Zap's New Product Lets Merchants Take Dollars Over Lightning Network

"Merchants can accept bitcoin and lightning payments with the same infrastructure, except they never touch the asset," explained Zap founder Jack Mallers.

AccessTimeIconJan 30, 2020 at 5:45 p.m. UTC
Updated May 9, 2023 at 3:05 a.m. UTC
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“You get to talk to lightning nodes with dollars.”

That’s how Zap CEO Jack Mallers described his lightning wallet’s new U.S. dollar clearing system in a phone interview with CoinDesk. Announced Thursday, the upgrade aims to address a number of hurdles faced by current cryptocurrency payment options.

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  • “You can download it, link your bank account, your debit card and you can scan any lightning payment you want,” Mallers said. “Then it will turn around and it will debit your account so that you're using U.S. dollars to interact with the lightning protocol.”

    “We're using lightning to physically clear and settle the value behind the hood,” he added.

    Mallers compared Zap’s new infrastructure development to swiping a Visa card, but using Zap’s web of lightning nodes to settle charges. Since users never interact with the digital asset, evergreen crypto concerns such as taxes and volatility melt away, Mallers said. 

    “Merchants can accept bitcoin and lightning payments with the same infrastructure, except they never touch the asset. Soon as we get the cryptographic proof that the lightning payment was made, we just credit their bank account immediately. They're still dealing in dollars,” Mallers said.

    Balance sheet exposure

    Zap itself handles additional risk by operating as a quasi-clearing system. While Zap does not collect private keys to operate and maintains the same privacy standards as before, Mallers said, the startup is inherently “short” bitcoin when users transact with its new product.

    “If you are wanting to send a $100 lightning payment with your Chase bank account, someone has to send that bitcoin for you and then in return we're getting dollars from your Chase account. That means that we're inherently short $100 worth of bitcoin,” he said.

    In other words, for every transaction in which Zap accepts dollars, the startup’s objective book position expects bitcoin’s position to go down in price. If Zap scales to thousands of users or more, the balance sheet becomes heavily tilted. As such, Zap uses algorithms in real time to hedge its position, Mallers said.

    “You don't want to have millions of dollars of bitcoin exposure one way or the other because your balance sheet would get crushed,” he said.

    Lightning strikes twice

    Zap’s lightning clearing system is the startup’s second major product upgrade in less than six months, with Zap integrating a fiat-to-bitcoin buying feature into its wallet last September. 

    As Mallers told CoinDesk, that product was misguided for commercial use cases – citing tax regulation, bitcoin’s infamous volatility and low consumer adoption for its failure. Mallers said he began looking for a change during the Lightning Conference in Berlin last October.

    “Pretty much every assumption of mine was just flat out wrong,” he said of the fiat-to-bitcoin product.

    As a merchant service for lightning, Mallers said Zap sits in a product niche compared to other crypto firms, fraught with its own difficulties. While Coinbase and Square’s Cash App bank on retail investors’ appetite for volatility and speculation, commerce applications demand stability, Mallers said. In its decade-long existence, bitcoin has yet to lend itself to commercial activity. Who wants to pay in bitcoin only to see the price jump 5 percent moments later?

    Mallers said Zap’s wallet is positioned to bring “normies” into the crypto space for the first time, mainly because of this dollar-denominated front end. 

    For example, marijuana dispensaries in Boulder, Colo., are already using Zap’s new clearing service, offering discounts for joints purchased with lightning-backed dollars. (Mallers’ mother, Brooke, runs a bitcoin-accepting dispensary in Colorado.)

    “[Dispensaries] are giving up to 10 percent off for people that make these payments, because marijuana businesses typically get charged around 10 percent to process a card payment or they're just not banked at all,” Mallers said. 

    As for his crypto-friendly alternative, Mallers said, “Merchants find it pretty easy.”

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