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Money-Printing: Is Raising the HBD Debt Ratio from 10% to 30% Safe?

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@luizeba
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Is Raising the HBD Debt Ratio from 10% to 30% Safe, or we'll end up printing more money than the network can sustain?

Source: Debt.Com

First, an important disclaimer: I'm a newbie Hiver and, even after reading a lot about the economic background of the Hive Ecosystem, I'm still not 100% sure on many of its mechanics. This isn't a post that will give you answers: it's a post that is meant to raise questions that can be answered by more experienced Hivers, helping both me and the whole community to understand what's going on and if the future of Hive is safe and stable.

HBD Debt Ratio

Recently, there were a few days in which HBD (Hive Backed Dollars) stopped being paid as a reward for posts. This made me realize that I had no idea on how the whole economic system behind Hive worked, so I started reading to (try to) understand it better.

@Arcange wrote this fabulously well-written article that made me understood how HBD worked. You should definitely read it so you can also learn this stuff: it's important, as a Hiver, to understand how our network work. And if you're into the technical part of the Blockchain, this article from @Andablackwidow explains it.

In a nutshell:

  • HBD (or Hive Backed Dollars) is the stablecoin of Hive Network. HBD value was designed to be 1 US Dollar, because the whole Hive Network guarantees that you can convert 1 HBD into enough HIVE tokens that are worth 1 USD.

If a HIVE token is being sold for 0.5 USD, you can convert 1 HBD into 2 HIVE (and 2 HIVE is worth 1 USD). If a HIVE token is now sold for 2 USD, you can convert 1 HBD into 0.5 HIVE (and 0.5 HIVE is worth 1 USD)

  • HBD is a debt issued by the Hive Blockchain that's denominated in HIVE Tokens. HBD doesn't have an intrinsic value in itself (you can't stake it to earn rewards, you can't use it in a game, etc.); it's value comes from the possibility to convert HBD into HIVE tokens.

Thus, having an HBD means that you can make the Hive Network issue more HIVE Tokens and give those newly-issued tokens to you, so you can sell them for 1 USD.

  • There is a maximum 10% HBD Debt Ratio (also known as "Haircut Limit") in order to keep the whole system stable.

Source: EduCBA

More HBD in existance means that more people can, suddenly, convert all this HBD into HIVE tokens. If this happens, the token supply suddenly increases and these tokens can be sold on the market. The HIVE token price will decrease due this increased influx of tokens being sold.

If HIVE prices decreases, what happens if people keep converting HBD into HIVE? The blockchain will have to issue more and more HIVE Tokens (lower HIVE price means that more HIVE will have to be issued for each HBD), which means even more HIVE tokens being sold, which means even lower prices.

Things snowball downhill and the whole systems goes down the drain.

To avoid this debt-fueled cataclysm, there's a limit on this Debt Ratio. Right now, this debt ratio is limited at 10%, which means that the HBD supply is limited to 10% of the HIVE supply. In other words: if all HBD gets converted into HIVE tokens, it would correspond only 10% of the total HIVE tokens in existance.

Increasing the Debt-Limit from 10% to 30%

Recently, the largest Witness of the Hive Blockchain, @BlockTrades, published a post in which he said he was going to:

"Investigate possible changes required to increase haircut limit for Hive-backed dollars (HBD) in hardfork 26. Public discussion is still needed as to the amount to increase the limit (personally I'm inclined to either 20% or 30%, with my preference for 30% to allow for a robust expansion of HBD supply)."

Source: Pixabay

This post has received dozens of comments, in which part of the community welcomed this proposal, and the other part said to be against it.

The main argument in favour of the debt ratio increase is that, nowadays, there is a lack of HBD liquidity. Because of this lack of HBD, there's not enough HBD to be traded on the exchanges (like BitTrex or LeoDex). HBD, as a stablecoin, should be traded really close to 1 USD, and this isn't currently happening simply because there is not enough of it on the market to actually be traded.

A higher debt ratio would mean more HBD available, increasing the whole trading activity around the stablecoin.

In the other hand, Hivers that are against this change claim that a larger quantity of HBD will also increase the risk of price manipulation, given the fact that a single user (or a group of them) with enough HBD could convert it all at once to HIVE Tokens and dump them all on the market, destabilizing the prices.

According to this position, a higher HBD Debt Ratio would mean that it will be "easier to print an infinite amount of HIVE".

