HBD Partial Insurance with BTC - Proposal to Print 1M USD of Hive
We are intrigued by the idea of using a pool of BTC, purchased using the Hive DAO DHF, as a partial insurance for the HBD stable coin, should the HBD fall below a certain USD level. We wanted to use this blog as a public forum to get feedback from the community and formulate a practical way that this might work.
This would bring a lot of attention to the Hive ecosystem and a lot of credibility to HBD. Our view is that Hive ultimately, is pristine collateral and will be used as such in the future, however a partial insurance backing of our stable coin with BTC, at least for now, will help to bring about that status for Hive quicker, than without.
The potential for the BTC community to use Hive as a side chain is beginning to look realistic especially with @BrianOfLondon's #V4V lightening donation payment system for content SEE HERE, which will be implemented into all threespeak front ends, and we hope on other front ends in the Hive eco system. This will make it very easy to donate or tip content on Hive using the BTC Lightening network. The interesting thing about this is that the content creator (the Hive account holder) receives this donation in Hive paid to their Hive account!
This combined with partial BTC backed insurance for HBD have the change to bring a lot of eyes to Hive
We see the potential for the HBD eco-system to develop as follows in the medium term:
1) HBD partial BTC insurance backing
2) Layer I Hive bonds with high APR returns
4) HBD as pristine collateral used to create a secure loan market worth billions of USD.
What did Luna do?
Luna has had huge success with their algorithmic stable coin UST. Let’s take a look at what they have done:
They set a highly, expansionary APR return on their algo stable coin, which works similarly to what is already in place with Hive Backed Dollars and Hive.
If their stable coin peg breaks they pay out with Bitcoin and other alt coins they hold. The BTC account would be replenished over time with dollar cost average purchases (DCA) once the peg returns
Recently, Luna has had to reduce its stable coin APR rate, as with almost all DeFi stable coin initiatives, such a high rate of return was not sustainable.
They have also recently announced that they are insuring their stable coin with a partial BTC backing such that if their stable coin peg goes below a certain price and breaks the peg, users will receive a partial pay out in BTC from their multi sig BTC account. We would propose a similar model for HBD insurance being partially backed with BTC.
How Hive Could Improve and Truly Decentralise Stable Coin Insurance Backing?
- Decentralised Multi Sig Luna’s Multi sig BTC account is controlled by the creator of Luna and only a few investors. They were self- appointed. Luna says that their stable coin insurance backing is "Partially centralised" which means it is actually centralised. On Hive the community elected, consensus witnesses could be the guardians of the BTC multi sig account, making it actually decentralised.
- Sustainable APR rate Luna’s high APR return is paid from a finite, private fund, which was funded by their treasury. It is effectively a fixed, limited amount and not protocol driven, inflation based like the Hive DAO is. This means that the HBD APR pay out would be far more sustainable and long term than that which Luna provides and that the insurance fund could more easily be topped up on Hive if needed.
- Difficult to Regulate The Luna team sold Luna to buy $1.7Bn of BTC at current value. Since this purchase was made using Luna which is an ICO token, it is likely to eventually be regulated as a security. Voting for a proposal on the Hive DAO DHF using a decentralised vote to create the funds required to purchase the BTC and holding the BTC in a multi sig wallet is far more difficult to regulate as a security.
- Only Decentralised Backing Used Additionally, the LUNA team have insurance backed their stable coin with other alt coins. We propose Hive only to use a partial BTC backed insurance, without other alt coins, since BTC is actually decentralised and therefore, more difficult to regulate as opposed to other alt coins.
- Room to expand HBD expansion is starting from a much smaller market cap meaning the long term growth of the token is significantly more sustainable and offers a much greater, longer term return than Luna. HBD is starting off at a market cap of approximately $24Mn and UST market cap is now $17Bn. This is 700x the market cap of HBD. This means that there is a market for this stuff!
