The evolution of alternate financial system is underway. We are embarking upon an enormous effort to arrive at something that is competitive with what is already established. For this to happen, we have to get the infrastructure and foundation in place.
We see a lot being made about the Hive Backed Dollar (HBD). This is something that holds tremendous opportunity. Of course, like with anything, there is a lot more than meets the eye.
Over the last few months, we spend a lot of time discussing the idea of time locked assets on Hive. Essentially the idea is to add another layer to the Hive Savings program which offers a higher return in exchange for a longer commitment. This is an idea that is being picked up by the Hive core developers, as they discussed it on their latest call.
On the surface this looks like just another way to embark upon generating a return for people. Some believe it is just a trying to pump things. It actually goes much deeper than that. In fact, it goes to the heart of the global banking system. This is an area that Hive can play in.
While obviously offering people a higher yield is a positive and could help to attract more capital to Hive, it is the evolution after that which is vital.
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Time Locked Bond
What does a time locked bond do for Hive?
The most obvious is that it adds network stability while also putting Hive deeper into the fixed income market. This is, however, just the start.
To explain this concept, let us look at what takes place. If we place 100 HBD in 25% APR account with a 1 year lockup, we obviously have generated a return. Under this scenario, we will earn roughly 25 HBD over the next 12 months (a bit more since the APY is actually higher). This is typically as far as people's thinking goes.
However, there is another piece to this puzzle. What we effectively did is create an asset. The action taken has a clear payout schedule, a cost, and a time period that is transparent. In other words, this is a financial product.
Here is where the idea of a bond come in. By taking the extra step, we not longer have money in an account but an asset that has market value. This is what bonds essentially are. The fact that it is fixed removes an entire layer of volatility.
The obvious drawback is the money is locked up and there is no liquidity. By going to the next level, this is removed.
A bond has market value. It can be traded or sold. Globally, the above board bond market is over $100 trillion. This is not a small pond.
By adding a liquidity layer, people now have options. The fact something is tradeable means that it also can be collateralized. Here is where things can get very interesting.
Digitizing The Entire System
With a time locked feature on Hive for HBD, we can create second layer solution that incorporates what we are describing here. Applications could be designed that would allow people to deposit their HBD into the savings program. When that occurs, a NFT is placed in the individual's wallet. This is an asset that represent the money that is locked up along with the future returns off it. In other words, it is a bond.
People who follow along with this realize we just added liquidity to the situation. This is obviously important to depositors. It will serve as an incentive for more people to get involved. If one can claim a higher rate of return for locking up the funds yet know they are still liquid, that will remove one obstacle. Of course, keep in mind the liquidity is due to the second layer. On Hive, the HBD is still locked up.
This is only one aspect of the evolution. There is a secondary consideration. Some might have heard about the idea of never selling your asset. Instead, of selling, it is far better to loan the asset out.
In other words, use the NFT for collateralization. At this level, we are entering the big money world. How big?
Perhaps you saw the news that hit the crypto site where the Fed, in 2019 and early 2020, loaned out $48 trillion to the mega banks. While articles like the one linked fails to understand the system, it does show the size of things. Overnight lending is, through trilateral agreements (what the Fed knows about), in the neighborhood of $4 trillion daily. It is completely unknown what the bilateral agreements total but it is likely much higher, probably topping $10 trillion.
This is daily activity. It is also how the international banking system generated enormous wealth (and power).
What is in question is why did the Fed have to step in? This is a multi-faceted answer and much of it outside the scope of this article. Nevertheless, one of the key components is a lack of high quality collateral. It is an issue that was plaguing the banking system for much of the last 15 years with no signs of letting up.
The opportunity presented to the cryptocurrency industry was outlined in The Banking System: Cryptocurrency's True Threat. It details how we can go to the heart of things with a new system.
Ledger Banking
We all heard that blockchain is Distributed Ledger Technology (DLT). This is ideal since the international banking system truly runs on Ledger Technology. Naturally, it is not distributed but it is a system that started 70 years ago. Thus, we know the solution for how this works.
To further exemplify where this can go, let us use a scenario where Hive Bonds are put up as collateral.
