This post is intended to be the basis for a landing page for Hive Dollars. If you search for Hive Dollars, the top 3 results give very little information about what they are (coinmarketcap.com and @coingecko have almost no actual information about what Hive Dollars are or how they work). My hope is that we can change that, and perhaps this post can be the basis for any such changes.
Hive Dollars or Hive Backed Dollars (HBD) are a decentralized stablecoin pegged to the United States Dollar (USD) and a native token of the Hive Blockchain.
Features
- Zero fees
- 3 seconds transfer time
- Stake for 20% APR
- Decentralized
- Truly non-custodial
- Community Collateral
- Time-lock security
- Native HIVE/HBD Exchange
- Supported by Decentralized Hive Fund (DHF)
Read below for more detail
Zero fees
Along with all other transactions on the Hive Blockchain, Hive Dollar transfers are free and always will be. Bandwidth for transfers is allocated to users based on the Hive stake they own or have been delegated. Learn more.
3 seconds transfer time
As Hive has scheduled blocks every 3 seconds, Hive Dollar transfers reliably take 3 seconds or less to be confirmed on the Hive Blockchain.
Stake for 20% APR
Hive Dollar can be staked to collect interest. The interest rate is determined by consensus of the Hive Witnesses. That rate is currently 7% annually but is expected to increase after Hard Fork 25 (June 30th 2021). Staking is instant, unstaking takes 3 days.
Decentralized
Hive Dollars are natively on the Hive blockchain, and are backed by Hive collateral that can be redeemed using a native smart contract, available in many Hive wallets.
Truly non-custodial
As native tokens, Hive Dollars are transferred with the private keys of your Hive account. You hold your own keys, and no individual or organization has access to or custody of the collateral that supports HBD. See below.
Community Collateral
Hive Dollars can be converted into Hive at any time, using the HBD Convert smart contract native to the Hive Blockchain. Collateral is held virtually by the entire community. Hive is a social network with thousands of active users and stakeholders. Unlike other algorithmic stablecoins, the collateral of Hive serves as more than just a backing for HBD - Hive has utility unto itself, it does not merely serve to speculate on the growth of the stablecoin. Indeed Hive Dollars are a relatively minor component of the overall Hive network and ecosystem. Further, no individual or organization can access the collateral, it can only be recovered by executing the contract on your own Hive Dollars.
Time-lock security
Hive Dollars can be staked as "savings" which adds a layer of security. If a Hive account becomes stolen, there is a recovery process which can allow you to lock out the attacker. As Hive Dollar savings take 3 days to unstake, a user has time to intervene, lock out the attacker and cancel their withdrawal, preventing loss of funds. Read more about Hive Account Recovery
Native HIVE/HBD Exchange
Hive has a native Decentralized Exchange (DEX) with a HIVE/HBD trading pair. As with other transactions, exchanging Hive Dollars for Hive has no fees on the native DEX.
Supported by Decentralized Hive Fund
The HBD Stabilizer is a trading bot funded by The Decentralized Hive Fund (DHF). The DHF is an autonomous organization, run by the Hive community, which has over $25.6 million dollars in capital at time of writing. The HBD Stabilizer trades HBD on the internal market to ensure the stability of the HBD price. See below for more information.
Where do Hive Dollars come from?
The primary source of Hive Dollars are from regular inflation in Hive. A portion of regular inflation is allocated to post rewards, 50% of which is paid in the form of Hive Dollars. Some also come from the DHF, which also receives an allocation of Hive inflation. Read more about Hive Inflation.
Hive Dollars are also created and removed from supply via the peg mechanisms below.
Peg Mechanisms
Hive Dollars are pegged to the price of United States Dollars, where generally 1 HBD = $1 USD. This "peg" is maintained by 4 mechanisms, each creating or removing supply of Hive Dollars until the price returns to $1 USD. Along with these mechanisms, market makers can provide liquidity and make profit whenever the price of Hive Dollars deviates from $1 USD.
Convert Functions
The Hive blockchain provides two native smart contracts which each allow market makers to profit when the price of Hive Dollars deviates from $1.
- Convert from HBD. Executing this contract allows a user to access the virtual collateral which backs their Hive Dollars. For example, if a user executes the convert function on 10 HBD, after 84 hours they will receive $10 USD worth of Hive. The exchange rate is determined by the median of the Hive price feed over that 84 hour period. The price feed is maintained by the witnesses of the Hive blockchain, who act as oracles for the price of Hive.
- Convert to HBD. A Hive holder can execute this contract to receive HBD immediately. They must post an excess of Hive as collateral, equal to twice the value of HBD based on the lowest hourly feed price of last 3.5 days, combined with a 5% fee. The collateral is deducted immediately and HBD amount is credited instantly. After 84 hours the Hive is returned, minus the value of the HBD (based on median feed price during the period) and the fee.
When the price of Hive Dollars are below $1, market makers can convert their excess HBD to Hive, removing supply of HBD from the market to increase the price. When the price of Hive Dollars are above $1.05, market makers can convert their excess Hive to HBD, creating new supply of HBD in order to bring the price down.