- BTC - HBD Direct Swap Liquidity It could be possible to send BTC to the insurance multi sig wallet in exhange for HBD directly from the Hive protocol in an autonomous way. Luna also do this, however their BTC mutlisig account is centralsied and the UST stable coin is issued to the investor in a centralised way for this transaction. This would create an additional supply of liquidity to assist investors accumumating HBD.
Result - Actual Decentralised Insurance Backing for HBD!!
Luna backed their stable coin with BTC and the crypto community loved it! There is no reason the same cannot be true for Hive, using actual decentralisation to achieve a similar partial BTC insurance backing of its stable coin HBD without the risk of regulation.
BTC Multi Sig
How would we be able to safely execute the multi sig account on BTC? We would like feedback from the community on this. We would propose that it might include the multi sig being controlled by the elected consensus witnesses somehow, however, we are happy to entertain other ideas from you in the comments.
We think that it is possible for the BTC multi sig would be controlled by the Hive consensus witnesses with the tried and tested Hive blockchain consensus rules for holding keys to multi sig accounts and super majority voted governance decisions. A similar scenario is in place already with the DHF account for example.
HBD Insurance Partial BTC Backing Proposal
This is an initial exploratory proposal only, and we would like to further explore the best technical option in the comments below. This is subject to change based on input from the community. However, this is just to give you an idea of how the system might look:
- A proposal would be created to purchase, for example 1 million USD worth of BTC on a DCA basis over a 6 month period and put this BTC into the multi sig wallet.
- As time goes on, the community could re-submit the proposal to top up this insurance BTC backing or even increase it. Should the HBD market cap increase significantly, it may be that the community wishes to increase the rate of purchase of BTC for insurance backing at this point as well.
- It is important to note that if the HBD / USD peg is never broken the BTC in the multi sig account is never touched. BTC is used only when the HBD / USD peg drops below a certain threshold such as 0.98 for example, at which point, HBD being changed into Hive would be supplemented with a BTC payment to make up all or part of the difference.
- The threshold below which BTC will be used to partially back HBD – Hive conversions should be set by the elected Hive witnesses.
- Should the HBD/USD peg break the threshold (0.98 HBD/USD for example), the rate at which HBD is paid out using BTC insurance should be set at a lower exchange rate so that it is uneconomical to carry out large sized dumps of HBD for BTC and deplete the pool of BTC without first buying the hive off the open market and pushing the hive price up.
An example would be that should HBD trade below the peg of 0.98 to 0.93 USD, 1 HBD could be changed to Hive at 0.93 USD worth of Hive. Approximately 0.05 USD worth of BTC would be paid out from the BTC multisig account.
The remaining 0.02 USD would represent a profit that could be captured and paid back into the DHF.
At 1:1 BTC to HBD exchange rate, a lot of BTC may be redeemed, but at a threshold of 0.98 and a conversion rate of 0.98 USD it is not a great spread and so should limit the orders to small sized orders only unless there is a lot of sell side pressure on Hive or HBD. - If the HBD / USD peg is broken, HBD received to the multi sig account in exchange for BTC insurance pay-outs should then be used to regularly DCA purchase new BTC to top up the BTC Multi sig account using all or some of the profits sent to the DHF.
- A system could be set up where BTC is sent to the insurance multi sig account and the Hive protocol creates and sends HBD to the sender, in an autonomous way.
- We would also recommend including $20K or so in the proposal for marketing budget to get the word out about what the HBD eco system is becoming in terms of high APR, BTC insurance backing, bonds and pristine collateral for collateralised loans.
Moving Towards HBD Being Known as Pristine Collateral
As mentioned above, this will help the crypto world more easily see HBD as pristine collateral. And over time, we envisage that the BTC insurance backing of HBD will not be required. However, this medium term insurance will build trust in HBD more quickly than without as it progresses on its way to the status of PRISTINE COLLATERAL!
Other Phases of HBD Progression Required
There are two other phases for HBD to go through to help it become seen and used as pristine collateral. Hive Bonds and progression to bonds as collateral backed lending. Let’s now look at Hive Bonds.
