What Gives HBD Value: Collateralization

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There is a great deal of discussion about stablecoins and what needs to be done to give them value. In the aftermath of the UST/LUNA collapse, people are wondering if algorithmic stablecoins are prudent. Even Vitalik and CZ are weighing in on Terra's new plans.

A lot is being made about whether stablecoin should be asset backed like Tether and USDC claim to be. However, much of this discussion enters around the fact few understand how the existing works and what truly gives value. Most, if not all, of that comes from really not grasping the US Dollar and why cannot be penetrated.

Over the next series of articles, we will discuss how to give a stablecoin value. We will cover the different areas where focus is required. If something like Hive Backed Dollar (HBD) is going to be a legitimate player, which it can be, we need to understand these different concepts.

The first we will cover is collateralization.

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Hive Savings Bonds

In the past we discussed the idea of creating a Hive Savings Bonds. This is a crucial step in the progression of HBD in terms of establishing value.

Much of the stablecoin conversation centers around the idea of backing these assets. The idea is to provide collateral in case the peg breaks as it did with UST. Of course, that was backed, in part, by Bitcoin and we see that did not work out so well.

So why is this a flaw?

Understanding bonding will help to clarify this a great deal.

With HBD, the idea is to have time vaults on-chain. This centers around having the ability to put HBD into a savings account for a certain period of time. In return for the "lock up period", a different rate of interest is paid by the blockchain.

Once this is live, second layer solutions could be built that create tokens ("bonds") to reflect the HBD that is in these vaults. Here we see the ability to provide liquidity to those who are opting for this approach. Just like any other asset, the bonds can be traded on exchanges.

More importantly, the Hive Bonds can be used as collateral.

What Is A US Treasury Bond

Here is where things start to get very interesting. It is also where the entire conversation changes regarding HBD.

To illustrate, we will use US Treasuries. When it comes to collateralization, these are the most pristine. They are highly liquid, stable, and distributed globally. They also are trusted by the banking and financial systems.

This brings up the question of what is a US Treasury? What is it backed by?

We start by looking at how one acquires a Treasury bond (or T-Bill). Basically, the person puts up USD to purchase the bond. The asset is good for a certain period of time until it redeems the money. There is also a rate of interest that is paid along the way.

So far, this sounds a lot like what a time vault on Hive would look like.

At redemption, the individual who purchased the Treasury Bond will have the initial investment paid back plus all the interest. This all comes in the form of USD.

In short, a Treasury bond is future USD.

Collateralization

Bonding is only a step in a more advanced process. Once Hive Bonds are created along with the establishment of a tradeable market, the potential for collateralization opens up.

This is a crucial concept to understand, one that completely changes the entire picture.

Going back to US Treasuries, when it comes to the financial industry, this is the highest form of collateral. The reason for this is it hits on three important areas:

  • Confidence
  • Liquidity
  • Stability

When collateralizing something, the lender needs to know a couple things. To start, if the collateral has to be taken, can it be sold. Here is where having liquid markets is crucial. It is why T-Bills are the best form of Treasury collateral because they are never off-the-run (lacking liquidity).

The second factor is stability. This is crucial for short-term lending. With something like Bitcoin, the volatility is death for this purpose. A slide of 10% overnight means that a lender might end up buying the asset at a 10% loss, something that it didn't want to begin with. To alleviate this, overcollateralization is required. Whereas a T-Bill might only require 1.5%, with Bitcoin it might be 12%-15%.

With Treasuries, volatility tends to be a lot less. Therefore, it is the preferred security when putting up collateral.

I once sold a machine to a start up bank. It was a lease program and the purchaser had to fill out a credit application. He said that was impossible. Simply, banks do not have credit, they issue it. In other words, I was asking the wrong questions.

This is a similar situation. When people ask what is backing the USD, they are asking the wrong question. People are looking for collateral to back the currency when the currency is the collateral.

We just showed how US Treasuries are nothing more the future dollars. They are also the most pristine form of collateral. No need to back the USD with collateral when it is collateral.

Here is where we can see the transformation of HBD. While others are trying to figure out how to collateralize their stablecoin to give it value, we build the value of HBD by making it collateral.

HBD Is Debt

Many are fearful of the fact that HBD is debt. This is true. However, we need to look deeper at that.

The situation with HBD depends upon the perspective. Whereas the issuance of it is debt, when bonded, it is transformed into an asset. The HBD now has a stream of payments over a certain period of time. This places it in the center of the fixed income market.

Of course, just issuing out debt without any control is bad. It is a situation that we witnessed with UST.

Ultimately, value, in part, comes down to utility. Over the next few articles we will delve deeper into this. For now, we just need to see how turning HBD into collateral is a major value proposition for the coin. We do not see this as part of the conversation around stablecoins because, once again, few truly understand what it takes to develop something like this. Most are effectively trying to create money market tokens. While this is worthwhile, it is something vastly different.

