The Future of Stable Coins
What is a stable coin?
Essentially these days a stable coin is simply a centralized crypto that is backed by USD in a bank or algorithmically using a volatile asset. Both of these implementations are comically flawed. I knew this the second I jumped on the scene back in 2017. Check out this post. Dec 23, 2017: The Blockchain is Backed by This. It was obvious to me the second I started doing research on crypto. Blockchain can only be backed by one thing: trust. Of course a subset of that trust is also the utility that blockchain provides and the infrastructure available to the users.
I've already explained many times why attempting to back a crypto with collateral is a fool's errand. However, most of the times I've done this I use gold as an example, because that is the most obvious example of all time. Trying to back a crypto with a PHYSICAL asset is a thousand times dumber than trying to back crypto with another digital asset (money in a bank or volatile crypto). That's because backing crypto with another asset adds a huge attack vector. If you back crypto with gold... who secures the gold? Who distributes the gold? It's inherently centralized garbage that isn't going to work. A crypto backed by gold is ironically worthless in the long term.
Do I have a blindspot?
I like HBD. Is that a mistake? HBD is a crypto backed by Hive and the conversion mechanism. I can easily pull off some mental gymnastics and explain this away by saying HBD is actually backed by trust. That trust is derived from the witnesses (oracles) and the price feed and the conversion mechanisms in place. HBD has guaranteed baseline value due to these conversions. It obviously wouldn't hurt to have more dapps and usecases for it besides 20% yield.
Is 20% yield unsustainable?
No, the yield allocated to a stable coin has nothing to do with its sustainability. I think this is a concept that most people seem to not understand. UST didn't crash to zero because it was offering 20% yields. UST crashed to zero because holding UST was the same as going long on LUNA. What we witnessed was the ultimate long squeeze that crashed both tokens to zero due to the debt being owed back being too high.
It is the debt ratio that is unsustainable.
Before LUNA crashed it had a debt ratio of something insane like 50%. The market cap of LUNA was only twice as big as the market cap of UST. That would be fine if LUNA itself was a stable coin, but LUNA was a volatile asset with thin liquidity. It only took a single day for the debt ratio to spiral out of control to 500% (x5 bigger UST market cap over LUNA).
HBD has a haircut in place that caps the debt ratio at 10%. We are also talking about increasing that cap to around 20% or 30%, which would also be fine. As long as we don't get into a situation where the debt is impossible to pay back, we're good.
But the future of stables?
This is another thing that most people in crypto just don't seem to understand. The future of stablecoins is that crypto itself will be the stable coin. People say Bitcoin will stop being volatile when its market cap supersedes all nations. That is incorrect. Obviously a deflationary asset will never be stable. That's an absurd notion. Stability requires elasticity, and Bitcoin has none. Rather, it falls to DEFI to pick up the slack.
The only way to make a stable asset is to manipulate supply, demand, and utility in such a way that the value of the asset goes down when it's being overheld, and the value goes up when it's oversold. Not a single crypto is even attempting such a thing right now, which I find mindblowing because mitigating that volatility is one of the biggest issues in crypto.
The customer is always right.
And what is the customer telling us? They are saying that they don't like volatility. Why are half of the top six coins by market cap stable coins? Because people don't like volatility. The market is telling us what it wants but no one is actually providing that service... instead opting to simply piggy back off of USD. Kind of mindblowing if you ask me, but it is what it is.
I believe the reason behind this circumstance is clear: everyone wants number to go up but nobody wants number to come down. In order to make a stable asset, number needs to come down on purpose by design, and no one wants to build that token, instead opting to run a casino where the early adopters get filthy rich on top of the backs of new users who might have to suffer for 4 years before they're able to profit from the next wave of new users. And we wonder why the skeptics call it a pyramid scheme.
Time in the market
The ultimate goal for every crypto should be to provide a stable asset that allocates predictable yields for its users. Ironically this is a self-defeating premise without the proper incentives in play. Without incentives, a highly valuable stablish crypto with high yields is going to get pumped by VCs, making it not stable. I've proposed some ideas about how to mitigate these problems (removing high yields when token spikes), but it's all untested game-theory at this point. Very much a put up or shut up situation.
Conclusion
The future of Stable Coins... is crypto. The future of everything is crypto. From automated market making liquidity provision to community to governance. This concept that USD is always going to be more stable than crypto no matter what is a foolish notion.