Hive Bonds & HBD as Pristine Collateral for Lending
There has always been talk about Steem and Hive Bonds in the eco system, where Hive or HBD could be staked and locked in for longer periods and rewarded with a higher inflation.
In the medium term, we believe that the community has a great opportunity to organise and build a long term HBD staking system with which to back HBD inflation and market cap expansion. This would look something like the following (should be set by the consensus witnesses):
- 7% APR with 3Day liquidation
- 30% APR 365 day lock in
- 10% of total bond, paid to other existing bond holders for early liquidation of 365 day lock in bond (rewards Hive bond HODLers)
Layer II NFT Bond Tokens
The bond staking system could be built into layer I, however there is an opportunity to build a layer II platform which gives the investor an NFT when locking in HBD long term. The buying and selling of this NFT would represent buying and selling of bonds on a typical bond market. These bonds would always mature at 1 USD worth of Hive per HBD in the bond.
Layer II smart contracts could be built to auto return the bond NFTs that represent a collateralised Hive bond, meaning the lender would no longer have to trust a third party about the return of their collateralised loans.
Future Hive bond holders will be able to lend out their bonds and collect a fee, on top of collecting their HBD APR’s, without having to trust a third party risk intermediary.
We can now start to see how HBD can become truly the first actual decentralised pristine collateral system.
HBD APR Regulation and Hive Inflation Foresight
Such a bond market in HBD allows the community to see exactly how much locked HBD is coming due (bond maturity) in the future, and with this information, the community can plan ahead to ensure that a sound monetary policy is in place to meet the obligations without putting Hive at inflationary risk should excessive amounts of HBD be liquidated for newly created Hive tokens.
Outperforming BTC as Pristine Collateral & Maximum Stability
This sounds almost the same as what the US bond and treasury markets do today, and they are considered pristine collateral because they can always guarantee their USD payouts to their bond holders. With such a bond system, it looks like Hive will be able to do this too.
Furthermore, this outperforms a BTC backed bond system, since the value of BTC fluctuates so much. An HBD backed bond system, would always mature at 1 USD worth of Hive per HBD held in the bond.
Hive Backed Flexibility Additionally, the Hive eco system can adapt to issuing Hive Backed Rubles or Hive Backed Yuan. It does not have to stick to Hive backed Dollars, should the USD become an unstable or devalued currency.
Penalty for Early Unstakers to reward Bond HODLers
We also envisage a feature where, should the investor need to take their money out of the locked HBD bond earlier than the lock in period, they would pay a withdrawal fee which would be shared amongst the other stakers and the DHF for example. This principle is already employed on the HEX blockchain for example.
What Backs Hive Bonds and Stability?
In addition to the partial BTC insurance described above, the network effect of Hive, demand for resource credits and the locked in HBD in Hive bonds would form the backing of the liquid HBD token as collateral.
We believe this would create strong confidence in the stability of the HBD stable coin when combined with all of the existing stabilisation mechanisms such as the HBD stabiliser, the HBD:HIVE market cap limit (Hair cut) and the price differential in the internal swap market.
The high APR DeFi liquidity provided by the great work from @LeoFinance and loan collateralisation market (described in this blog) will stablisie the HBD token and create deep market liquidity.
Benefits of Bonds
This is a great summary for why holding bonds are good for everyone from @muratkbesiroglu:
https://hive.blog/hive-167922/@muratkbesiroglu/re-taskmaster4450-rae0ur
I liked the HBD Bond concept. It creates obvious advantages.
- The benefit of a bond to its issuer: Since the maturity of the bond is certain, future liquidity obligations become definite. Thus, Hive can adjust its investments, bond issuances and returns according to its future liquidity needs. It is worth paying an additional premium for it. And as the HBD was obtained by Hive conversion, the value stands within the Hive ecosystem.
- Benefits of a bond for the buyer: Buyers earn a higher return on the purchase of a financial product for which they have given up liquidity for a certain period of time. In fact, they did not give up liquidity since they bought a financial product that can be sold on the second-hand market. And they can use that bond as collateral.
