SLP346 Nicolas Burtey – Synthetic USD & Bitcoin Banking

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Nicolas Burtey of Galoy Money rejoins me on the show for a fascinating discussion about doing synthetic USD as a building block to bringing it to the Bitcoin Beach wallet. We talk about: 

  • The latest with Galoy
  • Bitcoin Banking
  • 4 ways of doing synthetic USD value
  • Why is it necessary? 
  • How to fund it?
  • Risks

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Stephan Livera links:

Podcast Transcript:

Stephan Livera:

Nicolas, welcome to the show. So there’s lots been going on since we last spoke on the show. Of course we had a chance to catch up in El Salvador so that was great, with Adopting Bitcoin. Do you want to just give us a bit of an update? Where are you at and what are you working on these days?

Nicolas Burtey:

Yeah, sure. So we met back I guess in November for the first time in person at Adopting Bitcoin. So we are continuing to focus on our wallet in El Salvador called the Bitcoin Beach Wallet, which is very exciting to see how Bitcoin adoption is rolling out in El Salvador. So Galoy as a company, we’re working on open source software. The goal is to develop an open source framework to have banking on Bitcoin. One of the key features that we have been working for the last couple of months is the integration of USD into the wallet, which I think is something you want to discuss more today.

Stephan Livera:

Right. And I think the other point that’s worthwhile talking about is, when you’re in Central America, South America, it seems that there is a stronger demand for stablecoins representing USD value. So if you could just explain from your perspective what you’ve seen being on the ground. Why is that? And why is that so important?

Nicolas Burtey:

Yeah. So if you live in the US, you have USD as your checking account, and of course getting exposure to Bitcoin is great because then you can have a tool that can beat inflation. But if you are living in a country that is not on the USD standard, first, getting access to USD is already a huge improvement compared to your local currency because this local currency has probably much higher inflation than USD. And therefore, if you can get USD, it’s great. Then your inflation is much lower than maybe the inflation in your country, or with your local currency. One of the advantages of USD is an overall low volatility compared to Bitcoin, especially in the short term. So if you are a merchant, or if you are someone that has USD obligations tomorrow or next week or next month, it’s good to have this. If you need to pay $100 in the month, it’s good to have $100 in your checking account so that you can pay it in the month. So for me, the idea is that USD can be your checking account and maybe BTC can be your savings account. And so if you have money you know you don’t need, you don’t have any obligations in the short term, then it makes a lot of sense to convert it to BTC and save it for the long run. For a lot of people, for instance in El Salvador, merchants don’t have a lot of savings. Having USD for them makes sense, because they know that they have assurance that even if Bitcoin were to do -50% over two months, which happened, they can still pay the bill. And this is key. So it’s basically the first step, if you’re in developing countries, to make sure that you have enough money to pay your own bills. And when you get to the stage and you have extra savings, then you can convert it to Bitcoin. And one of the challenging points is to move from your local currency to Bitcoin directly. It’s like you make two steps at a time. And so adding the option to get some form of USD in your wallet is a great addition to have in a BTC wallet.

Stephan Livera:

And I can understand that there might be some difficulty if you’re trying to operate in an open source world, but then also still interacting and interfacing with the fiat banking system. So do you have any thoughts or ideas to share on how to achieve that? Or at least how you’re thinking about that?

Nicolas Burtey:

Yeah, it’s actually challenging. Because if you think of the Bitcoin environment, the real advantage of Bitcoin is it is permissionless. So if you can buy Bitcoin somewhere, you can take possession of it. You are the bearer asset of this Bitcoin. It also makes it straightforward to launch a Bitcoin bank like in El Zonte in El Salvador like we did 18 months ago as an experimental project. And we see that now this experiment is being replicated in other places like in Costa Rica with Bitcoin Jungle. And basically, you don’t need permission to start a Bitcoin bank, or just get Bitcoin in your non-custodial wallet. But as soon as you want to get USD, then you need to think about how will you be sourcing this USD. Probably the most common option in the broader cryptosphere is to get stablecoins. And so you can send Bitcoin to some exchange and maybe you buy USDT with it. But then you have an issue with USDT. Like I have maybe USDT on my Bitfinex account now, but what should I do with it? I can get it onto an exchange, but if I want to take possession of it, I need to withdraw it to some wallet. USDT is great because it’s compatible with many networks, but it’s also a downside that is compatible with any network. And so do you want to withdraw it on Liquid? Do you want to withdraw it on Bitcoin layer one, the Omni layer, or to some other protocol like Ethereum or Tron. And because it’s compatible with so many protocols—like I have USDT on Liquid, and you show me your clear code which is from Ethereum, and I cannot assign money to you. So it’s not very compatible between wallets. You tend to be on the same protocol. And so stablecoins have downsides. One of those downsides of stablecoins is that you are also trusting the issuer. So stablecoins are great because they are a bridge between permissionless money that Bitcoin is, and fully permissioned USD that the US fiat system is, you can still get some stablecoins in a semi-permissioned way. You still trust—there is an issuer, maybe Tether—and you trust that they really have the money somewhere. So there is some trust involved. But it’s still less permissioned than addng USD into a bank. So there is still some great [uses] for stablecoins. But one of the biggest drawbacks is this interoperability issue. And this is the fact that, on many protocols, there will be a high fee. So if you have your USDT and it’s on your Ethereum wallet and the gas fees are high and you need to pay $10 out to send it to another wallet, then the use case that we are targeting on our side—which is really using Bitcoin as money—is that you need to be able to buy your coffee with it. If you’re in El Zonte and you have a $5 bill, you should be able to pay for it. If you have to pay $10 fees, it doesn’t work. So yeah, there are some limitations with stablecoins.