Both of these convert functions serve to bring the price of Hive Dollars back to $1 - eventually, over time. As such, it is what we call a "loose peg". In order to maintain a tighter peg, well capitalized market makers must actively provide liquidity to the market, and actively convert their excess Hive and Hive Dollars when the price deviates too much. Historically - this can be relied on to eventually bring the price back to $1, but it is not always enough to prevent the price from deviating substantially, for substantial periods of time. Hence the need for the HBD Stabilizer.
HBD Stabilizer
The HBD Stabilizer is an automated trader which is well capitalized and works to maintain a tighter peg. It is funded by the Decentralized Hive Fund, a native DAO on the Hive Blockchain that allows stakeholders to commit capital to purposes that benefit the network. It can also be funded by Hive posting rewards, as well as donations from Hive community members.
The stabilizer maintains the Hive Dollar price peg with two main mechanisms:
- When the price of Hive Dollars are above $1, it sells HBD for Hive on the native Hive DEX. It then transfers the Hive to the DHF where it is instantly converted to Hive Dollars. This instantly adds new Hive Dollars to the supply while making a profit for the DHF.
- When the price of Hive Dollars are below $0.97, it executes the Convert from HBD function. After 3.5 days, it uses the Hive to buy HBD, removing HBD from supply. Unlike above, this is not a guaranteed profit for the DHF, but with a sufficient margin (hence $0.97) it should make profit more often than it makes a loss.
With the stabilizer running, market makers and arbitrage bots are more incentivized and require less capital to provide liquidity and keep the price of Hive Dollars in a close peg to $1.
Further minor peg mechanisms
- Witnesses can increase the interest rate on Hive Dollar savings to encourage the holding of HBD in savings, or vice versa.
- A rising price of HBD inherently increases the value of Hive, driving demand for Hive and increasing the scheduled inflation of Hive Dollars.
- Hive social media users have the option to take author rewards in 100% Hive Power and may be inclined to do so when HBD price is below $1, reducing the creation of new HBD when it is oversupplied.
Risks and Non-Normal Scenarios
Usual crypto risks
- Accounts cannot be recovered if keys are lost.
- Hive Dollars held on exchanges are subject to the risks of those exchanges
Conversion Risks
- When a user converts HBD, they do not know what the feed price of Hive will be, nor the price at which they can sell that Hive after 84 hours. The actual value of collateral will vary due to the difference between the feed price and real price.
Hive Systemic Risks
- Debt Limit and Haircut - If the ratio of Hive Dollars to Hive reaches a certain threshold, Hive reduces the production of Hive Dollars, eventually ceasing completely. At another higher threshold, the amount of collateral provided by the conversion contract reduces, known as the "HBD Haircut". This is effectively a partial default on HBD debt held by the Hive blockchain.
- Hive Inflation - The convert functions introduce and element of unpredictability to the otherwise predictable inflation schedule of Hive. This has historically caused Hive and Steem inflation to be higher than anticipated. However, the stabilizer can also reduce or eliminate inflation at times.
- Potential hyperinflation. The debt limit and haircut above exist to protect the Hive network from the possibility of runaway Hive inflation. In such a scenario, HBD will also have increased risk and likely have an even larger discount than the haircut. This scenario is so far purely theoretical and there is much debate over whether it can happen in practice.
History
- July 2016 - SBD (Steem Dollars) were introduced on Steem blockchain in July 2016. It had only one peg mechanism, the 'Convert From SBD' smart contract.
- March 2020 - Hive forks from Steem, duplicates balances of SBD from Steem as HBD
- April 2021 - HBD Stabilizer Introduced
- June 2021 - HBD Stabilizer begins to use convert function
- Coming June 30th 2021 - Hard Fork 25 - Convert to HBD function introduced
Further Reading
Section on Steem Dollars from original Steem Whitepaper
Stability is an important feature of successful global economies. Without stability, individuals across the
world could not have low cognitive costs while engaging in commerce and savings. Because stability is an
important feature of successful economies, Steem Dollars were designed as an attempt to bring stability to
the world of cryptocurrency and to the individuals who use the Steem network.
Steem Dollars are created by a mechanism similar to convertible notes, which are often used to fund startups. In the start-up world, convertible notes are short-term debt instruments that can be converted to
ownership at a rate determined in the future, typically during a future funding round. A blockchain-based
token can be viewed as ownership in the community, whereas a convertible note can be viewed as a debt
denominated in any other commodity or currency. The terms of the convertible note allow the holder to
convert to the backing token with minimum notice at the fair market price of the token. Creating tokenconvertible dollars enables blockchains to grow their network effect while maximizing the return for token
holders.
Steem Dollars are denoted by the symbol SBD, an acronym for Steem Blockchain Dollars. Creating SBD
requires a combination of a reliable price feed and rules to prevent abuse. Providing a reliable price feed
involves three factors: minimizing the impact of an incorrect feed, maximizing the cost of producing an
incorrect feed, and minimizing the importance of timing.