Bitcoin Could Challenge Stablecoin’s Dominance with Fiatless Fiat

Bitcoin could overthrow stablecoin’s dominance in the digital asset payment space with the introduction of fiatless fiat.

Bitcoin (BTC) could challenge stablecoin’s dominance in the crypto payment ecosystem with the introduction of fiatless fiat. Expert developer Nicolas Dorier made a move seven years ago when he developed the BTCPay Server.

Evolution of Bitcoin Payment

BTCPay Server was an open-source substitute for BitPay, the industry leader at the time, in an effort to democratize BTC payment systems. Dorier wanted to enable companies and enthusiasts to accept Bitcoin payments without depending on centralized platforms.

Although BTCPay Server was well-received by the public, especially supporters of Bitcoin and internet merchants, the emergence of stablecoins changed the landscape of payment processing. Stablecoins, particularly those pegged to the US dollar, have taken center stage in the payment space today, and Bitcoin’s role has decreased.

The market’s need for stability in an unstable cryptocurrency environment is reflected in stablecoins’ increasing dominance. Hence, BTC has been pushed to the side due to its volatile price.

Stablecoins Growth and their Implications

Even in the world of cryptocurrencies, the US dollar is still the most widely used fiat currency in international trade. With stablecoins, users can trade digital assets without experiencing the usual volatility of cryptocurrencies like Bitcoin.

However, many Bitcoin supporters see stablecoins as having one major drawback. Stablecoins strengthened the dominance of fiat currencies—especially the US dollar—which is what Bitcoin intended to counter.

The Concept of “Fiatless Fiat” Bitcoin and Synthetic Dollars

However, a new concept that has surfaced in the Bitcoin community in response to the stablecoin dominance is “fiatless fiat” — a Bitcoin-native substitute for stablecoins. This strategy seeks to imitate the stability provided by fiat currencies—like the US dollar—without depending on government-backed assets or centralized organizations.

The concept is based on past ideas, such as the synthetic US dollar idea by BitMEX co-founder Arthur Hayes, which allows traders to protect themselves against the asset’s volatility without having to sell their holdings. Synthetic dollars can be created through futures contracts, where two parties agree to speculate on the future price of BTC.

By using this technique, traders can keep their underlying Bitcoin positions intact while hedging their exposure to market fluctuations. Despite not gaining much traction initially, Hayes’ original proposal has since been modified and improved.

By using the Stablesats protocol, Blink Wallet employs a similar mechanism, enabling users to tie a portion of their Bitcoin balance to fiat money without converting it yet. In this system, wallet operators hedge users’ balances using futures contracts, providing a form of stability.

However, this approach requires users to trust the wallet operators with their funds. This trade-off between stability and custody presents a significant drawback for users who value the self-sovereignty that Bitcoin promises.

Lightning Channels: A Decentralized Alternative

Meanwhile, stable channels, which are based on the Lightning Network, have emerged as a novel solution to the centralization risks associated with synthetic stablecoins. Tony Klaus, a developer of Bitcoin, presented the idea of a decentralized mechanism that lets users maintain their exposure to Bitcoin while hedging against volatility.

Two parties can share a BTC balance through stable channels, with the amount of money given to each depending on how much exposure they want. Real-time adjustments to these balances are made possible by the Lightning Network’s rapid settlement capabilities, which guarantee that users can continually hedge their positions as prices change.

Comparing this stability strategy to more conventional stablecoins reveals a number of benefits. Stable channels are entirely voluntary agreements between two users, in contrast to centralized tokens that depend on outside parties.

With this peer-to-peer setup, the dangers of centralization—like censorship and money seizure—are lessened. Stable channels are also more resistant to systemic risks and give users more freedom in how they manage their assets.

However, stable channels present certain difficulties. Technical complications arise from the decentralized nature of the Lightning Network, such as the requirement for a continuous online presence to keep the channel’s peg to the selected fiat equivalent.

The stability of the channel may be disrupted, and losses may result if one party goes offline.