Debt is meant to foster growth. That is the ultimate goal. For that, Hive needs to use the debt as a vehicle for expansion. Unfortunately, there are no shortcuts. It will take time to build the depth and liquidity required. However, to ascend to the top, it is worth it.

To see what we are dealing with, here is an interview with Jeremy Allure, CEO of Circle, who claims stablecoins will be a $120 Trillion market.

In the next article, we will discuss the second way to give HBD value: derivatives.


If you found this article informative, please give an upvote and rehive.

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38 comments
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It seems we are still waiting for Bonds on a number of fronts. If that is going to be a catalyst towards getting stuff like this going, I hope they can get something put together sooner rather than later.

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At the base layer, it is a hard fork issue so it has to be coded in. We will not see the time vaults until the next one in 9 months or a year).

Layer two might come in some form quicker but will not be as robust as it will need to be. But have to start somewhere.

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(Edited)

HBD Is Debt

Many are fearful of the fact that HBD is debt. This is true.

Then I currently have $1428.74 HBD debt. This is approximately 2.6 months of minimum wage income (approximately $550 USD per month) in my country (in Hungary). So most people work three months to get this amount of money (most jobs provide monthly salary).

This thought is indeed scary/frightening. If I would have this amount in debt, then I do not even know what would I do.

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To you it is an asset. You have something that has value. You are paid the interest on it. Thus it is an asset on your personal balance, a liability on Hive's.

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To you it is an asset.

I know. And nowadays it pays a good amount of interest monthly. It was $23.02 HBD in the previous month (in April). I am constantly/regularly buillding (transferring to) my Hive Dollars (HBD) savings.

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Well, this is a intelligent article. But I confess its beyond my understanding. I understand the bonding of HBD, are you saying HBD will be locked in savings and the layer 2 will bond the HBD and we can use that bond in other places. Ok, that's easy to understand coz similar things are happening, bonded versions of staked tokens.

It's good use case for HBD, no doubth. But how does this garantee its stability?...

HBD is not going to be backed by anything, it remains another kind of algorithmic stable coin, I am sure its not the same as UST, has many more mechanisms on how it functions and I to a extent agree most of us don't understand this, as was the case of UST...

I see USD is backed just by Govt. guarantee, matter of perception and its different from stablecoins particularly HBD... there is no Govt. backing, and thankgod for it to a big extend, so the trust factor shrugs has to come by mechanisms of HBD...

Let it take time...and not scale so much that cannot be managed, as long as decentralised systems are in place, and its not going to be in money market for now I think its safe, although its there in a small part of DEFI as in PolyCub...

UST I mentioned in one of my comments in your post was centralised, and I want to tell you why - coz its stability depended on how Luna Foundation Gaurd swaps assets...its obviously not decentralised, it depended on actions of LFG... it meant buying UST, swapping it for Luna and that had backing of a lot of big companies because they had brought loads of UST and Luna and stuff...

Manipulation...atleast room for manipulation was there...

There is a stabilizer that does the swapping job in Hive, so I kind of slightly read but not delved and HBD will always be a percentage of Hive and all that mechanism is to maintain its stanility or solvency.

In anycase as HBD ecosystem grows, risks grow... now not much eosystem is there and its a nice coin for Hivers and I like it that way, than it going mainsteam and competing with main stablecoins, although I would not know...

And this BTC hype I tell you...

Yes, BTC is a decentralised currency, its not controled by Government all cool but its volatile, coz it no stablecoin so why all this countries making treasury of BTC and feeling supreme ...as if there are no risks, there will be risks in any volatile asset if its used for lending, borrowing and all...and again normal people don't understand they buy into the hype...

UST's fall... mecanisms faliur is there but its also due to it being targeted by big entities, they dumped a lot of UST and started the drama...

it all depended on how LFG balanced the ust by burning, swapping it and , finally its centralised and collapsed because the entity failed in the task...

Stable coin should be decentralised not depending on one entities balancing act, that's what I feel... although I supposed they had incentives for investors to burn UST for Luna and vice versa, and that was decentralised mechanism which did not work, whenever crash kind of price falls comes...

I don't know how stable hbd will be in large scale, its a massive challenge ofcourse and most importantly people will be scared of investing in algorithmic stablecoins for sure...

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Also, rules of Blockchain should be respected... in case of Luna... there is excess minting of Luna tokens suddenly to have enough Luna to burn UST to bring UST peg back....kind of reminds you of FED printing USD and causing hyperinflation... anyway!

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I see USD is backed just by Govt. guarantee

The US Government has nothing to do with the USD dollar. People seem to think there is some guarantee. The USD is not "government money" since the supply is controlled by the US commercial banks. In a credit base monetary system, the money supply expands via loans.

