The much-anticipated addition to Zap’s services, which would allow the wallet’s users to buy bitcoin via Lightning with USD for direct deposit into their Zap wallets, is being rolled out in a new form.
“Strike,” as it’s now being called, serves the same function that Olympus was supposed to, but through different means. With Olympus, Zap users would have a Lightning Network payment channel “pushed” to them with whatever amount of bitcoin they purchased through the service. With Strike, instead of instantly converting the cash to bitcoin for each user, Zap will hold a static dollar balance for each user and send Lightning payments for them on a transaction-by-transaction basis.
Yes, the model is custodial, Zap Founder Jack Mallers explained to Bitcoin Magazine. But it comes with plenty of upside. For instance, now Zap users can top off their accounts with, say, $20 and use this to spend bitcoin as needed. They aren’t buying bitcoin directly, but rather a claim on $20 worth of bitcoin at any point in time, so the service removes any exposure to volatility (instead of having a balance of 0.002 BTC, you have a balance of $20).
Zap decided to ship this model after it began testing the Olympus beta and confronted a few hurdles in the way of tax implications and user experience.
“There were many obstacles and aha moments,” Mallers said. “Volatility, taxes and the need to set up a Bitcoin wallet and own bitcoin were all barriers to mainstream adoption.”
Striking the User-Friendly Balance
The panacea, then, was to remove the complexity all together. Given Lightning’s technical barriers to entry and demanding upkeep, Zap decided that it would be best to neutralize the user’s need to interact with the network directly. If users really want self-sovereignty, they’ll find it on their own; for everyone else, Mallers espoused, there’s Strike.
“The biggest aha moment for me was the fact that a user doesn’t need to own bitcoin or have a wallet to scan and pay a Lightning invoice,” Mallers said. “Instead of ‘spend and replace,’ why not ‘buy and spend in seconds under the hood without even noticing’? If you want privacy and censorship resistance, run a full node, a Lightning node and drive it with Zap. If you want to invest, get a hardware wallet and HODL. If you want to participate in this new global economy, connect your debit card to Strike.”
Zap holds all USD deposits with an FDIC banking partner which services “many cryptocurrency companies,” Mallers said. On the Bitcoin side, all transactions are handled by Zap using the infrastructure it erected for Olympus — so, the original tech stack is still being used, it’s just going on behind the scenes. This work behind the curtain “not only handles application and protocol interaction but also real-time risk management and automated trading/hedging,” Mallers said.
Hedging is important here, as Zap will “take on all the balance sheet risk,” as Mallers put it. For instance, if they have 100 orders for $100 each, they owe $10,000 worth of bitcoin transactions to these customers. If bitcoin drops 25 percent, then they still have $10,000 in obligations even though, theoretically, they now only have $7,500 of the original money deposited. Zap conducts the leverage trading (longing and shorting) to keep its reserves on par with deposits.
Finding a Base
Mallers mentioned that the team demoed the product with nearly 100 testflight users who “really helped to shape the product” and its use cases. One that Mallers is particularly excited about comes from Colorado, where he onboarded a few local marijuana dispensaries to help them circumvent the banking restrictions that continue to choke the access these businesses have to cash accounts.
This, among other use cases, are why Zap is building this infrastructure: to provide a cheap, fast payment option that simultaneously eases access to these services for its users.
“I think users will use it to buy and sell bitcoin, to make remittance payments, to give financial tools to those that don’t have them, for internet commerce like pay-for-content and more,” Mallers said. “But I am most excited about what we have enabled and all the possibilities to come. The barrier to entry to this new economy has never been lower, all you need is a debit card.”
Though he’s excited, Mallers told us that this is still “very much the beginning.” Notwithstanding the basic fact that the Lightning Network itself is still a very young protocol with plenty of its own growing pains to come, Strike still has a balance to find with its automated algorithms and risk management before it’s able to support millions of users. It’s also got some work on the legal and compliance side of things.
So, for now, the service will accept new users on a rolling, weekly basis from its beta program list. Mallers hopes to have Strike ready for full public access by the end of Q1 2020.
Colin is an associate editor and staff writer for Bitcoin Magazine. He's proud to call Nashville his home, where he spends his days shouting at peddle taverns and trying to find affordable parking downtown. If it wasn't already obvious, he holds bitcoin.