Hive Bonds: The Collateral The World Needs
There is so much potential with the use of the Hive Backed Dollar (HBD). As we delve further into the topic, we can see more use cases appearing. There are some valid monetary use cases. From there, we can see the formation of an entire financial network. Here is where it is likely we can solve some major needs.
Before getting into the idea of collateralization, we need to comment about a recent change to the HBD placed in Hive savings. A couple months back, the medium of the consensus witnesses was 10% interest paid. This was changed overnight.
As we can see, the interest now being paid to HBD placed in savings was increased to 12%. This is a good step in the right direction to organically produce more HBD. If that is going to serve as a legitimate stablecoin, one of factors that is required is to get more of it on the open market. Simply put, we do not have enough to engage in commerce of any magnitude.
Another aspect of the project that likely needs altering is the conversion time. Arbitrage is a vital component of keeping the peg. Unfortunately, the risk associated with a 3.5 day turnaround is too great for most. People who arbitrage are looking to scoop up a quick percent or two. For this reason, we see the conversion time actually being a hindrance in that regard.
Hive Bonds As Collateral
The other day, we discussed Hive Bonds: The Next Step In HBD Evolution. A fair portion of this article will take from that, so it is best to read that as a primer to what is being covered here.
When it comes to collateral, there have been two problems that plagued the system. These have caused some of the biggest collapses in noted institutions such as Long Term Capital Management. These issues are what we seek to solve.
They are:
- The value of the collateral
- The ability to turn said collateral into cash
Here is why we see US Treasuries listed as pristine collateral. Neither of these is a problem when it comes to that asset. Everyone knows the exact value of a Treasury Bond. At the same time, it is a liquid market where the swapping of Treasuries for currency can occur.
The same is not true when the collateral is a Eurodollar Interest Rate Swap. Determining the value of the collateral is difficult and conversion to currency is impossible. These are basically bank instruments that get collateralized.
A major problem with the entire process is when collateral is not as valuable as was presented. When an entity thinks it is sitting on $11 billion in collateral and it turns out there is only $7 billion, we have a problem. Now, other entities end up with counterparty risk. The entire system which was "greasing the wheels" is now entering the stage of default as collateral calls are being made.
Numerous times we saw this. During the LTCM crisis, Japanese banks were exposed. Without adequate collateral, their positions were in jeopardy of failing. Of course, this is no different than the United States housing crisis that originated in the subprime market. That followed the same pattern, spreading throughout the system.
Hive Bond Solves This
The idea of a Hive Bond solves this. Here we have the situation whereby the collateral's value is always known. We have the par value which is paid out upon redemption. Thus, there is no mystery as to the return that one is receiving.
At the same time, by tokenizing the bond, we establish the ability to have a liquid asset. Without the ability to sell, an asset has diminished value. When people are stuck holding assets, that can cause a major problem. Liquid assets are always attractive since they can be unloaded, especially at times of need.
Another factor potentially addressed is the elasticity/inelasticity debate. Debt is necessary for economic expansion. We all heard the term "good debt". However, how do you provide the elasticity to give an economy what it needs to expand while preventing the participants from overindulging and entering the greed phase? Human history shows people cannot help themselves.
One solution is the idea of fixed money. The problem with this is there is no room for expansion. Inelastic money supplies hinder growth rates. After all, engineers, researchers, and computer programmers all want to be paid. Across an economy, when starved monetarily, growth disappears. Of course, an over indebted economy suffers a similar fate.
Here we have a possible solution to this issue. The fact that we are utilizing blockchain is providing a level of protection. Under the scenario described in these two articles, we can see how the HIVE/HBD link keeps things in order. The ability to massively expand the debt is tied to the conversion of HIVE-to-HBD. Outside the proposed interest rates, that is the major generator of HBD. This, naturally, has an impact on the amount of Hive Bonds created.
This is a serious subject. We are starting to see platforms pop up that utilize NFTs as collateral. It is easy to see how this might not end well. How can anyone reasonable put a sustainable value on an NFT as a collateralized instrument? Certainly it can be done yet it adds in another level of uncertainty. A NFT could easily be worth 50% less in a few months.
The concept of a NFT is similar to the idea of using Bitcoin as collateral. While the later is certainly with much less risk, the volatility is still an issue. Bitcoin can swing widely. While this helps traders, it does not provide a good basis for collateral. This is where entities could find themselves having to provide more collateral if the price drops. That is not a problem, unless more is not available.
And when things go back, this is often the case.
Expansion of the HBD Supply
There was a comment that was left by @starkerz in the previous article that fits into this. We need to keep in mind that part of this is to assist HBD as a stablecoin. Therefore, according to the outlook on the stablecoin market, we need to internalize exactly how much is needed. The numbers are going to get into the tens of trillions at some point. Major players will need hundreds of billions in stablecoins at a minimum.
These are some valid concerns. However, it seems to be overlooking the fundamental tie between HIVE and HBD.
The idea there will never be enough HIVE to back the HBD during year 8 or 9 is impossible. HBD is always worth $1 worth of HIVE. Hence, the amount of HIVE can move up or down per HBD but it is always there. Why is that? Simple supply and demand.
If, for example, during year 5, the amount of HBD is massively expanded, how is that not backed by HIVE? When people start to trade HBD for Hive on the open market, what happens to the price of HIVE if there is a huge run? Obviously the price goes up. So if, using the example provide, $100 million was out there and everyone wanted to get HIVE, the buying pressure would explode.
Remember, HBD is a stablecoin. That means it is no different from Tether, USDC, or any other payment currency. If there is $500 million worth of USDC trying to buy HIVE, is there enough of it out there? Of course. The price simply goes up. It is easy to get caught up in the "backing".
We also know that not 100% of the HBD is going to be turned into HIVE. In fact, it is safe to say that much of what is produced will end up either reinvested into the funds or used elsewhere. The later will arise as more sinks for HBD are established. Not everyone takes a currency and turns it into a speculative asset.
We already see this in operation to some degree on Hive. How many people take all they earn and swap it into Hive? Do we not see the vast majority on Hive-Engine receiving payouts and buying whatever tokens interest them?
It only makes sense HBD payouts, regardless of the source, will follow a similar path. Some will reinvest in a bond while others might buy Bitcoin with it. Having a payout in a stablecoin means all purchases are on the table. Hence, it is likely very little of the HBD created will end up going toward HIVE.
As always your comments are welcome. We have the opportunity to develop a major financial platform at the base layer of Hive. Due to the relationship between HBD and HIVE, we can do something that nobody else can. The fact both of these tokens resides at the base layer is crucial. None of this is operating at the second layer until we get to some of the lending or exchanges. Consider how powerful that is.
Hive's ability to expand utilizing its own base-layer, algorithmic stablecoin offers something very unique. For this reason, it is worth a great deal of attention to expanding what is possible. The ability to collateralize means that an entire financial system can be built upon liquid and easily valued assets. Not much offers that potential in the cryptocurrency world from what I can see.
Let us know your thoughts.
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