LeoGlossary: Hive Backed Dollar (HBD)
What Is The Hive-Backed Dollar?
The *Hive Backed Dollar (HBD) is a stablecoin that is resident on the Hive blockchain. It is categorized as an algorithmic stablecoin) in that it does not keep a reserve like many other tokens in this category. Instead, each HBD is can be converted into $1 worth of HIVE.
Hive is a decentralized blockchain that utilizes the Delegated Proof-of-Stake consensus mechanism. Like most other blockchains, it serves as a distributed ledger of financial transactions. All activity pertaining to the movement of the two native coins is validated by block producers and recorded in the chain.
It is a decentralized immutable text database. In addition to financial transactions, data can be posted on-chain and recorded in the blocks. This opens the system up to more than just operating like a bank. Here we see where social media applications enter the picture.
Hive started primarily as a blogging platform. Over time, other features such as gaming, microblogging, and video were added to the ecosystem. Since Hive only records text, images, audio, and video have to be stored off-chain.
The two coins are HIVE and HBD.
Decentralized and Distributed
Hive is a decentralized and distributed system. This is important when we look at governance.
The DPoS model uses coin voting to determine the block producers. Anyone is free to set up a node to run the software. All block production is on a rotation basis. The system has a top 20 consensus mechanism in place. The order of block production rotates through the top 20 along with those outside of it. Obviously, the lower down in the rankings, the less blocks one will validate.
There is a block reward for each one that is validated. The top 20 will process the same number of blocks, as long as they remain in consensus. This prevents any single node from being able to exert undue influence over the chain.
Since it does utilize staked coin voting, it is important to have a distribution system where one individual or group cannot take control of the block producers.
With Hive, there is no single entity that has more than 5% staked. This is known as Hive Power (HP) and it is what pertains to governance. The vote is weighted based upon the stake each individual has.
Without an overwhelming majority, the ability for anyone to attack is diminished.
Since HBD resides on Hive, there is no company behind it. This is important in an era of regulation. Governments and central banks are already focusing upon stablecoins, seeing the threat they pose. Of course, the threat that exists as compared to what they state are two different things.
The Hive Backed Dollar is beyond the control of outside entities. Even people within the system have no direct control over what is taking place. The circulating supply is determined by a number of factors, much of it tied to the decisions the members of the community make.
HBD is generated in a number of different ways:
The conversion mechanism is what allows for HBD to be "backed" by HIVE since anyone can utilize this feature. It is where the algorithmic part enters the picture.
Each day, a certain amount of HBD is paid to the HBD Stabilizer. This bot trades on the internal exchange, providing liquidity. It also helps to keep the peg of HBD close to $1 worth of HIVE. Profits from the bot are returned to the DHF.
The situation on Polygon is similar, with the token being pHBD.
Both are created by bridging over from the Hive blockchain to either of them. This is done by effectively depositing HBD in the bridge wallet, a move that will create the appropriate HBD on the other end. Each of these can be accessed by a wallet such as Metamask.
The Hive Backed Dollar is a debt instrument. If this was drawn up using a balance sheet, each HBD created would be placed as a liability for the blockchain. This is something that has to "be paid back".
Obviously, since each HBD is redeemable for $1 worth of HIVE, this is the payment that must be made. It is vital the network be able to convert each one into the appropriate amount of HIVE. For this reason, the limitation of debt is hard coded.
The haircut rule exists to prevent too much HBD from being created. One this level is surpassed, the amount of HBD generated is limited until the ratio falls back in line. For example, payouts will not include HBD but, rather, liquid HIVE in addition to HP.
This level was 10% yet was changed during Hard Fork 26. That moved the haircut ratio up to 30%.
One of the key features of HBD is that it gives people access to the US dollar without having to deal with banknotes. This is very important for those individuals who reside outside the developed nations.
At the core of this is the banking system. Since many countries have corruption that is overt, the trust in the banks is minimal. Therefore, it is difficult to get a hold of USD since it is hoarded. The problem is obviously the native currency is not reliable.
