Disclaimer: The technical feasibility of this at the base level is not know as of this writing. These ideas are being presented for discussion by the community.
The attack on DeFi and Stablecoins continues. The hearings on Capitol Hill are yielding the same results; more uncertainty and attacks from politicians basically seeking to protect the existing system. Between Senator Brown calling stablecoins neither decentralized nor transparent or Senator Warren tagging DeFi as the most dangerous part of the crypto world, it is evident that we need to do more to get out of the reach of these people.
Over the last few weeks we covered how the Hive Backed Dollar(HBD) could serve as an alternative to the regulations that are likely to emerge. Since it is an algorithmic-based currency operating at the base layer, there is little that can be done from a regulatory standpoint.
For this reason, we need to start expanding it. Hopefully, through the ideas presented here, we can attack some of the shortcomings while also created a more robust system on Hive. We can evolve this into a system where we have Hive Bonds on the base layer.
Ultimately, a few things need to happen:
- HBD requires even more stabilization
- We need a lot more in circulation
- A greater number of use cases are required
The ideas in here can hit upon all of this while advancing the opportunities on Hive.
As we look out over the monetary and economic landscape, we can see a few glaring holes that cryptocurrency should look to solve.
These are:
- The obliteration of the fixed income market
- The need for high quality collateral that is transparent and trustworthy
Source
Fixed Income Market On Hive
We recently saw the introduction of interest paid on the Hive savings account. Under this program, one simply puts HBD into the account and it earns 20% annually. The payout is determine by the medium consensus of the witnesses. We also have a 3 day waiting period of unlocking, so we know the blockchain is capable of time locked financial instruments.
Under this idea, we take it one step further. Here we create a typical bond tree. This would be coded into the blockchain and set there. The rates would be locked in for reasons that will be explained later.
It would look something like this.
1 year - 20%
2 year - 21%
3 year - 22%
5 year - 23%
7 year - 24%
10 year - 25%
20 year - 30%
30 year - 35%
This is an advancement on the savings idea. Effectively, at this point, we are setting up a certificate of deposit program. We will show how this switches to bonds shortly.
The idea is that people agree to lock their HBD up for extended periods of time in exchange for higher rates of return. Therefore, if one is willing to commit HBD to 30 years, a fixed 35% (.35 HBD) would be paid out each year.
After the time period elapses, the HBD is unlocked and the person would get the coin back since the commitment was fulfilled.
Advantages
Generates a great deal of HBD which is needed if it is going to become a legitimate player in the stablecoin industry. Circle CEO Jeremy Allaire stated his belief the stablecoin market is going to reach $120 trillion and set a goal of 10 trillion USDC on the market.
Larger markets tend to have less volatility. By producing a great deal more HBD, the peg should tighten up as more tokens are available.
While tokens are being produced, a significant percentage of them will be locked up as people hunt for yield.
No third party-counter risk. This is using "Code is Law" with the asset residing at the blockchain level. No company or entity is behind the project nor are the tokens in the possession of any other than the individual.
We establish a blockchain-based fixed income market.
The appeal to outside investors with low-risk, high-return assets being offered. One only needs to ask if the value of Hive is going to hit zero or will the blockchain stop running. Short of these two events, there are not many downsides that are evident (anyone who sees other risks, please put them in the comments).
** Disadvantage**
- A lack of liquidity. Who is going to lock their HBD up for 30 years, regardless of the return? Simply offering an expanded saving system is not enough.
Hive Bonds
Here is where some technical questions arise. Nevertheless, we should be able to handle some of this at the base layer while the rest can exist as second layer solutions.
To provide liquidity, we need to move this from a certificate of deposit concept to a bond. This is done by generating a new token for each HBD that is put into the "bond tree". For the sake of this discussion, we will use the 30 year option paying 35%.
When that option is selected, the second the HBD goes in, the individual receives HB30 (Hive Bond, 30 year) token in his or her wallet. This is an asset that is tied to the HBD placed in that account. Since the transaction is time stamped by the blockchain, everyone is well aware of long the lock up period is as well as the rate of return. The transaction is tied to the token so everyone knows the associated variables. It is all on the blockchain.
Hence we effectively generated an asset that has a specified payout over a period of time with an exact date of redemption.
More importantly, we now have a liquid asset that, although the HBD is locked up, can trade on secondary markets. This is exactly how bonds operate. There is a set redemption period which the face value is paid out along with all interest accumulated. Simply put, we just tokenized the process.
