The HBD Conversion Formula Matters More than the HBD Interest Rate

This post will make some positive suggestions about HBD after a short rant. The positive suggestions are to create a "long conversion" for HBD that has no fee. The second is to support local currencies.

HIVE guarantees the price of HBD with a conversion formula.

I contend that it is the formula, and not the capitalization of HBD, that is important. The chart above from HBD on CoinGecko shows that the conversion formula has kept HBD at a steady price.

As I understand the conversion procedure works as follows: When a user presses the convert button, the system will destroy the HBD and create one dollar's worth of HIVE in its place. The process has a 3.5 day delay and charges a 5% fee.

When the price of HIVE is below $0.95, a user can actually make a little money by converting from HBD to HIVE.

Please note, the program does not guarantee that a user will get $1 in HIVE for an HBD. It guarantees $1 minus the five percent fee. So an HBD is really worth $0.95.

This five percent discrepancy makes HBD unsuitable for many financial transactions. Merchants are unlikely to accept HIVE in payment because they have to value a HBD at only $0.95. NOTE there are additional costs in moving HIVE into their bank.

The chart above shows that there was a problem with HIVE moving above $1. The witnesses fixed this problem by adding a HIVE to HBD conversion process which destroys HIVE and creates HBD. One can make money by converting HIVE to HBD when the price of HIVE is above $1.05.

The HBD chart is very interesting. The decision to raise the interest on HBD to 20% did not seem to have a profound effect on the price of HBD. It appears that the peg is still controlled by the formula.

I argue that the 20% interest has had a deleterious effect on HIVE and the alt-coins on HIVE-Engine.

Remember, the system uses HIVE to guarantee the price of HIVE. The more HBD there is in the world increases the risk associated with this guarantee. The 20% interest rate has increased the market capitalization of HBD. When the witnesses started the interest experiment, the market value of HBD was well under 1% of HIVE.

When I looked at the Ausbit HBD Monitor a few seconds ago, the market cap of HBD was 5.1% of HIVE. The dreaded "haircut" happens at 10%.

Panicking HBD holders are likely to convert hundreds of thousands of HBD to HIVE in the current weak market. If HBD holders converted 1 million HBD to HIVE at 0.33, they would create 3 million HIVE that they would then dump on the market.

HBD could create a death spiral for the platform.

The high interest on HBD was a stupid. The solution is to recognize the mistake and to make some smart decisions.

Improving the HBD Conversion Formula

Since the conversion formula for HBD has a bigger impact on the price of HBD than the interest rate, I contend that the best way to improve HBD would be to improve the formula.

I want to re-iterate, the conversion formula includes a 5% fee. Smart people understand the that 5% means that HIVE does not guarantee that the price of HBD is $1.00.

Because the formula takes a 5% fee, HIVE guarantees that the price is $0.95.

From a merchants perspective, I would look at the 5% fee as a price that I have to figure in for any sale that takes place in HIVE.

If I were to sell products for HBD, I would have to price the products to cover this excessive transaction fee.

The best way to maintain the peg would be to reduce the fee. If HIVE reduced the conversion fee from 5% to 3%; we would probably see HBD hovering around $0.97.

The current system has a 3.5 day delay and charges a 5% fee.

I admit, I like this formula.

If I were the queen bee of the HIVE, I would keep this formula in place and call it a quick conversion. I then would add a long conversion process. The long conversion would delete the HBD and turn it into HIVE with no fee. The long conversion might take 7 days, 10 days or maybe even 14 days.

People who want to withdraw HIVE would have three choices: They could sell it on the internal market. They could run the short conversion and pay the 5% fee or they could run a long conversion and get a full $1 worth of HIVE!

Merchants are used to long transaction times. If the long conversion reduces the transaction costs, they would accept it because it simplifies their margin calculations.

Conversion v. HBD Market Capitalization

Apparently the witnesses believe that the key to getting merchants to accept HBD for payments is to increase the HBD capitalization and liquidity.

Since merchants can convert HBD to HIVE, the capitalization of HBD simply wouldn't really matter.

There is absolutely no need to have a large capitalization of HBD if people trust the conversion process.

HBD Market Capitalization Hurts HIVE capitalization

I need to repeat this argument. HIVE guarantees the value of HBD with HIVE.

This means that all of the HBD on the market is a threat to the long term value of HIVE. When I wrote this piece, HIVE was trading at $0.33. If the holders of HBD panicked and converted a million HBD at the current price, they would create 3 million HIVE.

The HBD market valuation pushes down the price of HIVE.

The ideal situation is for the HBD market value to be a tiny fraction of the HIVE value. This way HBD does not run the risk of hurting HIVE.

There are some cool things that HIVE could do if the witnesses ever realized that the formula matters more than the market value.

Adding Local Currencies

HBD stands for "HIVE Based Dollars." The conversion formula is based on the US Dollar. Well, I have bad news for the world.

If the formula is more important than the market value, then it might be possible to change the formula so that users could hold currencies other than the US dollar.

It would not be difficult to create formulas for people around the world to use their local currencies. The formula simply needs the current price of world currencies which is usually available on forex web sites.

HIVE users could then receive their HBD rewards in their local currency. People in Europe could receive HIVE based Euros. People in Nigeria could receive Hive Based Naira. People in India could receive Hive Based Rupee. People in Brazil could receive Hive Based Reals.

For Russia I would have a Hive Based Ruple. I would charge a 50% conversion fee and give the fee to Ukrain.

In this improved system, users would be allowed to choose their local currency. Allowing users to use their local currency would make it easier for users to do their financial calculations.

Adding local currencies would help HIVE attract a diversified international audience and it would reduce the risk of exposure of the platform to a single base currency.

Adding local currencies would do more to make HIVE a transformative technology than this idiotic notion of charging junk bond interest rates for HBD savings.

Conclusion

It is the conversion formula and not the market capitalization that gives HBD its value.

To be frank, the market valuation of HBD is actually a risk for the platform. Ausbit showed that the market capitalization of HBD topped 5% of HIVE today. The dreaded "haircut" occurs at 10%. HBD holders are likely to start panicking if HIVE falls any further.

I think we should end the foolishness of giving 20% interest on HBD.

Rather than committing financial suicide. HIVE should do something innovative.

Innovation starts with the realization that the conversion process is sufficient to guarantee the price of HIVE.

We should create a long conversion that does not have a fee. This would help merchants who wanted to use HIVE in their sales.

One could create conversion programs for different currencies. This would help build the international audience on HIVE.

Understanding that the conversion formula does more to stabilize HIVE than the interest means that HIVE could do innovative things like offer local currencies.

The 20% interest was a foolish idea. There are many better ways to improve HBD. Adding a long conversion with no fee would do more to stabilize the price of HBD than the interest rate.

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