Reddit already complained about "Hive Money-Printing"

When I found out about the Hive Blockchain, I looked up about it on Reddit to read other people's opinions about it.

Random Trivia Fact: There is a Canadian Company called "HIVE Blockchain Technologies" that is listed on the Toronto Stock Exchange under the ticker "HIVE". This company, apparently, mines Bitcoin and Ethereum using green energy. The existance of this company with this name makes it incredibly frustrating to search for "our" Hive Blockchain, because the majority of the results are about the "company" Hive Blockchain.

Source: Redeem

In some threads (like this and this ones), users complained that the Hive Blockchain "printed money for themselves" and that "when Justin Sun took over the STEEM network, they forked to Hive in order to be able to continue printing money".

When I first read those threads, I didn't quite understand what "printing money" meant. But now that I'm learning about the HBD system, I'm quite sure that the user was complaining about the emission of HBD.

This means that, if Hive want to be sustainable long-term and that HBD actually works as a safe stablecoin, we have to be sure of the proposed changes, as the cryptocommunity is looking at what we're doing.

A successful change can attract many investors and users to Hive, while a mistake can be catastrophic to the health of the Blockchain.

Market Cap Analysis

According to CoinMarketCap, the current market cap of HIVE is around 300M USD.

That means that, with the current 10% Debt Ratio, there can be about 30M HBD in existance.

Source: CoinMarketCap

Currently, the stablecoin with the largest market cap is Tether (USDT) with ~69B in Market Cap; the 2nd place is USD Coin (USDC) with ~32B; and the 3rd is Binance USD (BUSD) with ~13B.

HBD would be only in the 26th place in the middle of totally unknown stablecoins like mStable USD (MUSD), USDK and Origin Dollar (OUSD), with only 0.0434% of the market cap of USDT. Yeah, the current HBD limit is 2,304x smaller than USDT marketcap.

This makes me think that, indeed, there's a lack of HBD around, specially when you consider that there are HBDs stashed in Saving Accounts (yielding 10% per year) and that a lot of users that owns HBD aren't willing to sell their HBD on the open market.

The HBD that actually is being traded is just a small fraction of the total HBD in existance, and the HBD market cap is already very, very small.

Hive is Growing, and we need more HIVE / HIVE Power

Source: @Flauwy

Specially because of Splinterlands, the Hive Network is growing A LOT. I personally found out Hive a few months ago because of it.

Everyday there are literally thousands of new Hive Accounts being created because of the game: according to this official post, there are around 15,000 new accounts being created everyday (6 months ago it was just 200-300/day).

These new users need HIVE (and HIVE Power, and Resource Credits) to actually use the blockchain, not only to play Splinterlands but to use the rest of the Hive Ecosystem (post, comment and vote on our decentralized social media, exchange assets on LeoDEX or TribalDEX, play other games like Rising Star, etc.).

When you think about this, issuing more HBD (and consequently more HIVE Tokens, if the HBD is converted) doesn't seem like a huge problem, considering that there are a large quantity of new users that are in need of more HIVE in their accounts to use the Blockchain.

Why the Current Debt Ratio is 10%?

I wasn't able to find out a reason for the current Debt Ratio be 10%. Was there a study or an analysis on why 10% would be chosen over any other percentage, or was it just an arbitrary number to test the water?

Conclusion

While everyone is afraid of the "Debt" and "Increasing the Debt Ratio" sounds like a bad thing, I personally understand that increasing the HBD Debt Ratio will be good for the Hive Blockchain, both because it'll increase the available HBD on the market (and, even with the proposed increase from 10% to 30%, the coin will still be way, way smaller than the big stablecoins around) and because it can increase the creation of new HIVE tokens that are necessary to accomodate the several thousands of new users that are coming to the blockchain everyday.

But I'm a newbie myself, so I want to hear the community opinion, from people that has been on Hive for years and have more knowledge about the whole ecosystem than me!

Do you think that it's a good idea to increase the HBD Debt Ratio? Why? Why not?

Unless stated otherwise, all images are 1) created and owned by me or 2) from the game featured in the post. Also, this is definitely NOT financial, legal or investment advice. Cryptocurrencies are very volatile, so don't invest what you can't afford to lose. The content of this post is for informational purposes only; nothing here constitutes a solicitation, recommendation, endorsement, or offer.

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