This is the first in a multi-part series detailing how to develop a currency. The idea behind this is, perhaps, to outline a road map for the evolution of the Hive Backed Dollar (HBD).
Money is a topic most think they understand yet is extremely complicated. In this series it will be shown how even some of the best economists and central banks get it wrong. They are just are misguided in their analysis is the commodity back currency people.
We are going to lay out what brings value, the truth regarding inflation, and how things changed over the decades. The different components of a successful currency will be explained and we will delve into how most views are more than a century outdated.
What Gives A Currency Value
There is a great deal of discussion about reserves especially with stablecoins. The essential essence is what is backing the currency. Obviously, we are dealing with the presumption that a currency's value and stability comes from the back agent.
Here is where the gold lovers and central bank advocates (including economists) are aligned. Both believe that currency has to be backed by something of value. In fact, this is the view on the USD.
The gold standard still rages on in the mind of many people. We won't go into the details of why this was romanticized and actually, in many ways, wrong. The bottom line is this morphed into the "petrodollar", the mythological idea that the USD only had value because the Saudis price and sell oil in dollars.
The Fed lovers and ivory tower economists have the same view except with a different spin. To them it is not a commodity backing the USD that gives it value. Instead, it is the fact that the Federal Reserves backs it with reserves. This is the only reason the USD has any stability.
In fact, in reading research from the central banking crowd regarding cryptocurrency (stablecoins), their claim is the only reason they have any value, at all, is because they are piggybacking off the central bank and its policies. In the early days, there might be some validity to this view.
However, ultimately the reason is extremely flawed.
Simply put, a currency has value because of its network effect. Unlike the digital realm which measures users, in this arena the metric is economic productivity. As this grows, the stability of the currency expands. It has nothing to do with the backing or what the central bankers are doing.
Of course, to see this, we have to dig into what money really does.
Barter Anyone?
Do you ever recall reading about the barter system? This was where one person would exchange chickens for something else that another had, say a cow. It was a rather inefficient system and ran into challenges if one party didn't want what the other had. In this instance, a multi-party trade was set up where chickens, a cow, and lumber were swapped.
The ability to use currency removed this situation. Now there was a constant between all the products. We have no need to pull the one in with lumber. The person wanting the chickens can offer up money instead of the cow. If the chicken owner wants a cow, or lumber, or anything else, he or she can go buy it.
This is the basis of the monetary system. People most often consider the payment features. It is far from the only characteristic, something we will uncover in future articles. Tied to this is the idea of settlement. This is actually equally as important and is contained in the payment function. When someone hands over a $10 to pay for a sandwich, both payment and settlement occur simultaneously. When swiping the Visa card, payments occurs within a day or two whereas settlement can take a month.
Relating where money is in the trading situation, we can see how more is better. As the amount of commerce that takes place, the more money is required. Sure, this can be offset by a high velocity of money. However, this is affected by many factors such as savings rate, friction within the system, and extraction.
Therefore, the general rule is that more money is going to be required to increase commerce. Unless there is an exceedingly high velocity, more units will be required to facility trade.
HBD's Role
The Hive Backed Dollar has backing. It is not a reserve like USDC or Tether claim to have. Instead, it is an algorithmic stablecoin that is convertible to $1 worth of $HIVE. In this sense, it is similar to a convertible bond.
HBD is debt. This is basically a liability against the blockchain. The relationship between HBD and $HIVE is one which alters a great deal. As the value of the market capitalization of $HIVE goes higher, more HBD can be created. Of course, as more HBD is created, if it can used to buy [$HIVE on the open market, then the price of the latter will increase due to buy demand.
Of course, we have to note that debt on one balance sheet, according to double-entry accounting, means we have an asset somewhere else. In this situation, the liability on the blockchain is providing an asset to the userbase. The idea here is for people to utilize the currency for economic productivity, i.e. commercial and financial applications. Naturally, those are lacking at this point, an area of focus that is required.
As we also discussed in Hive as the premier payment system, the network that we are operating upon is unrivaled. This makes the stablecoin powerful as a payment mechanism. It is a decentralized electronic monetary transfer system without any counterparty risk.
HBD is piggybacking off the USD at this point. However, it is using it as a unit of account more than anything else. There are no dollars involved in this process. It is simply a measurement of how much $HIVE each HBD is worth, based upon a free floating exchange rate.
Ultimately, the goal is not for $HIVE go give HBD the value. Instead, we should be looking at all the different ways to provide value to HBD, without referring to the backing agent. Following this process means that we eventually get to the point where the conversion mechanism is not something that is even considered for most HBD. The utility (use cases) of the coin make it preferential in that form.
Here is where we see the idea of the Hive economy entering. As we can construct more aspects to the ecosystem, we can see how HBD will be penetrating many aspects. Ultimately, it ends up being the vehicle currency between all that is taking place.
This is one of the main area of focus. In the next article we will discuss the global expansion.
If you found this article informative, please give an upvote and rehive.
gif by @doze
logo by @st8z