Over the past couple years, we have discussed the idea of Hive Bonds as part of a Financial Network built out that is tied to Hive.
Like most things, we see a lot of viewpoints entering. Some are subjective, open to interpretation while others are a misunderstanding of what is taking place.
On that note, we had an article posted that brought up some points worthy of discussed. The viewpoints expressed did hit on some key areas which we will go through here.
So let us see what we are dealing with. We will start with what it got right.
Value
There is a major key point that was mention that is misunderstood by many.
What gives a currency value? Many believe that it is the "faith and credit of the government". Others look at the asset backing it. Others try to build the intrinsic value as a metric.
All of this is wrong. Money is a tool to help an economy grow. Hence, its value comes from what was explained in the article: utility.
I prefer to frame this as economic productivity. The output associated with the currency is what brings it value. Not anything the central bank does. All of this misleads people.
This brings us to the essence of most stablecoins. They do not focus upon this. Instead, they operate essentially as digital money market accounts. As we will see, this misses a great deal.
When building value for a currency, there are four primary areas to focus:
- payments
- funding and investing
- collateral
- derivatives
These are what generate economic output. Each of these have a role in the economy, adding value to the currency.
Interest Rates
The discussion also included a point about interest rates.
Here again we see a lot of viewpoints that limited. The basis in the article was around 20% for 3 days being too high. Many will say this certainly it.
Why is that?
The answer is conditioning. These people are equating interest ratesto what they know. If the present system pays 5%, then obviously 20% is way too high.
Unfortunately, this is not how things work. To start, it misses the point of what interest rates are for. They are not to stimulate (or restrict) the economy. This is nonsense the central banks peddle, which is also why their monetary policy fails.
Interest rates effect capital flow. They are designed to move money from one area to another. Hence, the interest rate should be set at a level that attracts capital. This might be 10%, or 50%.
There are another couple points that factor into this.
Rarely, when interest rates are discussed is growth brought up. A 20% rate is too low if the economy is growing at 200%. In this instant, if this is the primary means of increasing the money supply, there will not be enough capital to keep things moving ahead. Interest rates in the existing system are low since the real growth of our economies is abysmal.
The second major omission is financial intermediaries.
How often did you hear people bring up intermediaries during interest rate discussions? These are entities that extract a portion of the economic activity from the system. This means returns are lowered when all the fees are added in.
This is a long list and every entity is involved. The Fed charges fees to the banks for FedWire and FedNow. We know the bankscharge. Visa has its hand out. PayPal along with other payment applications are involved. The brokerage firm has management fees. Point of sale and ATM networks are charging. SWIFT. BIS. Exchanges.
Of course, if you manage to make any money in spite of this, the government brings up the thing called taxes.
So, as we can see, interest rates are a lot more nuanced than simply saying "20% is too high".
Hive Bonds
Here is where the article starts to go amiss.
Not only that, Hive itself isn't even a debt-based system, but rather collateral based. If a bond is a loan, then why does Hive need a loan? Hive, as a network, doesn't need to ask for money.
There is a great deal of time spent discussion bonds and debt in the established system. Unfortunately, this is still old thinking.
Here is the reality:
A Hive Bond is not debt.
There is no loan given out by the system. We are mimicking a traditional bond system yet we are not mirroring it.
If a Hive Bond is not debt, then what it is? It is nothing more than asset transformation.
The answer to this lies in the question, what is the Hive Backed Dollar (HBD)? Here is where the debt is created. This instrument is akin to a convertible bond. When people create HBD, they expect to be paid back. Their payout is in HIVE, essentially the equity in the ecosystem.
Thus, we see the obligation already in place. We are simply transforming the asset from one form to another. The liability to the ecosystem is the same with 100 HBD or a Hive Bond with 100 HBD tied to it.
One of the factors of providing value to a currency is derivatives. For economic expansion, this is not a "one size fits all" scenario.
Time Vaults
Times vaults are a part of the equation, but not for the reason mentioned.
The idea that time vaults create more value for a medium of exchange is not accurate. While it could hold true for something like Hive (although I would state the lock up is more a security feature than value creation), it has little applicability to HBD.