Eventually USD will begin to destabilize, and when it does the powers that shouldn't be are going to pivot to crypto as well in the form of CBDC. It won't be hard for crypto to become more stable then USD when USD is destabilizing. Truly the future of humanity itself is sacrificing efficiency to gain trust. A completely new era is upon us. We just have to whether out this impending shitstorm to get there.
The notion of having stability is to have many people trust the asset.
Trust is important, as part of security, cryptograpohic security, immutable ledger, transparency, and utility is the killer app, combine security and utility and value results.
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Your post points out that the conversion formula provides a sufficient peg for HBD.
The real question is: Does the 20% interest on HBD provide any value for the blockchain?
The 20% interest has pernicious effects throughout the Hive-O-Sphere. The long term effect is that most of the HBD interest will be converted to HIVE and sold on the open market. It is likely that the dumping of HBD will happen in a weak market.
In May HIVE gave out 55,000 HBD in interest. Over half of this interest went to the top 12 accounts. It turns out that the top 1 percent of active accounts received over 90% of the HBD interest.
So much for the claim that HIVE will lead to a more equitable society.
Converting 55000 HBD at $0.453 would create 121412 HIVE to be dumped on the market. The epic dumping of HBD will happen when HIVE is trading below $0.3.
The HBD interest has also had a pernicious effect on HIVE-Engine. One can prove the following observations by examining the transactions on honey.swap. Honey.swap which is the primary means for moving funds between HIVE and SWAP.HIVE.
It appears that a large number of authors were moving their HBD rewards to HIVE Engine and buying alt coins. When the witnesses raised the interest on HBD, the flow stopped.
There were many people who started liquidating their HE coins and moving it into HBD. The result was a collapse of the HE coins.
Even #LEO is faltering.
IF the conversion formula is sufficient for HBD to operate as a stablecoin, then why are we inflicting so much damage on the Hive-O-Sphere in a scheme that only benefits the top 1% of accounts?
!BEER
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Eyes opening remarks.I am just trying to learn hive and crypto.Thanks for the comment.
You bring up a good point, human behavior is often shaped by the rules. We used vote selling bots on Steemit because it was economically beneficial and legal. People frowned on it in public and wrote bots for it in private. A certain percentage of people will always exploit opportunities for economic gain.
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I am sad to see @spaminator downvoting your comments; so I upvoted your most recent post instead of the comment.
The mantra on both HIVE and STEEM is: "Code is king."
People should interact with the blockchains based on the code, and not simply on impressions that exist in their minds.
People who invest in HIVE based on the code are likely to transfer their HBD to savings when HIVE is strong. They are likely to convert it to HIVE and dump the HIVE on the open market when HIVE is weak.
I intend to dump my savings if I see the market value of HBD approach the 10% hair cut.
We should expect people to invest according to the code.
Thank you.
Hey, very interesting conversation. Can you explain this part ?
"People who invest in HIVE based on the code are likely to transfer their HBD to savings when HIVE is strong. They are likely to convert it to HIVE and dump the HIVE on the open market when HIVE is weak."
You mean to sell low, why ? 🤔
One could also ask about 15%, 12%, 10%, 2% bringing any value to the blockchain? Certainly if it doesn’t, perhaps the 20 oracles making it happen won’t?
These assumptions are very unfound, unclear and unrealistic. I mean, you could as well assume that the world will end on Friday.
I don’t get this logic. The same 1% locking in most Hive as HBD should not benefit?
In my opinion, Hbd is responsible for only about 5% of Leo price action.
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The assumption that the majority of HBD will be converted to HIVE is based on the FACT that the vast majority of SBD was converted to STEEM and the vast majority of HBD was converted to HIVE.
There is six years of data demonstrating this. And, yes, I understand that it is an assumption. It is like the assumption made at MacDonald's that people will continue to eat hamburgers with fries.
The statement that "55000*1/0.453 = 121412.80" is something called math.
Yes, I read the Principia. I understand that mathematics is based on a huge number of assumptions. The people who created the computer I use were comfortable with math to put it inside the computers that they build.
Quite frankly, if mathematics didn't work, you wouldn't be able to read messages on HIVE because they are encrypted and decrypted using this thing called math.
The claim that people stopped sending money to HE after the interest rise is based on my following the transactions on Honey.Swap which is the primary mechanism for sending funds between the HIVE and HE blockchains.
There were also accounts that sold their HE holdings, transferred the money through honey.swap and put the funds in HBD.
This statement is demonstrable (assuming of course that the dark arts of mathematics continue to hold true for the remainder of the week.)
I agree that the HE market was saturated. The reduced flow of funds caused coins like POB to go into a free fall.
You are completely correct about that statement. The interest rate on HBD doesn't bring anything at all to the blockchain.