Stephan Livera:

So just to summarize, there are different technological approaches. And as you were just saying, there are stablecoins like Tether and they can operate on different networks, but then there might be issues around interoperability. And so this also comes back to the way you are building things with Galoy. You are developing banking software, and you’re trying to make it Bitcoin-native and be open source. Could you tell us a little bit about that choice, and why you’re going that way?

Nicolas Burtey:

Yeah. So we’re building open source software on open source money. And I said there is a limit in the compatibility with USDT because it’s on so many protocols. But if you think about, Is there a Schelling point where maybe a lot of the industry is going that will create this compatibility layer? And for me the answer is Lightning, because Lightning—which is a layer two on top of Bitcoin, the layer one—brings instant settlements. So now I can send money from me to you—it’s almost instant. And there is also no counterparty risk with Lightning, which is key. So if I’m able to somehow convert my USD, whether it’s in a bank account or in some other way, or in a stablecoin, but when I send this amount, if I can send this through Lightning, then you as a recipient can have any wallet. As long as it’s compatible with Lightning, you can receive the money. And maybe your wallet is just a Lightning wallet. In that case, I will send you sats, even if it’s come from some source of USD—I send you sats and you receive sats, and maybe your wallet will convert it to you, or maybe your wallet will convert it to another currency after it’s been received. But the way to sound money is really using Bitcoin the network, not Bitcoin the store of value, but really Bitcoin the payment systems through Lightning. And yeah, this works because we have Lightning.

Stephan Livera:

Right. And so if you could just give a bit of an overview of the Galoy software that’s out there in the wild? Just so people get an idea. So obviously it started with the Bitcoin Beach Wallet in El Salvador.

Nicolas Burtey:

Yeah. So we started working on the software stack 18 months, closer to two years ago now. So what we have is really like an open source GitHub repository that allows anyone to run their own wallet using Bitcoin and Lightning, and also ways to connect to fiat environments. So we have a set of repositories. We have a back end, we have a web wallet, we have a mobile wallet, we have tipping services. We’re also working on a dealer, which is a bot to trade between fiat and Bitcoin. And so anyone can just fork our repository and run their own wallet. A project I did that last month that is getting traction is called Bitcoin Jungle, for instance. They have launched a wallet in Costa Rica, and they have I think some thousands of users using their wallet to get Bitcoin. And this team in Costa Rica is not trying to repeat the success of Bitcoin Beach in El Zonte. It’s to get adoption in Costa Rica. And the fact that our stack is open source, it allows anyone to launch their own wallets, effectively.

Stephan Livera:

Right. And it’s really cool that anyone out there in the world can just take it and try to replicate it. And I’m curious as well in your mind, How essential was it that in the case of El Zonte, there was a donor who seeded the town, or the project? Do you think that’s an important aspect of it? Or do you think it could build up off its own steam?

Nicolas Burtey:

I think it’s really helpful to have someone that seeds a project. A donor is a good way to do it. There was also the fact that the team in El Zonte also was very good at bringing attention about El Salvador, bringing Bitcoiners into El Zonte. It has done a tremendous job bringing awareness to the Bitcoin community about El Salvador. This is how I learned about it and why I was like, Okay, it’s really a good project. I want to be part of it. So it’s a set of contexts. But if you look at Bitcoin Jungle, for instance, there is three people that are starting this project. They have an entrepreneurial mindset. It’s not like there is a donor per se, but there is a small team driving this with technical expertise and also economic understanding of how they’re going to make this work. And they’re doing in a not-for-profit way. They think about, Okay, there will be costs, as I say, to running a wallet, and they’re thinking about adding ATMs so that they can also do this bridge between physical fiats and Bitcoin. And there are expenses related to that, so they want to cover their expenses. Which is great, because if they can show to also the Bitcoin community at large that, Hey, you can launch this wallet and it is safe, sustainable, you can make some money out of it, it’s a great way for all around the world. I think this Bitcoin Beach-like project popping up, this is how we can see it in every country and show to maybe some of their local governments or government at the state level that, Hey, there is this initiative that is going on. Look, it’s very good for tourism. It’s very good for economic prosperity in this area. So maybe we should look more into this.