With HBD this problem is solved.
We also have the benefit that these transactions are peer-to-peer. That means the wallets all transactions take place on-chain and the wallets simply read what is occurring. Hence, whatever balance is in the wallet is read, the transaction processed, double-spend problem verified, and block produced.
All of this happens within a few seconds.
Developing nations can really take advantage of this. Another benefit is that HBD is actually adding to the USD exposure without requiring an expansion of the US Dollar money supply. Asset backed stablecoins tied to the USD such as USDC and Tether utilize cash and cash equivalents as the reserve. This obviously requires them to get a hold of the different securities (or money). It is a situation that places greater dependence upon the loans of the commercial banking system and the monetary policy of the Fed.
The use of HBD carries advantages to merchants around the world.
When we look at the existing payment system, fees are everywhere. This is evident when we look at financial services delivered corporations such as Visa. Anyone who had one of these accounts knows that Visa takes a percentage of each transactions. With a company such as Walmart, it might be 0.5%-0.75%. For others who do not run the volume of transactions through, this can move into the 3% neighborhood.
With HBD, there are no fees. This means that the merchant receives 100% of the money. If the payment is for 5 HBD, that is exactly what is received. Since the blockchain is the one conducting the transaction, there is no intermediary in the equation. This could be a tremendous cost savings over time.
Hive also offers one block irreversibility. This means that merchants know within a matter of milliseconds if a transaction can be reversed. Since the average transaction time to get into a block is about 1.5 seconds, this means the entire transaction is complete in roughly 1.6 seconds. This is unmatched within cryptocurrency.
Just consider how long it takes for a transaction to go through on Bitcoin, and get fully verified by all the nodes. This can take hours (sometimes a couple days) and still get rejected. What merchant wants to take on that risk?
With HBD, the settlement is within a couple seconds and the customer can be on his or her way.
By placing HBD in the savings account, the APR as of Feb 2023 is 20%. This is Hive's first major foray into the fixed income market. It provides people interested in decentralized finance the opportunity to receive yield while passing on speculation.
This is a base layer operation meaning it is happening on the blockchain. It is also done without the use of a smart contract. Thus, there is no counterparty risk due to an application or other external factor.
Having a base layer feature like this can a powerful foundation which to build upon. This can be incorporated into games, Layer 2 applications and financial planning models. Suddenly it becomes a way to finance reward pools.
Lack Of Counterparty Risk
Counterparty risk is something that is crucial when looking at the world of finance. This holds true for cryptocurrency also.
Investors rarely consider this type of risk when assessing an investment. Whenever dealing with a financial decision, there is almost always an financial intermediary involved. Here is where the risk of the solvency of the financial institution enters.
For this reason, markets try to establish ways to benchmark degrees of risk. The standard is the 10Y US Treasury bond. This is the metric many utilize as being -risk-free. The return of other investments has to compensate for the increased risk added to a portfolio.
Since there is no laboratory, corporation, or financial entity behind the Hive Backed Dollar, there is no counterparty risk from this perspective. The other side of the transaction is always the blockchain since the coin is at the base layer. By utilizing the Hive savings account, one is able to conduct the entire transaction on-chain.
The ecosystem is built on the base layer and extends outwards from there. Layer 2 or sidechains each add their own degree of risk. By having all activity related to HBD and the savings account at the base layer, this is reduced.
What is the risk with HBD?
The haircut rule is in place to ensure that each HBD can be swapped to HIVE by utilizing the conversion mechanism. It is designed to shut down production of HBD if the ratio between the two coins exceed 30%.
Another potential risk is if the blockchain stops running. This is the only way to keep an individual from what is in the wallet. Since it is at the blockchain layer, any application with wallet integration will provide access.
As long as there are nodes running the blockchain, the assets can be accessed. Solvency is not an issue since there is no company that operates as a custodian of the funds.