Now we have an incentive model for people to put in their HBD yet maintain the ability to liquidate out if desired, based upon market conditions.
Internal Exchange
Hive has its own, on-chain exchange. This is a valuable resource that isn't utilized to its potential. Here is a way to enhance that.
The bond tokens created can be integrated so as to trade in the internal exchange. At present, one can swap HBD for $HIVE and vice versa. What we add is the ability to swap the Hive Bond tokens for HBD. This creates yet another use case for the stablecoin.
We essentially create the first market for the assets. Of course, the goal is to get other platforms trading them, further increasing the overall liquidity. As more bonds are generated, the tradeable market only increases.
High-Quality Collateral
One of the major issues confronting the global financial world is the absence of high-quality collateral. In 2007 we saw how easy it is for collateral (mortgage backed securities), thought to be high-quality, to end up as garbage.
With Hive Bonds, we can see how this changes. Since everything is transparent, there is no question as to what is contained in the collateral. Anyone accepting a Hive Bond Token knows that it is backed by 1 HBD locked up for a certain period of time, paying out a specific rate of return.
Naturally, with collateral, there are a few things to consider. The first is the ability to unload it if received. Here is where the aforementioned exchanges are important. The second is what is the risk associated with the asset?
When accepting collateral, one needs to know it will cover what is owed (at least in part). With Hive Bonds, we see this clearly. One of the biggest advantages is that the rate of return is set. While the value of a bond can fluctuate on the open market, when held to redemption, one knows at time of acquisition exactly what the payout is. We see a lot of ideas about collateralization being tied to Bitcoin, which makes sense yet it susceptible to the price volatility.
With this asset class, that is eliminated to a great degree.
Lending Applications
Here is where we can see the formation of second layer lending applications. The ability to lend based upon high-quality collateral is the goal of every lender. When dealing with assets of this nature, lending becomes less risky since one knows what is being "staked".
This is also where Decentralized Finance (DeFi) can easily be brought to Hive. With a base asset that is tied to the blockchain, a multitude of applications can arise utilizing this as the core collateralized unit.
One of the major problems with existing DeFi lending platforms is the volatility. If the price of the collateral drops a great deal, the lender requires more put up or liquidates. This is expected when not only dealing with volatile assets but markets that are very small. Part of this should be reduced as the markets expand.
Nevertheless, having a lending platform based upon a low volatility asset to start should help in the matter. There will be situations where more collateral could be required but it is likely to be less often than some other platforms we presently see.
The value of this is the full transparency of the collateral. There is no question as to what is in it or what the present market value is going to be. Also, since it is a bond, it is guaranteed to maintain at least par value. The stream of payments as well as HBD backing provide that.
As we evolve further out in the process, the more it ties back to the core level. By having this at the base layer, we establish a strong asset that can be utilized for other financial purposes. We are providing low-risk alternatives designed in a way that people understand.
Ultimately, this will go a long way to establishing HBD as a legitimate stablecoin since it will aid in the peg while also expanding the amount available. As a great deal is locked up, the risk associated with conversion to HIVE is simultaneously reduced.
It also can provide other applications with a means of funding. For example, games could not only accept HBD as payments but lock it up into the high-yield bonds to generate a revenue stream to pay out players. Others could utilize this concept for contests. Lottery systems around this would spring up. Ultimately, the applications utilizing HBD could skyrocket.
Here is the best part in all this. For this to be successful, the initial HBD has to come from somewhere. We know there are only 25 million HBD available, with a large portion of that in the Decentralized Hive Fund. This means that the start is going to require people to convert their HIVE-to-HBD, likely reducing the supply of HIVE on the open market.
As other factors associated with the HIVE token start to kick in, such as the need for Resource Credits, a lowering of the amount of tokens will be offset by an increase in the value of HIVE. This will only create a more resilient system as the total market cap of HIVE heads up.
Ultimately, we are creating a positive feedback loop since, after all, to even trade or lock up the HBD, one needs minimal Resource Credits that come from powering up HIVE.
This makes the correlation between HBD and HIVE even more powerful.
What are your thoughts? This "proposal" is in concept form. The idea is to start a discussion about the pros and cons of such a move, especially from a technical/security standpoint.
Let us know what you think in the comment section.
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