Stephan Livera:

Yeah. And so the idea then is that if there’s news, and tourists come, and so on, it builds opportunities in the space. And of course it’s a big learning opportunity for a lot of people, because for them it’s their first time using Bitcoin. And so I think that’s potentially what we were getting at as well around the use of US dollar value in some of the wallets that are there for the beginners who are new to Bitcoin. So what does it look like for those people when they’re learning about using Bitcoin and starting with Lightning, but then also wanting a US dollar representation of that value? As opposed to the orange-pilled person who’s already thinking in sats and values their net worth in sats?

Nicolas Burtey:

Yeah. So one of the first learnings that we got was that initially the wallet was in sats. You would only see sats, and maybe there was a few screens where you had a US dollar equivalent. But the first thing was like, No, we really need to show off at the center of the wallet that this is the amount of the value you’re sending, this is the amount of the value receiving. Even if there’s a sat equivalent it’s true, because people think in dollars, and you want to help them understand what is sats and where they should understand what is dollars, because the value changes between sats and dollars and things like that. But really, you’re billed in El Salvador—if you go to McDonald’s or go to restaurant in El Zonte—it’s a USD bill at the end of the day. The prices are still in dollars. And so you want to make sure on the way that there is a notion of dollars. But the way it currently is, is wallets that have BTC in the wallet therefore has a price of BTC for your change, so USD value in your wallet is changing. And so this is obviously great if you’re in a bull market,. It’s not that great if the price of Bitcoin is going down. And so people are looking to get USD in their Lightning wallet, so that now they can transact with this broader ecosystem. So if they go to a restaurant in El Salvador that has a Lightning wallet, they would want to send money through this wallet, but they want to keep maybe $100 in their wallets. They don’t necessarily want to have like 100,000 sats. And so this is a point we have been looking at and we are trying to resolve. And so when you think about how to do that from the perspective of custodial or a shared custody way like we do it’s like, Okay, there can be maybe a thousand users in the wallet, and they each have $10. So maybe in aggregate, you have $10,000. And so you need a way to store this $10,000. So one of the first things you can think of is, Okay, I can get a bank account in the bank and I can put in this $10,000 and then I’m good. It’s probably the safest way to go, because if you have money in the bank, assuming they have a banking license, the risk is that the bank will fail. There is some counterparty risk, but this risk is not necessarily extreme. But the challenge here is that you need to have a bank that accept to give you what we call an omnibus account, which is like a bank where there are multiple people that have money in this account. And you, as a wallet provider, you need to maintain the ledger. And so there is a very high bar for a Bitcoin company to get access to an omnibus account. So this is a great option, but it’s also very hard. And this is when I come back to the idea of permissionless money versus permissioned money. So here you’re really going for the very permissioned side of the money, because you need the bank to agree on what you are doing. Another way to look into it is you could say, Okay, maybe I will use a stablecoin in the back end. So now you don’t expose stablecoins to your own users, but if the user is sending you some money over Lighting and says, Okay, I want to store this money in USD, what you can do as the maintainer of the wallet is you can say, Okay, I receive some sats, $5 in equivalent for $5, and I will basically send those sats to an exchange and I will buy USDT with it. And then you keep the $5 that this user sent you in an account where you have USDT. This is easier to do from a regulatory standpoint, because now you don’t have to convince every bank that you have to have an account as an exchange. This is easier to do. There is a third option, which is to use derivative markets. And this is the one we have been developing for some time now. The idea is that if you want to get an equivalent amount of $5 in your wallet and you don’t want the value exchanged in dollars, if you get some sats in your Lightning wallet, you can go to the derivatives exchange and sell a position on this derivatives exchange so that for every $5 you have in Bitcoin, you have minus $5 in the derivatives exchange. So as the price of Bitcoin changes, all the gains you will have or all the losses you will have in the physical Bitcoin, you will have an opposite set of trades in the derivatives market. And so at the end of day, the value of Bitcoin can change and you still have the same amount of dollars overall. So this is the third option. And the last option that probably will be here in the future—it’s still a bit early—is the idea to use a DLC contract where you find a counterparty and say, Hey, you know, I just want $5. And we are trusting an oracle that, Okay, maybe a month from now, the number of sats will change depending of how the price of Bitcoin has been changing. The use of DLC contracts is something that I’m very bullish on, but also I think is far away. So it might still take a few years before we have this DLC contract. The reason I’m really bullish about DLC contracts is because then we will be able have an equivalent to USD in the world with very minimal trust to any counterparty, which is great.

