. Traditionally, the derivatives market was largely reserved for institutional investors.

El Salvador isn’t the only place experimenting with synthetic digital assets… the UK has been testing a synthetic CBDC, which is being undertaken by Government funded Millicent. Millicent is a UK startup that received a grant from UK Research and Innovation for the development if a digital financial infrastructure. A few months ago, the first trials of its Full-Reserve Digital Currency (FRDC) within a sandbox environment were completed.

The FRDC is a distributed ledger-based currency where the currency’s underpinning funds are held in a ring-fenced central bank account… aimed at addressing quality and liquidity concerns around stablecoins. Much like El Salvador, the UK is particularly concerned with banking the unbanked, making financial inclusion a key target of the technology. The synthetic CBDC allows for the smallest of transactions (as often the unbanked are capital insecure) that are settled nearly instantly with nominal fees.

Since banking the unbanked and serving all members of the community financially are the goals, holding the digital currency’s backing funds in a central bank account should drastically reduce any risks of a run on the token… and that’s a big deal when we’re talking about persons with limited capital to work with. These folks aren’t holding onto extra funds they can easily use to recover should the worst happen. This synthetic CBDC should, ideally, be accessible to as many people as possible.

So… we’ve learned about yet another amazing possibility in the crypto space. All the possible applications of the technology, especially for the betterment of underserved persons, is one of the most exciting aspects of the space. We hope we’ve managed to transfer a bit of that optimism to you as well. Let the mountains rise and fall, and we’ll be watching it all and bringing you the news. Come back next week, we’ll see you then!