Problem

All economical activities of general public are measured in local currency units, while Lightning Network (LN) is a by-design monoasset network based on Bitcoin. Some services like Strike (and Chivo?) bridge this gap by implementing a proprietary closed-loop settlement solutions for limited use cases. But the industry of ‘fiat denominated layers’ currently lacking:

  • Interoperability across LN network with native properties
  • LN backward compatibility
  • Fiat denominated accounts backed with sats
  • Instant hedge instrument against Bitcoin volatility for fiat-based business and convenience of new bitcoin users

Market Cap of stablecoins has surpassed $300B, making it a proven “glue” / bridge / layer of abstraction between fiat and bitcoin markets for centralized institutions. But stablecoin implementation on top of native bitcoin lightning “payment rails” still does not exist. Costs incurred for stablecoin settlement on any other network are exceeding day-to-day transactions standards, making the Bitcoin-based real-world economy dysfunctional.

Solution

The proposed solution is based on recently announced “hosted channels” standard implementation (aka “custodial channels” or “host-channels”). Host-channels could be modified to support constant nominal value in fiat currency while being programmatically backed by corresponding amount of sats. The most advantageous part of the proposal is that payments from/to such fiat channels will be transferred on top of LN network original nodes w/o any limitations.

This way users can finally split the experience between fiat<–>Bitcoin while maintaining 100% compatibility with LN specifications. Technically, a client-side app generates standard LN messages / packets and host-side, after settling client-host fiat relations, provides routing of payments in the network according to the protocol rules.

Market Opportunity

There is an economical value in hosted channels itself (see Liquidity abstraction in Lightning Network). However, for average low-income user or small business owner the value proposition becomes especially important when Bitcoin experiences short term downward volatility. In any case we will always be recommending to drain hosted/fiat channels and swapping sats on to cold storage. Our vision is that Standard Sats will provide valuable service without the need of being long-term custodian of the users funds.

Such channels might become the foundation for running native Bitcoin banks of almost any scale that target both global and local markets while maintaining a minimized infrastructure and open-sourced client- and host-side code. Since the protocol itself might be open, the end user applications may be also open and modular.

Possible use cases are limitless:

  • Instant global remittances in local currencies using LN with minimum possible FX spread
  • User or merchant can instantly control the exposure of his savings/current account into Bitcoin from 0% to 100% using slider or programmable logic, at a fraction of a cost
  • Convenient and interoperable local merchant trading denominated in fiat units

The fiat-channel module for lightning node could be used both for:

  • A trust-based community bank in the remote unbanked village
  • A submodule of a bank-application infrastructure for nation-wide bank, integrated with KYC/AML

Connecting Legacy Finance and Bitcoin Banks

A lightning node can be an organic part of OpenBankProject applications. We may consider two ways one can participate in a permissionless network and monetize its effect:

  • Liquidity bridge
  • Smaller community bank or a branch of the larger bank

The first one may rely on third-party customer OBP API, while the more advanced subordinary-type OBP API may drive the second one. Creating the new bank with bank-correspondent demands significantly larger resources, so we are focusing on the bridging-like functionality of our service. In this case, the user may deposit money via standard bank transfer and invoke a fiat channel when funding is confirmed. The stable fiat-denominated value will allow to utilize liquidity without rush and mindfully plan business activity related to the freshly created channel.

We believe that sats will become a standart!

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