What makes the USD so strong?
Many will take exception to this since it is, after all, fiat currency. It is backed by nothing and in the end is worthless, or so goes the mantra.
Isn't it amazing that is the same rhetoric that the likes of Warren Buffett use against cryptocurrency?
The reality is the USD is only getting stronger. No, this is not based upon the fact that it is going on up exchanges against other fiat currencies. Actually, if you think about it, over the last 6 months, the USD got a lot stronger against most cryptocurrencies.
Instead, we are going to focus upon what is truly making the USD powerful and what we can learn from it when applying it to the Hive Backed Dollar (HBD).
Spoiler alert: this has nothing to do with the faith and credit of the US Government.
The Biggest Network Effect In The World
If you think Facebook is a tough entity to take down, that is small compared to the US Dollar. When it comes to network effects, nothing can tough the USD.
It is what makes it so resilient. We also see it expanding each year.
To put it in cryptocurrency terminology, it has massive utility. This appears to be something overlook in the industry, especially when it comes to stablecoins.
Over the past year, we saw a lot of discussion about different projects trying to back their stablecoins with other assets. The challenge with this is that is transferring the value to something else. While that could be a way to hedge risk, it ultimately makes the stablecoin dependent upon something else.
Where in those discussions did we see project teams focusing upon the idea of building utility? Instead, there is noise about backing with USD, Bitcoin, and other assets. Again, that can help the confidence in the token but will do little for long term resiliency.
If we want to construct a stablecoin that has a major impact, we are going to have to move beyond the existing mindset that is out there. USDC is really just an extension of the USD. This is fine since it is tapping into the most powerful monetary network there is.
Unit Of Account
The strength of the USD does not come from who is using it or even how many are out there. In fact, most of the forms of money of the USD is really just a unit of account. They have nothing to do with the USD other than a counting mechanism.
Going back to the network effect, the numbers for the USD get staggering.
- almost half the estimated $300 trillion in global debt is denominated in USD
- the derivative market is estimated to be around $1 quadrillion - the majority in USD
- cross border bank liabilities - $32 trillion; $15 T in USD
- FX Forward and Swaps - 89% of the $98 trillion in USD
- Repo market - $3.5T-$4T daily (almost exclusively USD)
- $170 trillion in FX reserves (60% USD)
As we can see, the numbers are staggering. Naturally, not all of this is USD in the form of currency. Most of it is derivatives, which is where the banking and financial system took over money. They create and utilize what they want.
This is also a lesson when looking at blockchain and cryptocurrency. We are not changing the game as much as altering who is in control of it all.
Infrastructure Vital
One of the problems with the view the USD is being replaced is the fact that nothing else has the infrastructure. To operate on a global scale requires the construction of systems to engage in a way with as little friction as possible.
When we look at the complexity of the networks tied to the USD, in all its different forms, we can see how it is the largest in the world. The second most common currency, the EURO, isn't even in the same league. That is something that is regional at best.
Along with this, we need to get liquidity, depth, and sophistication. How much is required?
To gain some insight into this, at the end of 2019, Morgan Stanley has on its books $500 billion in assets with repledge agreements. This was being used as collateral on transactions throughout the global financial system on a daily basis. This is one bank, and not even the largest of the institutional entities. Can you imagine what Goldman and JPM have?
The point is the cryptocurrency world gets upset with Tesla unloads $1.5 billion in Bitcoin. This is a rounding error in the USD game. We are talking into the hundreds of trillions of dollars.
Building Out HBD
A central premise for HBD is that it is backed by $1 worth of $HIVE. Now, like much of the money just mentioned, there is no actual USD in the equation. It is nothing more than a unit of account.
In short, HBD is backed by $HIVE.
Now we come to the question of value: where does it reside?
This is the problem with the idea of backing only. We can see, under this scenario, the only way HBD has any value is if it comes from $HIVE. Thus, we have to make that coin as resilient as possible.
Naturally, this is a good idea. However, it is only one part of the equation.
The other is to focus upon building the value of HBD. For those accustomed to watching every move in the market, this is not price. We are not concerned about that since it is designed to hold the peg.
In this instance, value comes from utility. HBD's success hinges upon the ability to expand, transform, build, and multiply it. Of course, to achieve this, we need the infrastructure in place.
For example, we know the Chinese are in a situation where a lot of loans were taken out in USD. This is creating an issue since the now require USD to make the payments. Holders of the debt are not going to accept Yuan. This is one of the reasons why they are having to unload the US Treasuries, which are really USD in another form.
Could those loans have been done in HBD? Of course not. There is nothing in place for something like that. We lack the infrastructure to even undertake such a development.
There is also the lack of resiliency. When there are trillions in derivatives, all tied to the currency, it is hard to do without it. In other words, that is not easily replaced.
HBD exists as HBD and little else. We see the creation of pHBD which is a step in the right direction but that has little utility at this point. Over time that needs to change.
In Conclusion
Many feel that for HBD to be successful, we need payments made in it. Certainly that is a part of the equation, but it is actually a small piece.
Ultimately, we need HBD to evolve into different forms. This can come via bonding as discussed with Hive bonds. We also need to see investment made using this currency. A large portion of global investing occurs in USD.
The final piece is lending tied to collateralization.
Put all this together and we will have a resilient coin that is not dependent upon the backing asset. Under this scenario, HBD would have value on its own. $HIVE is just gravy at that point.
We do not need to recreate the wheel. The roadmap for making HBD a success is before us. We simply need to follow what works.
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