- Benefit of the bond for the second-hand buyer: They can speculate on the price of that bond. They will probably obtain a premium. They can also use it as collateral.
I really like the idea of selling bonds as NFTs. In Uniswap v3, LPs are represented via NFTs. The concept can be tested by issuing bonds with small volumes and attractive returns at the outset. It would be beneficial to create alternatives with different maturities to address various preferences. Issuing short-term bonds can make selling easier until people get used to the idea.
HBD as Pristine Collateral
Should the HBD partial BTC insurance backing and Hive bond system be built out, HBD will be in a position to form the basis of a pristine collateral lending, rehypothication and Repo loans market.
After discussing this with @taskmaster4450 at length, we believe that the HBD bond layer, means Hive, as pristine collateral, can, in a decentralised way replace centralised activities in the overnight repo and interbank lending markets.
This represents a vast improvement to and brings necessary transparency to the activites executed in the current shadow banking system in traditional finance.
The existing market for this is currently valued in the trillions of USD.
BTC is starting to be perceived as pristine collateral. There is a good chance that it will become the world’s preferred store of value and is already being used as collateral for certain types of low interest loans.
With the bond and collateralisation system described above and in more detail by @Taskmaster4450 HERE, the Hive eco system will ALWAYS pay out its bond holders in a sustainable way, as long as the code is written into the protocol, the community can guarantee on-going, current, promised APR rates on Hive bonds, and then self-regulate the APR rates of the new rounds of bonds.
Managed correctly, HBD will, with time, even be able to move away from partial BTC backing and establish itself as a rare, and true pristine collateral layer, as the USD has done and as BTC is currently doing.
Our witness Set to 20% APR – Temporarily…
We have set our 3 day liquidation HBD APR to 20% on our witness @threespeak temporarily - not permanently, since we will change it based on the economic health of our stable coin eco system. For now it is an excellent time to attempt to vastly expand the market cap of HBD, in a responsible way and one way this can be done is to temporarily increase the APR for HBD to 20%.
@dalz’s analysis will give us a great initial perspective on whether or not the APR settings for HBD are too high. So far we think HBD APR could increase far beyond 20% on a temporary basis and as long as the amount of HBD we think is coming due to be converted into Hive will not significantly affect Hive inflation, we are comfortable 20% APR on HBD for a 3 day liquidation for the short – medium term.
We have made this move with the anticipation (hopeful expectation) that the HBD bond staking system that @taskmaster4450 is advocating gets built into Hive, at which point we will reduce our 3 day liquidation in to something like 7%
A Window of Opportunity for HBD
We are presented with a window of opportunity to attract significant investment into Hive as the highest yielding, sustainable, truly decentralised stable coin.
If we can get the HBD bond system built before a possible scenario occurs where witnesses or the community decide to reduce the 3 day liquidation APR on HBD down, investors willing to stake their HBD would be able to move their current HBD lock ins across to long term bond staking and maintain their high yields into the future in a sustainable way. This would be quite the classy move from Hive if we pull it off since so far every other chain that has tried high yielding stable coins is either centralised, or has not managed to maintain the high yield APR rate into the long term that HBD can.
Some stable coins have a market cap of over 1 billion USD. With the mechanisms mentioned above, Hive really can become the first long term, truly decentralised stable coin with a sustainable, long term, high yield return for holders.
If you like these ideas consider voting for @threespeak witness:
I do like the idea of backing HBD with some other core assets and bitcoin seems like one of the most solid. Especially after what we have seen with LUNA. It opens up some real possibilities of being noticed and wealth flowing into hive.
In our view, BTC is the only digital asset that should be used in the insurance backing of HBD, since it is the only one that has no VC, no seed round, no ICO, no company and no CEO behind it. Making it actually decentralised, and therefore outside of the reach of regulators. HBD has the opportunity to hold this status too and so we think only digital assets outside of the purview of regulators should be used in its insurance backing. this is one of the things that sets it completely apart from existing stable coins.