The 20% interest is extremely dangerous because it rewards HBD at a higher rate than HIVE.
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Ermm did you factor in the HBD stabilizer into your calculations?
The HBD stabilizer is a bot, supported by the HIVE Decentralized Fund, that receives, converts and trades HBD.
The fund is funded by the DAO. It existed before the rate hike and will continue to exist after the hike.
It appears to me that this account is independent of the savings rate.
I figure that the HBD Savings Richlist is the best source for analyzing HBD Savings.
How???
If anyone thinks it’ll serve them better to risk forgoing potential profit from hives volatility, governance, for 20% Apr? good for them, hbd is meant to be pegged and not volatile. To me it’s not smart to even think to attempt to convert all one’s hives to hbd for the sake of 20% Apr lol.
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The top HBD interest holder have very little HIVE.
Last month 12 accounts received over half of the HBD rewards. The month before that 8 accounts received half of the rewards. So, we are paying tens of thousands of dollars in interest to very small number of accounts that are not actively engaged in the HIVE forum.
But they are engaged with their money right?
Your insinuations will carry more weight when it’s backed by facts and perhaps figures other than assumptions.
Here’s what that looks like
https://leofinance.io/@dalz/what-is-the-inflation-from-the-hbd-interest-realized-and-projected-or-august-2022
You do know what a fact is ... don't you?
The statement "12 accounts received over half the HBD interest" is called a fact. A month before the number was 8.
The reason it dropped from 12 to 8 was that some of the large accounts converted huge amounts of HBD into HIVE when the price of HIVE dipped below $0.40 .
It is a demonstrable fact that the large accounts converted HBD to HIVE and sold it when the price of HIVE was weak. We can prove these things by looking at the small number of accounts that hold most of the HBD.
Claiming that the large accounts did this because they feared the haircut could be called an insinuation.
The article you referenced contains the line:
I guess I would describe that statement as a definition.
Of course, You might describe it as an insinuation as the term derivative is associated with the financial collapse of Enron, Lehman Brothers as well as the mortgage backed securities and credit default swaps that caused the Great Recession.
The observation that the same mechanism was also at the heart of other problems like the collapse of FSLIC and numerous other bankruptcies could be called an insinuation.
Of course the term "insinuation" does not mean that the claim is not true. The term "insinuation" simply means that you don't like what I said.
BTW, it is a demonstrable fact that a large number of accounts stopped transferring funds to Hive-Engine after the witnesses raised the HBD interest rate.
It is a demonstrable fact that many of the alt-coins have seen their prices collapse after the raise in the interest rate. One can prove this by looking at the honey-swap transactions ... which I did.
It is a demonstrable fact that the price of HIVE has lagged against the price of BTC since raising the interest rates. Here is a chart from CoinGecko.
The facts seem to indicate that the high HBD interest has been bad for HIVE.
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BEER.That why blockchain was created, to establish trust. By going with a decentralized consensus mechanism, as compared to the ledger system run by the banks, the trust was to increase.
Perhaps we can trust the ledger and the transactions tied to it, but what about that built on top of it, i.e. cryptocurrency?
Here is where people make the same mistake with crypto that they do with fiat currency: they overlook utility.
The challenge for UST was it was "backed", for the most part, by LUNA. What was the utility for either of these? The answer is none.
With HBD, there is the "backing" by Hive. The key is to focus upon building utility for both coins.
That is how you build the desire within people to hold and use the coins. Sadly, it is completely overlooked in the crypto world.
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The future of the stablecoin market is bright!
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Nice cross-linking of a great post. Very appropo to subject matter.
You are a SEO Master.👍
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I agree, utility is a killer app and security is a killer app, and security plus utility equals value, which brings stability.
Security brought me to crypto, and utility brought me to Hive, and together they make me see value.
This is true value, which I see, where others see only a Ponzi scheme. Perhaps my vision is not to good?
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Well said man.Why people's money will be handle by some group of people.When people understand what bank does with their hard earned money, they will soon lose interest in it. And if block- chain keeps continue their promise to keep it decentralise, it's going be a wonder.
In my opinion, the day is not far from us.Though people may think 'small mouth,heavy words.🤣
could all go faster, some fiat lost massive value this year and purchasing power.
The future of Hive and HBD are trust mixed with holders.
Keep writing this post.
I am telling you Hivers will not understand this posts unless you write it over and over till Hive reaches $10 and HBD will be the best stablecoin back by trust.
Got to say it the way you explain stuff is simple.
!BEER
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Word.