Stephan Livera:

I see. Yeah. So let me just summarize those. Just for listeners, so everyone’s following along. So you outlined a few options there. So one is just straight—literally dollars in the bank account, and it’s just managed centrally, and I think everyone understands basically how that would work. And then secondly, you were saying it would be this idea of doing something similar to that but just with stablecoins, and using stablecoins to go out to the exchange, and maybe somebody who’s managing that, in this example, Bitcoin Beach, somebody who’s managing that wallet has to go to the exchange and do that role of moving stablecoins into USD and back and forth. And then the third option you’re saying is somebody centrally is doing a derivative market action to have a net opposing position to the amount of USD value for the aggregated users of all those accounts at that wallet—let’s say it’s $10,000—they would need to have that opposing position, a derivative of that. And then the fourth option, as you’re saying, is the future. Hopefully, if we get this idea of a DLC stablecoin or some kind of contract for difference option, then that would enable a similar kind of functionality where people who want to have some USD value can represent that inside their account balance in the overall wallet. Have I got you right there?

Nicolas Burtey:

Yes, that’s right.

Stephan Livera:

And so probably the first few questions people might have would just be, What happens in times of big market movements? Are there opportunities or risks there, especially in the case of the derivatives optio? So option number three, where if as an example in ETFs, there’s this thing called tracking error, where you’re trying to track an index, but actually they weren’t able to exactly track that index. So would a similar kind of thing happen here where maybe you couldn’t track exactly the derivative position against what a lot of people were doing? As an example, let’s say the price is really dumping hard really quickly. And so people are trying to get over to USD value, that the derivatives people couldn’t get over to that in time. Is that something you’ve seen? And I guess you would’ve seen obviously big price moves in the last few months.

Nicolas Burtey:

Yeah. So derivatives os where we have done most of the work right now. The main reason for why derivatives is interesting is because of something called the cash and carry trade. So what is cash and carry trade? The idea is that: in general, the price in the futures market is higher than the price of the spot market. Why is that the case? It is the case because there’s a lot of people that are very bullish on Bitcoin. They understand that, over time, the price of Bitcoin tends to go up, therefore it’s good to be long Bitcoin. And if you want to be very long Bitcoin, you’ll leverage long Bitcoin. If you want to be leveraged long Bitcoin, going to the derivatives market is one of the easy ways to do it. And this starts to push the price in the derivatives market up higher than in the spot market. And the idea of the cash and carry trade is to say that, Okay, because the price in the derivative is higher, I can short the derivative, I can buy the spot, and I take this arbitrage of the difference between those two markest. And I can do this trade over and over again. And if we look at, for instance, the exchange that we are using for our bot, we use OKX, which is a derivatives platform that has Lightning enabled. On average last year, the yield on this arbitrage was 18%, which is not negligible, right? It means if you have $1,000 in your wallet, a year after you have $1,180 in your wallet. So there is some yield to be generated from this trade. Now, as you point out, this trade is not without risk, because the risk is that if the market moves very quickly—because you have a leveraged position—you can get liquidated. And you don’t want to get liquidated. So in our implementation, the first thing to understand is that the reason why we get this yield is really because we take the opposite side of the trade versus what most on Twitter are doing. So most of Twitter are leveraged long. Here, because we use a derivative protocol to hedge, we actually take the opposite side of this trade, and we are short. And because we are short, we get to get this yield, but also we can think of what is the highest risk of liquidation? Is it when we are typically long? Or is it when we are short? Typically, a lot of the liquidations might happen where you are long more than you are short, because, for instance, if you get to leverage of 3X, the price will need to move more than 33% before you get liquidated. And if you look at when is there a price that Bitcoin moves more than 33% over a very short time, like, let’s say over less than an hour—if this happened, this happened strictly when Bitcoin goes down versus when Bitcoin goes up. Of course, if you have a bot that is very reactive, you will not get liquidated if you can just change your position. And if you need more collateral because suddenly, in our case, the price will go up quickly, then we will send Bitcoin to the exchange and make sure we have always a margin of collateral that is sufficient to ensure that, given some bad days, we never get liquidated, basically.

Stephan Livera:

I see. Yeah. So essentially it becomes around how much Bitcoin you are storing at the exchange as your margin so that you don’t get liquidated while these movements are occurring. And so how much manual management does it take for that?

