One of the more anticipated projects relating to Hive took a step forward. This is something many of us discussed over the past couple years since it could open up Hive to the rest of the world.
Not long after I posted about how Hive needs services, we see this rolled out. Granted, it is in the early days of testing but we are seeing the promise.
As you can see there are a number of transactions from people on Hive into and out of the account. Here we are looking at the movement of Bitcoin on the VSC network. This is a wrapped version of the coin. What really jumps out of the fact there are no fees. Unlike Bitcoin, where the fees can be prohibitive, we see nothing charged. This will change when the system goes live since the node operators will receive a minimal fee for their service. We will expand upon this in a bit.
The other factor that is evident to those using the system is the settlement time. While Bitcoin can take an hour in many instances (minimum of 10 minutes, we see this settle in about 15 seconds. This includes the communication between the VSC nodes and Hive.
This means that Hive effectively becomes the settlement layer.
So let us dive in and see what is being created.
Decentralized And Collateralized Bitcoin Transfers
The system starts with the notion of decentralization. During the early phases, we are using one node. However, there is already a second node in operation by Town Hall that is testing the system. When the testnet is fully rolled out, more will be added.
Decentralization is vital to the success of Hive. We are building something that is government resistant. Centralization is a point of vulnerability. VSC is removing that.
Each node is going to be responsible for the money it facilitates. Here is where collateralization enters. Whatever is placed pushed through that node is, from what I understand, going to require double collateralization. That means if someone wants to wrap $10,000 in BTC, the node will need $20,000 to process it. It is a preventative measure to dis-incentivize nefarious activity. If the node operator runs off with the BTC, the escrow will release the money it has to the user.
The system is designed for decentralized scalability. In this instance, the smart contract relating to the wrapped token can be used for any node that is set up.
Resilience will come from having hundreds, and then, thousands of nodes on the network. As more features are added, the incentive to utilize more smart contracts is there. We know one of the next areas of development is a decentralized exchange (DEX) which the nodes can utilize for swapping.
Resiliency and trust are two big factors.
Major Use Case For HBD
The Hive Backed Dollar (HBD) is getting a lot of attention of late and for good reason.
One major aspect of this network is that HBD is at the core of the design. When a node has to collateralize, there is one coin it can use: HBD. That means that whatever BTC flows into the network, it is going to be backed with double that amount in HBD.
Therefore, if we have $5 million in wBTC flowing through the network, the nodes will have 10 million HBD posted as collateral. Over time, this could swallow a lot of HBD.
As a point of reference, if we double these numbers, that is more HBD than is available. In this instance, the only option is to convert HIVE.
What is described here is already being written into the system. There is, however, another aspect that will enhance this.
How about some HBD staking? This is a concept that will likely be implemented at some point. It is basically a replica of what we already know.
Under this scenario, HBD is staked to the network by the users. This allows them to interact "freely". That means direct transaction fees are eliminated. The number of transactions that one can do is tied to the HBD staked.
The advantage is that HBD can be used to generate a return. Once the HBD is staked, it can be placed into savings. The payouts earned can then be used to compensate the node operators.
Here might be another major sink for HBD. If people are regularly sending wBTC transactions, staking some HBD might be a good option. Of course, for the minimal users, there will be the direct transaction fee selection. Major traders could prefer to take a different approach.
Multiple Tokens
We are dealing with Bitcoin. There is reason to believe this is just the starting point.
There is nothing that says node operators cannot run a contract for wrapping Bitcoin along with others for different coins.
Since we are dealing with BTC, it is likely the addition of the forks such as Litecoin and B-Cash is not a major leap. The code base is similar.
Of course, this does not touch the major elephant in the room. At some point, we could see the EVMs enter the picture. This could entail not only Ethereum but all the ERC-20 tokens being potential additions. That is not to say everything will be included although I surmise the node operators and developer will have the option of what contracts they add.
The point being is that, down the road, we could see Ethereum added. Since it will be wrapped like Bitcoin, the DEX could be set up to handle both.
Difference With Lightning Network
Many will say this sounds like Lightning Network. To a degree, it is.
There are some major differences. To start, Lightning is only Bitcoin. As just mentioned, the goal is to eventually incorporate other coins, especially the EVM, into the system. Also, something that hasn't been brought up is non-fungible tokens (NFTs). NFTs contracts can also be built by developers.
This means we are looking at the potential of:
- Bitcoin
- Bitcoin forks
- Ethereum
- Ethereum forks
- NFTs
Lightning is not doing that.
Also, as stated, Town-Hall set up a node. This is a team that isn't the most technically advanced. With some basic skills, we were able to get a node live. The same cannot be said for Lightning. Talk to those who run nodes on that network and it quickly becomes clear the technical nightmare it can be.
Also, there is a different incentive mechanism. Nodes are going to be set up for a wide variety of reasons. Operators will have a choice which contracts they implement. The primary goal might not be the transfer of Bitcoin. In fact, many nodes might not include that. For example, if a node is set up for a game, there might be no tie to BTC. Under this scenario, the NFT smart contract might be the thing of interest.
In Conclusion
Node operators are going to be their own entities.
This is a decentralized system since any wrapping will be done by a multitude of nodes. That means there is no honeypot whereby one account has all the Bitcoin. We see that with a lot of systems.
Also, trust is enhanced by the fact the nodes will be collateralized. This will protect users from nefarious operators who seek to bilk the system. This incentive is removed since they have to put up 2x the money to begin with.
We can see how utility is added to Hive. If liquidity grows to the point where $50K transactions can easily be handled, this will allow Hive to reach out into the world. Right now, access to the system is a bit limited due to the fact the coins are not on exchanges. This can solve that problem.
Finally, we are looking at resiliency. Eventually, nodes will be run all over the world. The operators, in many instances, might not be known.
There is one final piece that is going to keep this separate from all else that is pseudo-decentralized: no KYC.
Anyone can transfer Bitcoin on this network without having to go through KYC. It is likely the largest node operators on Lightning will end up complying and implementing KYC. The governments will require it. Since many of these could be run by the likes of Coinbase (or even the major banks), they have no choice but to comply with what the government sets forth.
This is going back to the original tenets of sovereignty.
Overall, this was a major step forward for the Hive ecosystem. Hopefully, some of the potential is starting to become clear.