We will use the pHBD liquidity pool that is being set up on Polycub. For this example, there is 10 million in the pool. That means there is 10 million HBD, half of which is locked up in the savings (3 day) paying 20%. The other half is kept liquid from bridging from pHBD to HBD. However, through analytics, the team realizes that most of their activity occurs between the hours of 4 AM and 8 PM. There are 8 hours where very little happens. This means the HBD is basically sitting idle.
Here is where the lending comes in.
Leofinance goes to the application and decides to loan their money out. In this scenario, they take 2.5 million HBD and put it up. Looking at the returns being offered, they see they can get 10% APR. This means they will get .0000913 per 8 hour shift. On 2.5 million HBD, this produced 283 in that 8 hours.
This is how the swaps work in the financial realm. These are also called Repurpose Agreements (Repo). I know, rather boring stuff but wait until we see what happens.
The arrangement is essentially the bond holders are "selling" the bonds to Leofinance with the agreement to repurchase them at a later time (8 hours), for more money. The price is the 2.5 million plus the 283 HBD.
It is easy to see why this is an advantage to Leofinance. There is 2.5 million HBD just sitting around not needed for 8 hours. Why not put it to work? It is all automated and 228 HBD doesn't sound like much but consider this is done every day*. That equates to over 80K HBD per year.
Of course, consider what happens if they are using 25 million HBD.
The one question that might be arising is where does the 283 HBD come from to pay Leofinance? Here is where the magic enters.
There is 2.5 million HBD that is "loaned" to the bondholders. Here they take the money and direct it into another project that generates yield, for same 8 hours. Perhaps it is something that has a 30% APR. Now the bond holders are able to make 684 HBD. When the 228 HBD is subtracted, we are left with 456 HBD profit. Keep in mind, this is above the 20% APR that the bond holders are receiving for putting the HBD in the bond to begin with.
By utilizing smart contracts, after the 8 hours, all of this is unwound and the payments are made. Everyone made some money and goes away happy.
The key, however, is the collateral.
Replicating The Banks
As we can see, the situation is allowing all of us to play in arena we presently are excluded. By adding the time locked HBD feature to Hive, we see can how this market opens up to us.
The final piece that is essential is to look at the collateral itself. Here is where stability enters the picture. Many tout Bitcoin as having this future use and that might be the case. The challenge, at the moment, is Bitcoin can lose 15% overnight. We have seen drops of double digit in just a few hours. It could change in the future which does open up the door for possibilities.
If this happened under the example just posed, the bondholders might be tempted to default on the loan. After all, if the collateral put up is worth 15% less, just let that be transferred to Leofinance and let it take the loss.
It is at this point that HBD enters. The true value of these bonds is they are generated via a stablecoin. The backing asset is not going to drop 15% once the expansion and arbitrage opportunities takes place. Plus, with enough bonds created, we can have a robust market of transacting. This is another evolution of the fixed income market, offering people the opportunity to buy bonds. Once again, we see the reach of Hive expanding.
What I described in this article is a basic trilateral agreement with Bank of New York Mellon being replaced by the application. Also, anyone can enter simply by putting the required amount of HBD into the application.
The key is that growth leads to both size and liquidity. As the system expands, the collateral is elastic, thus being able to meet demand. The present system suffered a collateral shortage the last 15 years since Mortgages Backed Securities were shown to lack the quality that was touted.
We know the international banking system built something very powerful. Cryptocurrency has the opportunity to replicate that while improving upon it. We go further by adding decentralization and transparency. That coupled with the elasticity of quality collateral will help to forge a new model.
After all, tracing it all back leads us to a transaction on the Hive blockchain, something everyone can see. With the record available, we can see exactly what is backing that NFT. We also then have free market operations on the bonds which reveals the liquidity of each particular one.
The Fed put in hundreds of billions each night for months to keep the system liquid since banks were not lending to each other. Since this can be tied to the lack of collateral, we see how even capturing a small portion of this could really help HBD. An open source application built on a decentralized second layer that is tied to Hive really changes the entire equation.
This is why getting the time locked HBD feature on Hive is so vital. It opens up an entirely new world of potential. Instead of trying to use other assets to act as collateral, HBD is creating the collateral.
It is a very unique position.
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