Fully agree with this 👍
This speaks to so many different levels of the industry and screams about the opportunity that is being presented here.
It is one of the reasons when I formulate my thoughts, I try to envision some of what you guys are building (along with DLUX). Starting with that mindset from the ground up is vital.
Certain things have to be in a single wallet or within the control of a few but we should strive to spread things out as much as possible.
One aspect of what I am toying with will require a bit of application centralization but can be negated by the software being open source and other "front ends" being opened.
Things like that can have people playing whack-a-mole when tied to a decentralized back end.
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Here's my quick idea tapped out on my phone but needing more work.
This is indicative of my thinking on how to decentralise what I'm doing with @v4vapp.
Bitcoin multi sig contracts are very limited. They form the basis of the entire lightning network so I've come to understand them.
I agree with comments elsewhere that trying to use 20 witnesses to one wallet would be a nightmare and as they go in and out of consensus you can't change their keys.
I rather see a growing collection of wallets with a manageable numbet of custodians.
This spreads risk and means we can have multiple custodians.
A lightning node is basically a Bitcoin account with shared ownership of multiple multisig wallets. But there's no way to run a lightning node without 100% power over it.
The only thing I can say about that is we are dealing way above my knowledge level. I have not the slightest idea of how to make it secure if this path is chosen. Fortunately there are those around here who grasp this stuff fully.
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So part of the challenge is to insure HBD in the most decentalized way as possible. Decentralize the insurance with a decentralized asset; decentralize the approvals; decentralize the verifications; etc. This is how I'm understanding the proposal.
While HBD could be partially insured by ETH or BNB (the other top-ranked cryptocurrencies), both are centralized to a high degree. If HBD is going to be partially insured, BTC is pretty much the only asset to use.
Whatever centralization we encounter will be done at the lowest level possible, and it will be minimal. This may not be avoiadable, but it would be worse if an asset that is not BTC is used t partially insure HBD.
This is definitely an ambitious undertaking, to partially insure a decentralized stablecoin such as HBD with the decentralized asset that BTC is known to be (at least relative to altcoins). If we can prove that this can be done in a decentralized manner, this would truly be ground-breaking.
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It’s really great seeing all the development on Hive and how HBD is being given more attention recently.
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Yes, we are super excited about the potential of HBD and Hive if this type of path is followed in a RESPONSIBLE monetary policy way
Hard to believe the HBD stabilizer is about a year old. Before that HBD got no attention. Smooth did a great thing rolling that out. It got everything started in this area which, down the road, will show how it completely altered Hive.
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It moves 10% most days. This artificial stabilization method will fail us. I don’t want it to buy it’s just simple math. We should grow Hive and end this HBD dream.
It’s a huge mistake to focus on HBD instead of Hive itself. I just don’t get it. This won’t end well
I believe the both of them are being given attention, no one is getting ignored. HBD is just getting more attention than it used to have. Increasing HBD attention doesn’t reduce Hive’s. They can both co-exist.
Not when HBD stabilizer needs to artificially keep price at a buck and it’s moving 10% a day randomly. It’s going to hurt our reputation if something goes wrong. I think it’s going to end badly.
I’d love to be wrong but I don’t think I am. Well I guess nobody thinks there wrong but I know what I mean. I just think the ideas here of backing HBD are gonna end so badly.
Well, you can never tell what the future holds, time will tell. But for now I trust the process and I don’t see anything wrong with it. But like you said, I might be wrong. Let’s just keep our fingers crossed and see how it goes.
This is really awesome experiencing this new features happening in the blockchain especially with the progress of the HBD moving in a positive state is really encouraging and am excited to witness all this happen
Yes, really excited, as long as the expansion of HBD is done responsibly, this really can be a winner. we can use @dalz HBD supply analyses to keep track of how HBD conversion to Hive might affect the Hive inflation and keep on top of current HBD APR that way, such that we maintain responsible monetary policy and do not cause Hive to inflate unnecessarily. should we achieve that, HBD will become the first decentralized, pristine collateral
Do you still feel same way now? To me it’s a fail. Hive should be focus not HBD. Most days it’s moved 10% I just see this hurting Hive and I don’t think it ends well if we continue to push this dream of HBD.