Nicolas Burtey:

In addition, it’s really a risk parameter, because if you are taking a short position, you could actually get just a short position of 1X or -1X. And in that case you will not get liquidated. But if you just use no leverage, basically, you just get this short version of 1X, then you are increasing your exposure of exchange risk. Because then if the exchange got their money taken away, then basically you will lose 100% of the dollar value that you have in the exchange. But if you just use a leverage of 3X, then you trade the exchange risk, because now if the exchange has an issue and you cannot redeem your Bitcoin, then you will lose this money. But now because you used some leverage you have some liquidation exposure. So it’s really about risk-management. You can get to a stage where you have no liquidation risk, but you have full exchange risk. Or if you some leverage, you have less exchange risk. But then you have some liquidation risk that you have to manage with your trading bot.

Stephan Livera:

So it is the idea that the trading bot is just operating at 1X, or is it actually operating at a multiple level of leverage?

Nicolas Burtey:

Yeah. We have in the GitHub repository for GaloyMoney, we have a repository called Dealer where we have implemented this strategy. And currently the default settings is to use a 3X leverage. But it’s something that you can configure the amount of your risk appetite.

Stephan Livera:

I see. Yeah. And then who’s doing the management of that? Is it certain semi-trusted or community leaders? Or who’s doing that actual management of that aspect of it?

Nicolas Burtey:

So the idea of having USD as part of the Galoy stack is still a work in development. So currently we are running some tests with exchanges, but it’s not being rolled out to the general public. So currently there is no—

Stephan Livera:

I see. Still in testing and development.

Nicolas Burtey:

The idea is to bring this to the market end up coming—it should be ready on the back end end up in the coming few weeks, and in mobile wallet in the coming few months.

Stephan Livera:

Cool. And so what kind of costs are involved? Because as you mentioned, there is the cash and carry trade. I guess it’s generally true that Bitcoin has been in that contango position where the future price is higher than the current price, and therefore if you’re going the other way, you are getting paid that premium. So is that the general idea then? That the community—or let’s hypothetically say this is the feature that’s getting rolled out—is the community then going to get paid some funds? Or is there going to be a fee to pay in order to have that USD valuation there available for the users of the wallet?

Nicolas Burtey:

Yeah, it’s a good question. How will this be rolled out is—at least on the Galoy side, this tool will be available to people that deploy wallets with our software. How they want to offer the services to their own users will depend on them. I expect initially the cash and carry trade can be used by the people doing the wallet, who just fund their operation. And this is exactly how banks work today. If you think about banks, what typically they get is deposits. Typically we deposit from the user, they use this deposit to give a loan to people so they can do things with the loan. And hopefully they get paid back with some interest. And this is how, 101, banks work. And so here in the wallet, you can think it’s very similar. You get this deposit and you can get some yield. And similarly to banks, banks may offer to give the yield back to the user, some part of it or all of it, depending on their business model. Another fee that you can think of as using the USD is there may be some spread to convert from USD to BTC. And how much spread do you want to charge is a parameter that you can set. But the idea is: do you want to change 20 basis point, do you want to charge 1?% Do you want to charge 0%? Charging 0% is risky, because then people can try to maybe gamify your conversion rate. And if they see some mismatching parties, they can try to exploit it. So it’s typically a good practice to charge some spread, but this point can be minimal. I believe if we really want to get Bitcoin as money, but still have the option to use USD where you checking account, your spread to convert from this USD to Lightning should be as much close to zero as possible, because if you charge 1% or 2% then there is a lot of friction and you might say, Okay sure, maybe I’ll do it one time to buy my Bitcoin and then I stay. But if you want to buy a coffee with it, it should be really cents or sub-cents to do this payment. But yeah, trading fees is another way as basically wallet runners to also get some revenue. To get this trading position on the exchange, you also have to pay trading fees, so you’re also incentivized as a wallet to just make sure that you don’t lose money. And whatever the exchange where you’re hedging your position is charging you, you want probably to pass those fees to the end user.

Stephan Livera:

Right. So as an example, let’s say you’re operating one of these wallets, you’ve got a bunch of users. And the idea is that if every time they’re flipping between Bitcoin and USD that you are charging them a trading fee, because in turn, when you go to your exchange and you are doing your operations there, you are getting charged a trading fee. So the idea is you’re passing through the costs, or maybe there’s a little bit of a extra profit there that you’re using for some other kind of day-to-day management of the overall system, and to help cover the running costs. So maybe that’s one angle there.