He needs to write it here ten times, and have it replicated else where 100x.
As you always say, the utility of making money and security of the hive blockchain equal value, which may go up and down, but generally marches forward.
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BEER.i think that they are also saying that they would rather hold a crypto stable coin than USD (or whatever fiat) in their bank account. Which, by inference, could be saying that they are just on the sidelines waiting to buy the lows, haha, rather than hunkering down for the long haul.
Yep, you speak the truth.
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The perspective you offers on the subject of stablecoins is very interesting. The truth is that I agree with you on so many things, but especially when you say that it is nonsense to back cryptocurrencies with the value of a physical asset or even the USD itself.
In particular, I don't think there is a way that cryptocurrencies can become stable assets in any way, because the inherent volatility is part of their intrinsic characteristics. But the fact that people try to support cryptocurrencies that are equivalent in a 1:1 ratio to the value of the dollar, has, from my point of view, a very simple explanation. People want to be able to trade and invest where they can take advantage of the liquidity levels that are going to occur in the crypto markets as they go up and down.
In any case, I also agree with you that the future of stablecoins is crypto and that the future of everything is crypto. Because in my opinion, in the future, everything of value in the world will have to do with crypto in one way or another.
Very interesting publication. Thanks for sharing. Greetings.
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agree.
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Of course the future of stable coins is crypto.
But wen your token?
You've been writing about these tokenomics for a while and have even posted solutions in the past - like manipulating the inflation so that the value could keet growing x 2.
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Ha Ha Ha... I know right?
WEN @edicted token?
WEN @edicted defi project?
I would be very interested to see and @edicted fork Cubfinance because he believes inflation is a "killer app" and if his ideas about trading pairs, which heavily influenced the last pairings on Polycub: Hive-PolyCub, SPS-Polycub, and generated huge income for the deflationary PolyCub project, I would love to see their effect in the inflation tokenomics of Cubfinance.
You listening @edicted?!
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Dang.
I don't know @edicted personally, so but my comment is starting to feel like the equivalent of telling my husband to take the trash out.
(Spoiler alert: I NEVER ask my husband to take the trash out, as "he sees it too.")
Sorry dude, I'll stop my nagging.
LOL
👀
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Well said @edicted
but you may have to write this a few more times until the majority of people on Hive get it. Then it has to be replicated 1000 times for enough people outside Hive get it, and then move into Hive. LOL
People think stable coins have to be backed by dollars and gold because even though they have moved into the crypto'sphere, they still think like they are operating in TradFi.
Some even pat themselves on the back saying they are smart enough to straddle both worlds. Thats not smart, well the making of millions of dollars is smart, but the straddling of two worlds, but forcing the concepts of Tradfi into crypto is not enlightened or particularly brilliant.
Brilliant is when you realize that a cryptographically signed immutable transparent ledger with real decentralized consensus is security, and utility is the ultimate holder of value. Plus in a complimentary fashion, it is security and utility, which bring stability.
But you already know that, you wrote this article.
@shortsegments
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First of all, an amazing breakdown. When complex subjects get broken down like this, the audience widens. Thank you :)
I am trying to absorb whatever I can to see if I can have a chance at changing my financial crisis so allow me to ask what exactly would be the value of the crypto we would peg crypto to if not in USD terms?
I wonder how that would work for every blockchain that has somehow pegged its total value on USD.
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Extremely interesting. I understood quite a few things that were sort of obscure to me so far.
I'm actually preparing a piece of content on the topic and this will be useful
Thanks 👊
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I have a fair understanding of $hbd, but even at that, these kind of posts are never enough. Give us moar ser
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I will say this.. Instead of focusing on what a stable coin is.. I want to focus on what i believe it shouldn't be. I think it's so oxymoronic to say a stable coin is something backed by fiat currency.. that's so anti crypto and dumb. bitcoin is the closest thing to a stable coin we have. I would say bitcoin myk in the future will be better as one simply because i would venture the most trusted reliable stable coin will be the one the public has the most interest in network wise. so if i have a stable currency that supplies me a dividend for being part of that network then more people are probably open to building a network that gives them value as opposed to some uknown entity using a basket of unstable govt decreed fiat currencies which is utterly dumb but then bitcoin is similar in that we don't know who has the most stake in it. the bottomline the more people that have a vested winning interest in that network will produce the best stable coin and i think that's just common sense. i'm never going to trust tether or any of them. i'm going to trust the one best for the world and the world will know what that is just like they know tether is full of shit.
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A very informative and educative post I hope I can be under your mentorship @edicted
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