Why? Because more HBD can always be created. The conversion mechanism is what provides the elasticity. If we are going to try and apply the scarcity model to value, which is backwards for a medium of exchange, it fails since the scarcity can be eliminated through conversion. There is a near infinite amount of HBD that could exist which destroys this model.
Understanding the purpose of time vaults is essential.
To start, this applies to capital flow. The interest rates tied to each vault needs to be set at a level to attract the desired level of capital into the system. Here is where adjustment enters. If there is too much money flowing in (I would make the case impossible in the digital world), then they should be lowered. When the situation is not enough, raising the rates is the answer.
Time vaults recognizes there are many different types of investors, even within the area of yield. Some are willing to make longer commitments while others are not.
The second area of time vaults is for the transformation.
It is the time vaults that allow for the creation of a derivative. This assigns certain properties to the Hive bonds that are not present with HBD. These characteristics are essential for the next stage.
Collateral
Once again, we encounter one of the areas of building value for a currency.
Collateral is essential for economic expansion. Innovation and advancement come with risk. The system has to size this up while also looking to reduce it. Here is where lenders seek different ways to minimize the negative impacts.
For those who are not aware, the Repo market is basically nothing more than collateralized loans, amounting to $4T-$5T daily. Since the Great Financial Crisis, much of our woeful economy output (globally) is due to a shortage of collateral. This is outside the scope of this article but one of the main drivers of the Hive Financial Network concept was the need for collateral
Time vaults allow for the creation of collateral since it applies characteristics of time, APR, and amount. This is not done when people simply put money into a savings account.
So why Hive Bonds?
This stems from the simple premise that as volatility increases, collateral decreases. That is why bitcoin is not a great solution as collateral, especially on a short-term basis. When the value of that can drop 10% overnight, that does not work on loans that are mostly 14 days or less.
Hive Bonds are build based upon a stablecoin. So while there could be volatility on the individual bond price, the underlying asset has a targeted exchange rate. This is essential for lenders. It removes a great deal of risk. The fact that the asset is also housed on a blockchain takes away some of the counterparty risk too.
Liquidity
The final piece is liquidity. This received a great deal of attention. Unfortunately, this overlooks a great deal.
When people think of currency, their first (and only thought) is what can I buy with it. In other words, the only concept is for payments. The idea of funding/investing, collateral and derivatives never enter the equation.
We see the same concept with liquidity. That is crucial, no doubt. However, we also have a couple other pieces:
- depth
- distribution
- sophistication
The US dollar is untouchable due to these factors. Actually, the problem is we are dealing with a shortage of USD, putting the entire system in contraction. Here is where cryptocurrency can step in.
What was described here targets these other areas. Getting back to liquidity, Hive bonds seeing a secondary market is not to provide liquidity to HBD, it is for the collateral. HBD can be liquidity simply by creating more. It has market driven elasticity. If there is a demand for it, the participants in the Hive economy can generate more.
The reason for liquidity on collateral should be obvious. Volatility is not the only enemy of collateral. A lack of liquidity is equally as detrimental. This is what sunk Silicon Valley Bank. The assets they were offering against overnight loans had no liquidity, hence lenders turned them down.
In Conclusion
The financial system is a complex mechanism that has many layers, each with its own interests. The same is true for money. Most people try to narrow it down to a simple ideology which is not applicable to reality. What sounds good in theory is obliterated when dealing with a complex organism such as the economy.
When looking at the existing system and where there are opportunities starts with incorporating at many different components as possible. Looking at a currency solely as a payment mechanism is why so many fail. Without others facets that are historically tied to banking, commerce will not flow.
Fnancial markets are simply mechanisms that move risk around. Each transaction shifts the risk from those those averse to ones who are willing to take this on. There are two sides to each. So while debt is a liability to the one issuing it, it is an asset to the one holding it. Of course, there are degrees in each depending upon the risk associated with the entity issuing the debt.
HBD is a powerful tool for Hive. That said, it requires a lot more than simply being a medium of exchange.
If you want to learn about money], do not follow what the economists are saying. By the same token, ignore the central banks. Neither of these do money. It is the bankers who are immersed in this. Understand the system they are operating within.
Any business seeks to meet the demand of its customers. Banks are no different and their product is money, in its many different forms.
In other words, the banks are the existing system people are looking at replacing.