A new Bitcoin-based stablecoin launched in May, sparking renewed interest in new types of financial products made possible by the Bitcoin blockchain, potentially altering bitcoin’s price, supply and demand dynamics.
The new stablecoin using the the Bitcoin blockchain was created by Stably, a Delaware-based startup. The dollar-pegged stablecoin is called #USD, and it takes the most fundamental unit of Bitcoin, called a ‘satoshi’ or ‘sat’ for short, and turns those smaller units into tokens that represent a claim against US dollars held by a custodian. It is the first stablecoin that is native to the Bitcoin blockchain, whereas others, like Rootstock or Sovryn, offer Bitcoin-collateralized stablecoins on layer two architectures.
Purchase And Redemption
Purchase of #USD currently involves a manual process where funds are sent to Stably’s custodian, Prime Trust, which in turn holds it at Federal Deposit Insurance Corporation-insured banks. Funds can be sent via ACH, FedWire, SWIFT or via debit/credit cards.
#USD Issuance Process for $1,000
Jamiel Sheikh
Token holders are required to go through a know-your-customer process and the purchase amounts are segregated into tiers depending on the level of KYC completed and documentation provided.
Stably’s KYC Tiers. Source: Stably
Jamiel Sheikh
Redemption of a token also currently involves a manual process where the sat holder informs Stably of their intent to redeem and their originating wallet address. Once approved, two independent transactions occur. First, the token holder sends the sat back to Stably’s treasury Bitcoin wallet, at which point Stably instructs Prime Trust to send funds to the customer. These transactions are not atomic and could span days. Purchases are limited based on KYC and transaction history factors. A request to increase purchase limit require completion of a Stably GoogleGOOG Form.
Ordinals, Inscriptions And BRC-20 In Practice
Stably relies on several new technologies such as Bitcoin ordinals, inscriptions and the BRC-20 token standard. Despite a number of media outlets equating ordinals with NFTs, the ordinals protocol provides only a mechanism to enumerate sats, providing each sat with a unique identifier or serial number. The first sat ever minted, on the genesis block, holds an ordinal number of zero. The ordinals are not stored on-chain. All existing sats are assigned a number and a registry of the affiliation between a sat and its ordained number sit in off-chain clients that adhere to the Ordinal protocol or theory.
Sats can also be inscribed with custom data. The data sits in the SegWit section of the Bitcoin blockchain and can be considered to be on-chain, benefitting from the security and verifiability of the Bitcoin blockchain. The BRC-20 standard allows token information, encoded in JSON format, to be stored on-chain in space available by the recent Taproot upgrade. The choice of using JSON as the encoding mechanism is arbitrary and alternate, more terse or packed forms could be used instead. The token standard uses Bitcoin as a data availability layer, and ordinals and inscriptions as the method to submit the data to Bitcoin.
The only time where BRC-20 leverages ordinal theory is in the second phase of the transfer function, where the balance is bound to a single sat to prevent double spend and enable transfers. The deploy function is immutable, meaning that it cannot be changed once deployed. Bitcoin is not innately aware of the BRC-20 protocol, viewing it only as arbitrary data and Ordinal off-chain indexers are required to produce a balance state. The rules of the Ordinal protocol allow there to be no ambiguity around which sat is assigned what number. As is in the case with UTXO transactions, sats are destroyed as inputs to a transaction but then effectively re-emerge on the outputs side in first-in first-out (FIFO) schema.
Because sats have specific moments in time they are minted, classification of when a sat is mined has become a hobby. One such classification suggests sats more rarely mined have special status. For example, the first sat ever minted on the genesis block of Bitcoin is categorized as mythic, not only because of its temporal importance but because sats mined in the genesis block cannot trade.
Supply Creation
Stably initiated its supply of #USD on May 22, 2023. The process required two BRC-20 steps, first a deployment and then a minting, akin to deploy a smart contract and create a token supply pool on the ERC-20 standard. The deployment and mint actions, described in JSON format, are each etched into respective sats. In the case of Stably, sat ordinal #1866921187802496 and #1866921187846496 have inscribed in them the two actions.