There is one guarantee in place: that each dollar a US bank creates can be redeemed for one physical dollar. The value of that is not guaranteed whatsoever.

This is a prime example of not truly understanding the system and the different variables in it all.

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Is very interesting to know how the HBD works and how can be posible that works in a stable coin way. Thanks for sharing. I learn a lo twith your posts about cryptocurrency

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HBD is getting so much love recently I'm starting to get jealous :))

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Hive Bonds sounds like a good idea. I wonder if Witness would take up and collectively build some backend for savings, bonds and other HBD use cases in near future. It'd be interesting to see what blocktrades and other witness have a say on this point.

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It could be something that is added at the base layer or layer 2. Most likely, since the base code is looking to be kept to a minimum, it will likely be layer 2. We will see how jumps on the idea to build some of this stuff.

Been talking to a couple people about it. That is why we need to keep the discussion in the open. Some will pick up on the idea. Perhaps Leofinance does something with it down the road.

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(Edited)

I have a question or two related to your 'crypto as pristine collateral' argument.

I understand how transparency plays into this concept.

What I don't understand is how a lender is going to take, as collateral, an asset that can be easily lost forever (if the private keys are lost) or stolen (if the private keys are stolen). I would never take something like that as collateral.

It would need to be locked up in a smart contract to ensure its safekeeping (but even those can be subject to hacking or other types of failures). Is that the mechanism you are envisioning?

Or are you merely referring to the HBD savings contract (or a similar bonding contract) hard-coded in Layer 1?

Or is there a broader application of this concept?

I guess I'm still a bit fuzzy on what you mean by pristine collateral, as it relates to crypto, in general.

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It could be layer 1 if it was coded at that level. Without that, it goes layer two where the application would have a token created for what is deposited. The payouts pertaining to that HBD in savings would go to the wallet holding the token. So if something is collateralized, the token would have to be placed into some type of escrow account. If the terms of payment were not met, then the token would be forwarded to the lender.

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Another top notch article! By just reading (and try understanding) your posts I will one day become a financial advisor naturally :p

It made me wonder though, what is your background? You seem on top of your stuff!

Looking forward to the next in this series ✌️

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It made me wonder though, what is your background? You seem on top of your stuff!

I went to school for economics. Spent 30 years in sales and marketing. Throughout that time, I was in an industry that went digital, meaning my study of technology from a 5,000 foot view started. I was always interested in markets and got into the study of the Eurodollar system and balance sheet banking. I also pulled out my econ hat after getting into crypto and starting to delve into crypto-economic systems.

In the end, cryptocurrency is just the next iteration of the Eurodollar system, ledger based banking. We are just doing it without banks.

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Quite an informative article I must say. I’m really just getting to know of the capabilities of the US treasury bill as regards it’s collatralization potentials.

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I am very new to hive. Everything what you mentioned here is not possible for me to understand but what I have realised is you are trying to support the platform.I was thinking about luna what happened to it. I was worrying about hive also. Now I feel good after reading you. Thank you for your informative post.

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HBD has a lot more safeguards in place. However, we still need to develop the value for HBD.

That is important.

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Bundling HBD into bonds would be yet another layer of protection against a death spiral like the one UST experienced. The collateral could not be converted while being locked up.

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Bundling HBD into bonds would be yet another layer of protection against a death spiral like the one UST experienced

No doubt.

The collateral could not be converted while being locked up.

No reason to convert HBD at that point since it is in a form that actually has more value.

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I find it hard to understand the technical issue that exists on HBD, but this post has sparked some comments that I read with interest

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“When people ask what is backing the USD, they are asking the wrong question. People are looking for collateral to back the currency when the currency is the collateral.”


This is spot-on. I really like this post. Anything that can be freely exchanged for goods, services and financial assets, like currency, is the ultimate collateral. And US bonds, even if real returns are slightly below zero, is a good “form” to hold that currency in…because it better protects against inflation than cash does.

I think about value a lot…where things obtain their value from…

  • Milk because it gives me energy
  • House because it gives me shelter
  • Clothes because they keep me warm
  • Currency because I can exchange it for these things
  • Currency denominated debt because it gives me a slight return to hold the currency in…
  • Plus the currency is the only thing I can use to pay off the government (taxes), so they don't put me in prison or take things from me, good reasons to hold that currency :)

Turning HBD into collateral is a good concept that should be explored. Questions like this come to mind:

  • Why should I hold HBD?
  • Can I exchange it directly for goods, services and financial assets?
  • Will there be penalties if I do not hold HBD?
  • Are there benefits, like you said, HPD denominated debt with an interest rate that’s highly liquid and exchanged freely globally?
  • What's the better option? Or the next best alternative? And why wouldn't I hold that collateral instead?

This is just a stream of consciousness I'm spouting off, but I think your post is thought provoking @taskmaster4450.

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