LeoGlossary: Hive Backed Dollar (HBD)

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The Hive Backed Dollar (HBD) is a stablecoin that is resident on the base layer of 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.

Both of these coins reside at the base layer.

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.

Due to the nature of the system, the double-spend problem is eliminated. Hive, however, is more than just another financial ledger.

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.

Non-Centralized Stablecoin

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:

  • when the 50/50 option is chosen for blog payouts
  • through the depositing of HBD into savings
  • by converting HIVE to HBD, lowering the supply of the former while increasing the latter

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.

HBD Stabilizer

As with any currency that has a peg, maintaining it ultimately depends upon market activity. Hive has its own internal exchange which trades HBD and HIVE. Here is where we find the HBD Stabilizer.

This is a trading bot that is funded by the Decentralized Hive Fund. This is the decentralized autonomous organization (DAO) that has community resources to used for enhancement of the ecosystem.

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.

Derivatives

The Hive Backed Dollar has a couple of derivatives that were created by Leofinance. One is housed on Binance Smart Chain (BSC) and the other Polygon. Both tokens are backed 1:1 with HBD.

On BSC, there is bHBD which utilizes liquidity pools. This allows individuals to participate as a means of generating a return. It also provides liquidity enabling people to gain access to the token.

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.

Having liquidity pools in addition to the internal exchange provides arbitrage opportunities. As traders take advantage of mismatches in prices, the opportunity to assist the peg arises.

Debt Instrument

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%.

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