There is a lot of discussion around the Hive Backed Dollar (HBD) and the threat it poses to Hive. It is important to have these conversation to place safeguards in place to deter nefarious activities. Anyone just has to look back to the events surrounding UST to realize how things can go awry.
Because of that, it is important to detail some of what is in place. At the same time, I think it best to explain how things can unfold which will actually provide more resiliency to the ecosystem.
Convertible Note
HBD is similar to a convertible note.
This is a token that can be redeemed, through a conversion mechanism, into another assets. In this instance, HBD is turned into HIVE.
The convertible part should be rather obvious.
Where the note enters is the fact that HBD is being structured to become a fixed income instrument. With savings, it is already that way albeit with a loosely defined time period. This changes with time vaults.
By setting up time vaults, we are effectively placing a coupon rate on HBD. Whatever the individual selects, that is the return generated for the duration. Once reaching maturity, I presume, the user will have the option of removing the funds or putting it in for another period.
That said, HBD is a debt instrument. The blockchain has to back up the circulating supply with HIVE. This is not done through reserve but, rather, based upon the market capitalization of the backing asset.
One measure that is in place is quantitative. It is called the haircut rule. As long as the market cap of HBD is below the level set for HIVE (30%), all is good. Exceed that ratio and the system starts to eliminate the production of HBD.
This is one feature established to provide resiliency to the blockchain. It is a counter to a vulnerability that could exist.
Monetary Transformation
To me, the greatest source of resiliency comes from the idea of monetary transformation.
If all of this seems like a bit of a shell game, it is. What we are really discussing is moving value around based upon market needs. The idea of resiliency enters when this starts to distribute it.
Think of this as counter to a honeypot. The problem with many smart contracts that got hacked is a single wallet holding the funds. This is called a "honey pot". The hackers only need to access that single wallet to enjoy the "honey".
Monetary transformation removes the honeypot from the equation.
So how does this work?
This is where the magic starts to happen.
Derivatives
The solution is derivatives.
Certainly, this gets people alarmed since they are misinformed about derivatives. Most jump to the idea of leverage which does cause a lot of problems. However, that is only a portion of the derivatives market. Actually, the largest percentage of those assets are actually to hedge risk, not leverage it.
In this instance, we are not even dealing exclusively with risk. It is really nothing more than asset transformation.
For example, a wrapped token is a derivative. WBTC is not Bitcoin. It is a derivative of that asset, created to enhance utility.
Therefore, the key to resiliency for HIVE against HBD is derivatives.
Building Layers
Essentially what we are talking about is building layers which move further away from the core.
For example, Hive Bonds are nothing more than a token that is created to augment the HBD placed in a time vault. The main reason for this is speculation and liquidity. Investors can speculate on the price of these on the open market while those holding to maturity can enjoy the yield. If one does want to cash out, the liquidity allow for this.
Bonds are also debt instruments. Some might be apt to say that we are creating more debt. Actually we are not. Keep in mind, when the HBD is created, that is debt to the ecosystem. We are merely transforming it into another asset, with different characteristics.
Wrapping HBD on other blockchains is also a defense mechanisms. We all know the need for liquidity pools. Hive is difficult to access from the outside. For this reason, having HBD pools on Ethereum, BSC, and Polygon is a good idea. We might want to look elsewhere in the future.
If these pools grow in size, that is now HBD out there. However, the attack point is not really HBD. A pool that is attacked could disrupt the market but the HBD is safe. It is in a wallet on chain. The attack is not really against HBD but, rather, the derivative, say wHBD.
Could this simply be an extra step? Sure, if the majority of HBD outstanding was in the one pool. If 50% of all HBD was located there, one could simply bridge over, pull the HBD out of the Hive wallet, and attack the system.
However, if this only amounts to 5% of the total HBD, that is not going to be enough cause damage especially with other security measures in place to deter the behavior.
Collateralization
Why am I so big on establishing lending platforms tied to HBD and the bonds?
Here is where the answer becomes clear. We are, once again, engaging in transformation and layering.
Under this scenario, the HBD is actually switched to collateral. How this is envisioned is the token tied to the HBD in a time vault is posted as collateral to a lending application. Now that asset is locked up for the period of the loan.
Let us say that 1000 in HBD is locked up in a 10 year vault, 3 years in. Now we use that token to get a 5 year loan. The "bond" is locked up for 5 year, basically removing it from the market. Even when the loan is paid off, there is time left before the HBD hits the market.
We see something similar with how the creation of VSC is unfolding.
According to my knowledge, nodes are going to be collateralized. By this, it is my understanding, that if a node wants to process $50K transactions, it will need 50K HBD posted as collateral. The design is to dis-incentivize node operators from not processing transactions and running off with the money. Why are you going to steal $50K when that is what you posted, and lose, if you do?
This money is not locked up per se. That said, as long as the node wants to operate at this level, it effectively is. The HBD tied to this these nodes is no longer an attack vector since the utility removes it from the market.
Of course, if the VSC system grows in size, we could see a lot of HBD required to facilitate transactions. Trades of $50K or $100K are minimal, even in the world of cryptocurrency. Some nodes will need to have this kind of HBD posted at some point to facilitate them.
Distribution
Notice how we did not focus upon payments at all. To me, this is a small, but important, piece to the puzzle.
The numbers are on the financial end of things. What comes with payments is distribution. We know decentralization means resiliency.
Even HBD in liquid form could be a defense depending upon the use case. The problem is, at the present moment, people see HBD only to swap to HIVE. That is the main utility for it.
However, what happens when HBD is used to buy food or medicine? Is someone going to swap the HBD, i.e. put it on the market, in that instance? The answer is no. At the same time, if the merchant who receives the payment uses it to acquired goods it needs, we can see the circular nature.
It is possible that tens of millions of HBD are effectively "locked" in a country like Venezuela. This is not in a time vault or anything like that. Instead, it is the utility as a medium of exchange that provides this.
We see the same with financial service providers. If loans require HBD for repayment, as an example, what do you think people will do? They will accumulate HBD as they need to make the payment. On the flip side, the lender is not going to swap HBD into HIVE simply because the application is going to want to make more loans.
In Conclusion
The resiliency comes from a couple factors:
- distribution
- layering via transformation
- utility
Basically, it becomes nothing more than a numbers game. How much HBD is in different areas? The idea is to "lock up" as much as we can. By this, we are not necessarily talking about a time vault where the HBD is literally inaccessible. This can be a "soft lock" where utility effectively means it is not a threat.
That is how we build a currency. The mistake most stablecoins are making is they believe the value comes from the asset backing it. This is nonsense in the long term. Where the value comes from is the economic productivity tied to the currency. It is a combination of both commercial and financial.
HBD is the trojan horse for Hive because it only requires the building of some of the features described here. Everything mentioned requires HBD. Each of these areas can ultimately swallow up millions of HBD simply out of necessity.
In the process it reduces the points of vulnerability. This is done simply through another form of decentralization.