Time vaults are something we discussed a great deal over the past year. This is something that could be the foundation for a more expansive financial system.
What are time vaults?
The best way of thinking about this is akin to a certificate of deposit. Whereas a savings account is liquid, a CD requires a greater time commitment. In exchange for this, a higher interest rate is often paid.
For the sake of this article we will simply use a 1 year time vault with a 25% interest rate to keep things simple.
Time vaults add to Hive's base layer, fixed income market. This is a multi-faceted approach brings a number of benefits to the ecosystem.
This was something that came up in the latest Blocktrades post.
This will be a powerful addition to Hard Fork 28. In this article we will delve into what it will provide for the Hive ecosystem.
So let us dive right in.
On-Chain Staking
We all see the news about Kraken and the lawsuit the Securities and Exchange Commission filed. They are being sued to the tune of $30 million for the staking of coins on the exchange. The agency believes this is dealing in a security that should have been registered.
It appears the goal is to remove staking on exchanges as an option for retail customers. Naturally, institutional investors will still be able to do this. Ironic how the regulation in the U.S. financial system works.
Hive solves this.
We already have the ability to stake $HIVE, turning it into Hive Power. Of course, this does more than just garner one a return. Since Hive Power is essentially an access token, it allows for people to access the resources. This can be akin to the idea of digital real estate. This is also the basis for governance.
At the same time, we also have the Hive savings account whereby people can deposit their Hive Backed Dollars (HBD) and earn 20%. This is a rather straightforward financial instrument providing a healthy yield to all who are partaking.
Time vaults would add another layer (product) to the mix. This could be a single account like was mentioned or even a tree offering a multitude of time frames with different yields. We could start with one and, then when successful, add during the ensuring hard fork (HF29).
The most important factor here is that Hive is offering this without counterparty risk due to an application or company. In this instance, the blockchain is the counterparty. As long as the software is running on a server somewhere, the HBD is accessible.
Try to do that with coins and tokens on FTX.
Source
The Basis For Other Financial Products
The topic of Hive bonds is something we outlined in great detail.
Hive bonds functions best when there is a time vault on the HBD. This is a layer 2 idea that will take HBD deposited into the time vault, and create a token associated with that deposit. Since there are parameters with the HBD such as time locked up, return, and amount, this token has the characteristics of a bond similar to a US Treasury.
Once the token is created at the second layer, it now has created a liquid asset. A layer 2 DEX could then offer trading, which encourage more HBD to be locked up. One could always unwind without really taking the HBD out.
Remember, this is layer 2, happening off-chain. It means payment would come likely in some type of derivative of HBD such as a wrapped token. The backing agent of that, HBD, would also likely be locked up also.
The most valuable aspect to Hive bonds is the ability to use them as collateral. Here would could see a stablecoin based lending system in place. This would be similar to the existing bond system most of the financial world is familiar with. The difference is that a Hive bond has an exact value. This means the lending platform knows exactly what the payout on the collateral is if held until maturity.
Finally, a lot was made of an individual deposit into Hive savings of $400K. This is a number that is likely to grow. While it is encouraging, what if the value on the money that was deposited still could be used for economic productivity. In other words, how about expanding the Hive economy.
Here is where a bonding system tied to a lending platform enters. People could still extract the value out of these assets and put them to productive use. It becomes a way to push financial and commercial activity on the value that is already in place.
Opportunity For Applications And Games
We are looking at a funding mechanism that holds a great deal of potential. The idea of time vaults on Hive could change the gaming industry.
There was some insight provided to us by the road map of Ragnarok. This is a game that is in beta testing right now. It is going to have entry fees along with prize pools tied to the different tournaments that are run.
Here is where time vaults could be valuable.
The payment for the entry fees will be done in HBD. That is the currency that will be accepted. Whatever fees are paid, that will be deposited. Of course, this earns interest which will be used as the prize pool.
Hence, the payouts always come out of interest, none of it touches the principal. This means that each year, as long as people are playing the game, the amount deposited keeps growing. This is Investing 101: never touch the principal and keep using the interest.
Here again we see how HBD locked up is tied to economic activity on Hive.
Imagine the creativity and innovation we could see come out of this concept.
Hive Security
We always have to bring up security. After train wrecks like UST, it is wise to keep an eye on potential threats to the ecosystem.
Time vaults actually make the entire process of Hive Backed Dollars stronger. Just like the Decentralized Hive Fund (DHF), HBD in time vaults is not a threat, at least not immediately. Since all on the network is transparent, we know what money is due to come out of the vaults.
Of course, in a situation with Ragnarok, the HBD will be redeposited since the idea is to keep providing prize pools for the players.
A thought hit me: how about an automated redeposit? One can select this and, in our example, the HBD would be redeposited automatically for another year. If the user wanted to change this, the button could be deselected at least, say, 30 days before the original year is up. This would allow for some greater control and idea of the intentions of the HBD in the time vaults.
Security is also enhanced by having operations at the second layer. We see how wrapped versions of HBD being used in transactions regarding Hive bonds can offer resiliency. The wrapped token could actually be utilized in commercial activities if people build out applications and games at that level. Either way, even if that is solely financial activity, it could form the foundation of the Hive Financial Network.
Hive Payments
There is a lot that goes into developing a currency. On of the things about Hive's algorithmic stablecoin is the fact that it is starting to receive localized support. We are seeing how the region of Sucre in Venezuela is starting to really implement this as a payment system.
Many in the developed world overlook the basics.
Here is what HBD does for the people in that region:
Of course, this project is focused on the functioning of our local economy, on the positive impact that hive has generated in our lives through its economic model and the financial freedom that it has provided us, because our local currency (The Bolivar) loses its value daily and acquiring bills like $USD or our own currency turns out to be a nightmare.
We often miss the fact that these people are not dealing in digital dollars. If they want access to USD, which is preferred over their local currency, they have to deal with banknotes. This is difficult to acquire and even more dangerous to hold.
HBD solves this problem.
This is the chicken or the egg scenario. It is difficult for HBD to have use cases until there is more HBD out there. At the same time, more HBD without use cases can create problems.
Time vaults can help with this endeavor.
What are your thoughts? Let us know in the comment section below.
If you found this article informative, please give an upvote and rehive.
gif by @doze
logo by @st8z