Nicolas Burtey:

Yeah. One interesting aspect here is I’m really striving for—like if you want to use Bitcoin flowing seamlessly from this—this fee should be very, very minimal. And one way that is possible to also lower those fees is that, if you look at the flow of the wallet, you see that overall maybe during the day there is as much USD that got out away as the USD that got in. So let’s say we have a thousand users that each have $10. So there is $10,000 being kept in USD. And there are like 10 users that send $100, so there is $1,000 going out. But the same day, there are 10 other users that gets $100 in. So basically you start at $10,000 at the beginning of the day, maybe it fluctuates a little bit, but you end up with $10,000 at the end of the day. Maybe you don’t need to hedge your position further on this day. And therefore you don’t have this trading fee on the exchanges, because you just settled everything into a ledger within your own wallet, basically.

Stephan Livera:

Yeah. So you do all that netting inside. So I guess walking that through as an example, let’s say you have a thousand users in this overall wallet, each with an account within that wallet, and each of those users would have a Bitcoin balance and a USD balance. And what we’re saying here in this example is they each have $10 in their USD balance. And so of course they might have been flipping back and forth between Bitcoin and USD, but just for the sake of this example, 1000 users, each with $10 in their USD balance. So the overall balance is $10,000. And that’s the balance that the management team is having to deal with at the exchange. But as you were saying, if, over the course of the day, some people had to take some money in and some people have to send some money out, you could net that all internally, such that you minimize the amount of actual trading that has to go on at the exchange, or at least changing the position size at the exchange. And so in aggregate, the thousand users of that overall wallet have $10,000 USD that needs some kind of reflection out there in one of those four options, as we said. Either at the bank account, either using stablecoins, using the derivatives, or using the DLC stablecoins potentially in the future. So is that an accurate summary there?

Nicolas Burtey:

Yes.

Stephan Livera:

And so then it just comes down to what kind of risks the community would be comfortable with, but also what are the benefits to them? Because the benefits for them are that people who are relatively new to Bitcoin can get eased into the process of being exposed to Bitcoin. And maybe over time, more and more users just say, No, I’m just going full Bitcoin. I don’t need to do all this back and forth. But for people who are newer and need to be able to make payments in USD, well then they’re the ones who might need to have a balance of both sides, some Bitcoin and some USD balance. So is that the main benefit and risk there that you are getting at?

Nicolas Burtey:

Yeah, exactly. And if you think about your journey going from not knowing about Bitcoin to measuring your wealth in Bitcoin, it’s many steps. So the idea is that in developing countries, I see so many reasons for why people might want to be plugged to Lightning. Because if you want notice to receive money from another country and you have a Lightning-enabled wallet, then you can send one instantly from any other place on Earth—only Lightning enables this, and for zero fees or very low fees. At the beginning of your journey, the sats you receive, whether settled in Bitcoin or whether settled in USD or maybe some other currency, doesn’t really matter. What matters is that there should be as much people plugging into this network as possible. because the Lightning Network is a network and the network will really grow to the square of the number of users. [Metcalfe’s law]. We want to plug as many people as possible into this network, is step one, probably, if you think about Bitcoin adoption in developing countrie. And then after, they can get used to the QR codes and understand how this new payment system works. Then they can obviously learn about other aspects that are key to Bitcoin. The fact that it’s permissionless, they can use it with a non-custodial wallet, it cannot be censored, it’s protection from inflation. They can learn about this after, while they use the wallet. Something that we learn from El Zonte is really that what’s key is for people to start using the wallet. It’s much better than trying to think about what is money and why Bitcoin is a superior form of money. You really want to approach this from a practical standpoint and just install it yourself, try it, send money to your friend, go to a shop and buy something with it. And then it will generate questions from you. Starting with a perspective where the way that you start is with using a USD balance makes the hurdle to get started lower, in my opinion.

Stephan Livera:

Yeah. And so the other advantage I can see with this is you are getting at this idea of permissionlessness, because that means the user can have that USD representation without having to go and set up a bank account, and all the same problems that are associated with being able to set up your bank account, because people get their accounts shut down, or maybe they don’t have the right KYC documentation required, or maybe they don’t have the physical address or these other requirements. So this is allowing them to have some sense of the best of both worlds. So they can have Bitcoin exposure, but also retain some USD exposure if that’s really what they want—if their bills and their outgoings are denominated in USD. So I guess that is relevant for lots of people even if you’re in El Salvador and you can pay it in Bitcoin, because you might still have an outgoing. Let’s say you have to pay your rent, or you have to pay your staff, and that contract or that agreement is denominated in USD, not in Bitcoin. So even if you can pay it in Bitcoin, if Bitcoin has just come down from $60,000 down to $37,000 like it is roughly right now, then you still have to find a way to come up with that shortfall, which if you were doing it all directly natively in Bitcoin, well then that’s something you’d have to think about. So I guess it also does turn a little bit on how many users of that wallet are flipping between Bitcoin and USD in the course of that day, because there might be people during the day who are now saying, Oh, I need to switch over to USD right now. And this is something that, as an example, I believe you can do this with Chivo?

