In the decentralized world, it takes a long time to get things done. On Hive, there are discussions, debates, and more discussions. This often includes witnesses, users/stakeholders, and developers.
The topic of Hive Bonds goes back a couple years. It was first proposed as a liquidity mechanism for HBD, only to evolve into something much bigger. One of the main ideas is to generate a high quality form of collateral.
I will cover the details of the collateral and counterparty risk in a future article. For now, the biggest component is infrastructure.
This starts with time vaults.
Time Vaults Being Coded
There was an interesting conversation on the CTT broadcast yesterday. It started out with the focus being on the APR of HBD in savings. This evolved into a larger discussion about the future of HBD along with what could be built.
Blockchains joined later in the show providing valuable insight into the technical process. He also mentioned that he would start the process to get the time vaults built.
Before going any further, we know this is going to happen, we just do not know when. It might make it into the next hard fork or it could be the one after. The point is we might have a bit longer to wait.
Nevertheless, knowing they are on the way means other actions can be taken.
What Are Time Vaults?
Time vaults will reside at the base layer. It is basically a series of savings accounts like we have for HBD now. The difference is that they will be set up in a manner that requires a time commitment in exchange for the interest rate garnered.
Right now there is debate about the interest paid on HBD in savings. Some are for lowering it. What is not debatable is the rate does not require much of a lock up period. Basically, one gets that with a commitment of 3.5 days.
Time vaults will reflect certificates of deposit. As the length expands, the interest rate will increase. This will be determined by the witnesses. Thus, the time periods are hard coded into the chain but the rates can be adjustable.
We also will have the rates locked in. For example, if one deposits HBD into a 1 year vaults today, that rate is good for the entire time. If the interest rate is changed tomorrow, the money that went in today is under the old rate.
As we will see, this is the essence of a financial network.
There is another advantage to time vaults. They do provide a security feature for the ecosystem. Since HBD is a debt instrument, it could be a point of vulnerability. We already saw some security features put in place to prevent a TerraLuna situation. Time vaults would be another.
Under this scenario, any HBD put in is locked up for a period of time. That means anyone can see what is coming due and when. My view is the risk diminishes the more that is built on top of HBD. With more options, the idea of converting back to $HIVE is reduced.
Hive Bonds
This is the first idea of what can be an entire financial network. The time vaults are base layer. Hive bonds will be a second layer (or a series of) solution.
Basically, one would deposit the HBD through an application. This would place it into a multi-sig wallet. The individual would garner the interest for that particular transaction, just like at the base layer. There is also a token issued for the HBD, forming the "bond".
This token can be tied to an exchange. Here we see liquidity provided to individuals who lock the HBD up. Just like when one buys a bond, the money is not returned until maturity from the borrower. However, one can always go to the market and sell the asset.
Collateralized Lending
Another facet of the financial network is lending.
Many are familiar with the Maker DAI lending application. People are able to post bitcoin as collateral on a loan. This allows individuals to borrow against a certain percentage of their asset.
For example, if someone has $5,000 in $BTC, perhaps they borrow $2,500 (or 50%). This is a common scenario.
The drawback is volatility. Bitcoin can move from $30K to $25K in no time. This means that people have to put up more money if their collateral value drops below a certain level.
What is being proposed with Hive Bonds reduces this. A Hive Bond is based upon a certain amount of a stablecoin placed in a vault, garnering a specific return over a certain period of time. All components are fixed.
The market can change the value as we see with bonds. They do, however, usually pale in volatility when compared to stocks, let alone bitcoin. The one time they did tank was when the Federal Reserve rapidly raised interest rates. This provides the Witnesses with incentive to be slow with their moves regarding rates.
We are looking at the result where bond is less volatile than bitcoin, making it a much better unit of collateral.
Value To The Ecosystem
Over the last couple years I discussed what gives a currency value. It is not the usual things pointed to including the asset backed notion. This is going to really hinder the majority of the stablecoins out there.
What gives a currency value is the economic productivity tied to it. This can come in the form of both commerce and finance. Generating a circular economy helps a great deal with the first. The latter, however, is where the steroids are.
The entire foundation of this financial network is HBD. Over time, the goal is to get it tied to:
- payments
- derivatives
- funding and investing
- collateralization
As the options expand, more HBD is required. While there is debate over the present interest rate, in the end, that is still small numbers. We could potentially be dealing with the need for billions of HBD. This can only happen through conversion of $HIVE.
Unlike most other stablecoin projects that are trying to provide value through the reserves, this creates it through utility. If we are dealing with a DeFi network of financial services that people are using, HBD will be in demand. Since this is directly tied to Hive, the market will, at some point, reflect that in the value capture token.
Counterparty Risk
The other piece that has to be mentioned here is the counterparty risk.
When dealing with the financial system, there are two issue: friction and counterparty risk. They tend to stem from the same area, financial intermediaries.
As more financial institutions are involved, that expands the risk. One needs to trust each. Solvency at every level is important and, if one fails, it can have a fallout effect.
We are looking at reducing this as much as possible. HBD in savings eliminates any centralized entity. The counterparty in this transaction is the blockchain. Even the wallet is decentralized in the sense one can access through many different websites.
This is being expanded with the development of an open source, desktop wallet by the core development team.
Hive bonds does add in another level of risk. This can be mitigates by having many options for creating the bond. By this I mean 3Speak, Ecency, PeakD, Leofinance, and whomever else could set up something on their platforms to allow it.
We also can utilize decentralized, layer 2 node systems to host the transactions, tied to multi-sig wallets.
Thus, even though we are dealing with second layer applications, they are tied to infrastructure that is decentralized.
The same is true for many of the ideas of this network. There will obviously be some areas of centralization but we can reduce some components in ways the existing financial system cannot.
In Conclusion
Stepping back and seeing the bigger picture is important.
We are discussing a longer term road map here. This is going to develop over the next year or two. HBD in savings was the blockchain's first real step into decentralized finance.
Now we are looking at taking it even further.
Time vaults will be the next leg in this evolution.
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