How is it moving in a positive way? HBD moves 10% most days and it’s artificially moved back toward a dollar. It’s going to hurt Hive Itself.
https://twitter.com/3speakonline/status/1515120029574049792
https://twitter.com/KennyCrane/status/1515221706931113986
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IMO at the current scale of Hive, witnesses doing multisig is likely to be unwieldy. The witness set changes, which means the multisig would need to be updated. And getting ahold of witnesses to sign off on spending the BTC during rapidly changing market conditions (which is probably when you want it) is likely to be challenging. Some of this could be improved with software, but developing and auditing software on a limited budget (and a larger budget is unlikely to make much sense for a $1 million fund) is likely to be more risky than just doing it some other way.
I would just recruit 3-5 trusted community members for the proposal.
Noted
This actually makes a lot of sense. Sure it is always nice to try and devise every layer as decentralized. However, there are certain aspects that, for practicality reasons, require some form of centralized management.
A handful of trustworthy vested members handling this is not a vulnerability or too much of a threat.
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how is this better then luna? cause it is people we trust not people they trust?
if the btc is really going to cause that much of an issue. multisig seems to be a mess on btc. i'd rather have a solution without it if it isn't solvable.
Taproot (soft fork) maybe the solution here but i haven't done enough research into it yet to be sure.
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Would you admit this post didn’t age well?
Could those 3 to 5 people be rotated through the witness list autonomously?
Once 5 or more have signed the transaction it processes?
If you want to replace signers of a Bitcoin multisig you need to move the coins (potentially $1 million worth in this case) to a new address with a new multisig. To automate this requires some sort of hot wallet software, and which all of the signers would need to have online. This is not trivial and presents significant risk. It would need to be very carefully developed and audited.
Also trading between BTC and HIVE/HBD has to be done somehow, probably through an exchange (which means someone probably has to KYC and interface with the exchange) or perhaps DeFi (adding additional issues, probably including more signers/wallets, and the fact that all Hive DeFi solutions involve a centralized custodian afaik, so further trust required).
If this is a theoretical discussion all sorts of things "could" be done, but if the goal is to actually accomplish something, grasping at challenging decentralization problems when you can get by with something reasonable to accomplish the function is just a huge blocker.
Seems needlessly complicated.
I'm not sure that we can attract enough investment to make it worthwhile.
If we burn half the hive, 200m, hive's price would have to moonshot to get us anywhere near the amounts being discussed, and absent an immediate moonshot we are limited in what we can expect to actually create in hbd.
I'd like to see some projected curves.
The more converted before the price appreciation, the less total hbd we end up with?
Wouldn't burning half the hive also halve what the witnesses and the pool gets?
In HIVE it would but not in value if the price of HIVE went up.
Can you explain to me what sense it makes to back a stable coin with an unstable asset, particularly an emergency fund?
There is no math behind it that makes sense.
Price goes down, HBD amount the same, value from asset down. Sense?
Price goes up, HBD is the same, and Bitcoin has a higher value. Also no direct relationship between.
Besides marketing a stupid idea and copy and paste luna. A coin that will become unstable the next time for sure...
A pool with 1M in Bitcoin and 1M in HBD woulr be way more interesting and smarter. And also can generate revenue for the chain.
Some fee for trading.
Bitcoin price goes up = people adding more HBD to the pool because of cheap Bitcoin.
Price goes down = vice versa.
liquidity owned by multi sig, pool onchain.
With Bitcoin version on hive that represents the token, people are likely to trade and stabilize HBD massive.
It's a "backed by bitcoin" that could really work.
If HBD is cheaper than 1$, I can buy bitcoin on a discount.
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