The sats that kick-off the #USD ecosystem
Jamiel Sheikh
The BRC-20 standard borrows from the EthereumETH ERC-20 token standard enabling tokens to exist. Unlike ERC-20 based stablecoins like USDCUSDC or USDTUSDT, where a single token represents a claim against one dollar, a sat can be inscribed to represent a claim on any numbers of dollars held in custody by Prime Trust.
BRC-20 vs. ERC-20 token standards
Jamiel Sheikh
Symbol Collisions
The use of the hashtag in the #USD symbol for a stablecoin departs from traditional style four characters. USDC, USDT and BUSDBUSD are familiar symbols of stablecoins that have been traded for years. Unlike ERC-20, an Ethereum fungible token standard, which allows for duplicate token symbols, the BRC-20 standard does not allow for unique symbols.
The USDS symbol, used by Stably on other blockchains for their stablecoin, was already registered on Bitcoin preventing its reuse by Stably, hence the #USD symbol. In fact, all variations of USDn (where n is some letter) have already been taken, indicating the ability for symbols to be hijacked, much like domain names are.
First Issuance
Total potential supply of #USD is capped at 69,420 billion sats. The number is not directly equivalent to ERC-20s total supply in that it is merely a declaration of potential capacity to issue. When funds are received by a potential customer, a single sat can be issued with the full claim inscribed into it by Stably and then transferred to the customer. Stably has thus far issued $101,000 of #USDs in two transactions where a single sat represents a $100,000 claim and a second sat represents $1,000.
Bitcoin, As We Know It, Dies?
A sat is one hundred millionth of a single bitcoin. If the market price of a single bitcoin is $25,000, then it stands to reason a sat’s market price is .00025 cents, which give rise to questions about value and arbitrage and potentially the dissipation of the concept of a Bitcoin. It is theoretically possible that sats represent redeemable assets worth more than their fractional market price, potentially creating arbitrage opportunities. While ERC-20 tokens are independent of the underlying Ethereum token, a sat is an integral component of a Bitcoin’s value. In the future, the sum value of a set of N number of sats may vary with the sum value of a different equally sized set sats.
The market for ordinals is growing
Dune Analytics, @Domo
Given that sats have values that may diverge from the market value of Bitcoin, it can stand to reason the Bitcoin blockchain may eventually become a sat trading platform, where each sat has independent value and not the 1/100,000,000th fractional value of a single Bitcoin. A world where trillions of sats trade, each with their own supply and demand curve, would mean Bitcoin as we know it today no longer exists.
Liquidity And The Future Of BitFi
In a lengthy discussion with the author of this article and the two Stably co-founders, CEO Kory Hoang and CTO David Zhang, the future of BitFi, its risks and challenges were top of mind.
“The birth of #USD is the herald of a new age, one where decentralized marketplaces/exchanges for BTC vs. tokenized fiat can finally exist natively on the Bitcoin network itself,” Kory told me in an interview.
However, BitFi still is lacking the tools and support seen in the Ethereum world. For example, #USD has no secondary market liquidity – there are no centralized or decentralized exchanges that currently accept or trade it. Buying #USD comes with risks, including innovation, market and liquidity risks and anyone considering purchasing #USDs will need to take into account these risks.
“This is why we are working hard to roll out automatic #USD issuance/redemption to enable more seamless fiat on and off-ramping, support conversion of stablecoins on other chains to #USD and research open-source market making bots that can help liquidity providers create a more efficient market for BTC / #USD on-chain,” says Kory.
Kory, a former analyst at Pitchbook, raised $500K in April 2018 to launch Stably. David, formerly of AmazonAMZN, teamed up with Kory to build their first stablecoin by late 2018, surviving the stablecoin wars in 2019. By 2020, Stably pivoted into providing Stablecoins-as-a-Service and on/off-ramp infrastructure.
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