This is the second part in this series. To read the first article, click here.
When trying to replace the existing financial system, a lot of work needs to be done. This starts with construction of the foundation and works it way up. Any missteps in the base could present an opportunity for it all to come crashing down.
It is exactly what we see with Bitcoin. Over the years we discussed its flaws and why it would not succeed as intended. Now that Wall Street is in the process of hijacking it, we see how the dream of electronic cash, i.e. medium of exchange, is dead. This means we have to look in another area.
What is the foundation that we are referring to? Essentially we are looking at the core unit upon which everything else is built upon. Here is where we see getting it right from the start is essential.
In the last article we covered how the banks set up their own system, outside the central bank umbrella. For decades, this was actually off the radar. The best approach is to not be known. The enemy cannot fight if it doesn't know you exist.
So let us dive into the framework of the Hive financial Network. We will contrast it with Bitcoin who show why there are certain components which are essential.
Market Driven Stablecoin
The most basic element of the Hive Financial Network is an algorithmic stablecoin. This uses the US dollar as the unit of account yet is not backed by dollars. Here we see the first crucial element.
We are dealing with a currency that has no ties to the existing banking system. Any addition is to a money supply outside that of any country. The same cannot be said of USDC or Tether, which are asset backed (most U.S. Treasuries).
Elasticity comes from market forces. It is the supply and demand that determines how many units are available. Through the conversion, more Hive Backed Dollars (HBD) can be generated. Reversing the process will contract the money supply.
Unlike central banks which are nothing more than propaganda with their monetary policy, this is actually a direct impact. We can see how the money supply that is used in the broad economy can expand or contract directly. There is no need to mess with interest rates which do not affect money supply anyway. That is designed to alter capital flow, which is why the policy tends to fail so often.
Stability
HBD brings stability to the table. This is crucial and happens in two ways.
The first is being USD denominated. Here the unit of account means it is tapping into the currency with the greatest network effect in history. The depth of the USD as compared to anything else is unrivaled. When it comes to the prices of goods and services, it is more stable than anything else.
Another way HBD has stability is in the value of the backing. At any time, HBD can be converted for $1 worth of HIVE. This means that even if the market has a different rate, the conversion will net the owner $1. The amount of the second coin paid will vary since that has a free floating exchange rate yet the stability of HBD is built in.
If we compare this to Bitcoin, we can see a radical difference. It is not uncommon for BTC to move 10% in a 24 hour period. That presents a major problem when getting into the next layer.
Collateralization
Short-term lending requires stability (in addition to liquidity). Depending upon the length of the loan, credit risk might not enter the equation. If we are dealing with only a couple weeks, nobody cares about the credit rating of the borrower.
Instead, the question the lender is asking is can it get the money back if it has to take the collateral.. This means the asset can be sold, i.e. liquidity, along with fetching the price to cover the amount of cash paid. In other words, a 10% drop is not going to cut it.
While some might look at the fact the lender can make 10% if the price moves up, this situation is not one where speculation is desired. Entities engaging in this behavior are not looking to introduce another degree of risk. They are doing the opposite, trying to eliminate as much as possible.
Bitcoin as collateral is an issue for this very reason. While it has the liquidity, there is no telling what it can be redeemed for. At any point, the price could move and not return to the previous level for a long time. Notice how we are around 26 months since BTC hit the $65K.
This means the haircut on the collateral is going to be enormous. Lenders will have to compensate for this by charing a higher rate of interest along with overcollateralizing. All of this makes borrowing more expensive.
Hive Bonds
There is a reason why US Treasuries, especially T-Bills, are considered the highest form of collateral. The liquidity is there along with belief of being "risk-free". We can make a case the latter is a bit of an illusion but, for now, we will go with the fact the U.S. never defaulted and resisted negative interest rates.
The proposed idea of being able to transform HBD into bonds takes all of this to another level. Here is where the stability of HBD is transferred to an asset that can be used as collateral. By incorporating this with time vaults, we are creating a product that has a time stamp, a stated return, and an expiration date. This all makes it ideal for exactly what we are referring to.
With a bond, the return is known at the purchase. This differs from other assets. What will the ROI on a stock be over the next 5 years? We have no idea. The same is true for one holding Bitcoin. These are speculative assets.
The volatility can be alleviated over time. Hence, as collateral with long term lending, it can offset the price swings. However, there is no guarantee the price will be higher in 5 years. The popping of the dotcom bubble and NASDAQ price showed that.
Hive Bonds operate differently. We know exactly at the time of the bonding what the payout will be. This means that a lender is guaranteed payment on the asset if held to redemption. Naturally, there needs to be correlation between time and length of loan. Backing a 4 week loan with a 30 year bond is not ideal. Liquidity will offset that since the instrument could be sold yet that is not guaranteed. We have Silicon Valley Bank as an example of that.
Even U.S. Treasuries can be off-the-run (no buy demand at the moment). This is why T-Bills are the safe haven, they are always liquid. Hive Bonds will follow a similar model. There can be longer term lock ups, creating an asset with a higher return along with the ability to collateralize over that period (think of a mortgage). However, by having short-term vaults, we can have an asset that behaves similar to bills.
Trillions
How big is short-term lending?
Here is a chart that show just the daily repo transactions.
So what does this mean? Here is an explanation:
The market for repurchase agreements (repo) supports short-term liquidity and price discovery by allowing financial institutions to lend or borrow cash, usually overnight, with securities as collateral. Repo venues vary on the extent to which participants know their counterparty, the extent to which they know the specific security being used as collateral, and whether their trades are cleared by a central counterparty.
We are dealing with over $4 trillion per day in volume. Here is how massive the global funding market is. When we look at numbers, this dwarfs most of what is out there.
The best part is that Hive can do this with reduced counterparty risk. By creating this all on blockchain, the potential exists to remove financial intermediaries from the equation. There is no need for Tri-Party agreements, which is basically 3 financial institutions, when the blockchain serves that purpose.
Here we see trust taken to another level.
It is also one that operates outside the control of the central banks and governments. It is modeled after what the banks set up yet we are excluding the banking cartel. Under this design, anyone can participate.
Build the proper foundation and the ability to disrupt is enormous.
There are trillions of dollars at stake. This is something the Hive Financial Network can tap into.