Nicolas Burtey:

Yeah. So to your first point, I really believe that thinking about USD as your checking accounts, BTC as your savings account is the best framework, at least that I have. So that if you are spending an amount, you should keep it in the currency denomination of your obligation. So typically USD in El Salvador. But then the extra money that you have, yes, buy BTC with it. To your point about Chivo, you can go from back and forth from USD to BTC. What we have seen at least on Twitter over the last couple of months is that they initially were saying, Hey, you can move from BTC to USD seamlessly, and there was no fee initially. But because there was no fee, it seems there were people that tried to do some form of scalping where you had one or two minutes to say, Hey, yes, I confirm my trade between BTC and USD. And so you could try to gamify it like, Okay, I want to sell my Bitcoin, but now I look at is the price going up or down? I would only sell my Bitcoin if the price is going down after I have my quote. And I think now they are changing their strategy because they see that offering absolutely free conversion to the user can be dangerous because people can abuse this.

Stephan Livera:

Yeah. So that’s something in general when you’re offering a quote and you’re saying this quote is valid for this amount of time. Well, then people can try to play with your system there.

Nicolas Burtey:

It’s a free option program.

Stephan Livera:

That’s right. But I guess the idea is you’re making enough money overall as a business to make up for these kinds of things. But in the case then let’s say with the Galoy stack, how are you thinking about that? Would that be offering them a free option? Or would it just be like you exchange Bitcoin to USD but you’re just paying a trading fee?

Nicolas Burtey:

Yeah, there would be some trading fee. We want to strive to be very low. It’s maybe in the 10, 20, 30, 40 basis points. I’m not sure yet. And the thing is it might change depending on the market conditions. I think this is a key part. So if basically the price is not moving much, you can have a very tight spread. Now, if the market is moving rapidly because it’s in the middle of a liquidation cascade whether it’s a short squeeze or a long [squeeze], this is a scenario where you need to protect yourself by having a larger spread. So it’s also very dependent on market conditions.

Stephan Livera:

I see. And so the idea then is that this could be an option there for people to provide a USD value for the users out there, and longer term, maybe the DLC stablecoin thing comes to fruition. Is that how you’re seeing this? That they might move or even your wallet might move to that kind of solution in the future, potentially?

Nicolas Burtey:

Yeah. So the way we are building on the software side, on our side, there is really what we call the dealer part. So the current implementation that we have for the dealer is using derivative contracts, but this could be moved eventually so there is an interface, and you could build another dealer that could be for using fiat on a bank account, or using stablecoins, or in the future using DLC. So it’ll only be basically how do we get USD that will change in the back end. You could swap, or you can even combine them. You can say, Okay, I want to have 50% in stablecoins and maybe 50% in a derivative. So you limit your risk. In the future, any option should be there. On our side, we just have I would say one example which is using derivatives as of yet. I would think that is related to the wallet side. The visible part for the user—this will not change. You could get stablecoins or you could get it using derivatives in the background, or USD in a bank account. This should not change anything for your day-to-day user using your wallet. And so there should not be any change on this side.

Stephan Livera:

Right. And the cool part is that this is functional today. So was it OKCoin you mentioned you’re doing this with?

Nicolas Burtey:

The dealer we’re using is OKX. So we looked at the different derivatives exchanges. We started with OKX, because they are plugged into the Lightning system, and they have large volumes. So the idea in the future is to make it more robust by having more options. We also currently use perp (perpetual), but we couldn’t add also futures, because the risk profile between perp and futures are a bit different, but we used perp to get started. But the idea is really to have this interface where you could plug in whatever dealer you want. And if you want to offer to your users some USD in a bank account, it will be possible.

Stephan Livera:

Yeah. So this could really open it up in terms of who could on board into using Bitcoin, even in an incremental fashion. Without having to be fully committed to the Bitcoin vision from day one. So I guess that’s probably the advantage that I could see, and that this could be replicated in many different communities all around the world. So that’s probably the hope, right?

Nicolas Burtey:

Yeah. You’re right. I think the idea is that it’s too late to take a lot of engineering effort to come up with this type of solution, but by making it open source, anyone could start their own. So I’ll come back to Bitcoin Jungle maybe one last time. So the reason I like this project is because it’s the first time someone has been using our code without our involvement, and they launched their own wallets on the Apple store and the Play store in two weeks. From like not knowing our code to having a wallet functional in a matter of only two weeks, with two people on the team working on the engineering side. So it’s one month of engineering to get from nothing to a wallet working, which is just awesome. Because you think about the Bitcoin companies like River or Strike or Swan, they have a lot of engineering. A lot of engineers are on their teams to do the software. And for me Bitcoin reached a stage that this market is big enough that it makes sense to have open source solution that exists that people can just adopt on their own. And I think it can really help to have a lot more solutions in many, many countries all around the world.

Stephan Livera:

Fantastic. So what are some of the steps that you see being required to make more people take this idea on? Do you think it’s more about getting lots of news and stories showing this thing to give people that idea? Or do you think it needs to be shown as a success in more and more countries, or more and more examples outside of El Zonte to show, Oh, look, it wasn’t just one place, it’s multiple places it’s working in?

Nicolas Burtey:

I think for getting more Bitcoin adoption around the world, especially in developing countries, these projects are really helpful. And I think we saw what El Zonte did, right? On our side, from the Galoy side, the current limitation is engineering. We need still to do a lot of work to make it easy for anyone to deploy their wallet. Luckily, if you know Community, if you know React Native, there’s different stacks on our tool that if you know them, you can get very quickly to having your app on the app store. But if you don’t know them, it’s still a many months process to get there. And so we are working hard to give all the tools to make it very easy to deploy your own wallet, but there is still a lot of engineering effort to make it a lot easier.

Stephan Livera:

One other thing when it comes to developing countries is just the generally low level of income or wealth that makes it difficult to save, because people are living so close to hand-to-mouth, or they’re living very close to their level of ability to feed themselves and do all of the normal essentials. So I guess that’s one just general difficulty with getting Bitcoin adoption in these kinds of scenarios. But at the same time, the flip side is, for some people, it is a way for them to start saving that’s more accessible than buying a property or buying stocks.

Nicolas Burtey:

Yeah, and if you think about El Salvador, 70% of the population pre-Bitcoin Law—I don’t know how to think about the statistic today—but 70% pre-Bitcoin Law didn’t have a bank account. And so it’s not even that you cannot get started. If you don’t have a bank account, property is not even on your mind. You have to deal with physical cash all the time. You don’t have another option. And even sending money, like if you want to pay your electricity bill, basically you either need to take a bus and pay the bill directly to the provider, or you need you pay a third party that will take your cash and you take a fee just to pay your bill. And so just introducing Lightning to this population, you go from people who have no bank account, no financial access, to having one of the best tools, if not the best financial access to the world. And from here, yes, they can start saving. Even if it’s dollars that’s great, because previously they would not think about saving. In El Zonte, yeah, you start introducing why the notion of saving to the language, because when you don’t have a bank account, you don’t even know how to get started with that.

Stephan Livera:

The other question I have is also what kind of other infrastructure is required? Just as an example: ATMs. Being able to go from a Bitcoin ATM to get some cash out, or being able to have a peer-to-peer market, or being able to redeem in a stablecoin. How essential do you think these things are for developing countries who are looking to have communities take Bitcoin? How important is that broader infrastructure?

Nicolas Burtey:

I think ATMs are key, because it’s really a psychological reason that I see where you being exposed to this Bitcoin thing and you have no idea what this is and it feels very digital—because it is—but if you don’t have a bank account and you’re used to having physical bills to pay for things, money is very physical. It’s not digital, even though derivatives are all digital, but for people living in developing countries, they don’t have access to a bank account. The money is physical. An ATM is a bridge between this new form of money and the money that they already know. And it helps them see that, yeah, I can put Bitcoin into this machine and I get cash. So maybe this is money because I can change it whenever I want. Like it’s available, it’s easily convertible. And so for this reason, I think ATMs are key. Also, the local market is something that has developed a bit naturally because you have all this merchants that receives this Bitcoin. So you can go to this merchant and say, Hey, can I buy $100 worth of Bitcoin from you? And the merchant will typically say yes, and maybe they will have a spread on this. $101 or something like that. But the peer-to-peer market is something that we saw also develop naturally.

Stephan Livera:

Fantastic. All right. Well, I think that’s probably all we’ve got time for. So anything you wanted to finish off with for listeners? And what should they be doing out there if they’re interested to get involved in some way or use the technology in some way?

Nicolas Burtey:

The best is to jump on our Slack channel. So if you go to our GitHub repository, it’s GaloyMoney and there is a link to our Slack. So join our Slack channel and yeah, we need more eyes to review code. So if you’re a developer, we’ll be happy to review as part of our community.

Stephan Livera:

Fantastic. Well, thank you, Nicolas. I’ll include that GitHub link in the show notes for people. Thanks for joining me.

Nicolas Burtey:

Thank you, Stephan.

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