HBD: The Ultimate Stable Coin

in #hbd10 months ago

stable coins balance.jpeg

It's no secret that HBD is a pretty poor store of stable value.

But that doesn't mean we should scrap it.

With a few modifications HBD would be the best stable coin out there.

Modification #1

Allow any account to create & destroy HBD.

Anyone can currently destroy HBD and receive Hive in return, but it is only profitable to do so when HBD is trading under the peg ($1) AND we aren't hair-cutting the conversion rate (happens when HBD market cap is > 10% Hive market cap). In addition, no one can create HBD when demand increases. The only HBD supply that enters the market is through our inflation with author rewards.

By turning the bank accounts into Collaterlized Debt Positions, we can allow anyone on the network to create HBD using Hive collateral in the bank accounts. I've also suggested that we move our 15% inflation given to vest holders and transfer this to the bank accounts to give users even more reason to hold there without leeching the author/curation reward pool. More information on this tactic can be found in my Can I Get A Witness post.

Modification #2

Consider increasing the conversion rate to account for inflation.

The main mechanic that pegs HBD to $1 is the fact that witnesses provide a price feed that tells us how much Hive is worth compared to $1. We trust these feeds and this logistically makes witnesses arbiters of the network that quite literally 'feed' us valid information from outside the consensus algorithm.

The problem with this entire model is assuming fiat currency is a stable form of value. Fiat is anything but stable, and is guaranteed to lose value every year and siphon value from hardworking citizens into the pockets of the central bankers.

USD has a long history of being stable enough to be a "good-enough" solution, so many people all around the world accept it as the world-reserve currency (that and it is the Petro-Dollar enforced by our military). Is it safe to assume this stability will continue into the future?

I would argue that now is the best time to start assuming that USD is no longer safe to depend on as a stable asset. The FED is printing trillions and giving all the banks the greenlight to hold 0% reserves. Bank runs are an inevitable outcome at some point. In addition, bail-outs for banks were made illegal in the wake of the 2008 housing crisis.

Bail-ins

At the same time bailouts were made illegal, bail-INS were made legal. This means that likely sometime in the near future there is going to be a bank run and massive bank failures, while at the same time many bank accounts are going to be haircut, and the owners of those accounts will become FORCED INVESTORS OF A FAILED business.

That's right! A bail-in means you lose your money and now own shares in the bank. Not a lot of people know this exists, and when they finally do implement it, it's going to cause widespread panic and likely domino effect into even less trust of this broken system.

Get to the point!

The point is we can not rely on USD as a stable store of value, so we need to start adjusting the conversion rate of HBD to start accounting for inflation. Imagine if next year we voted to increase the conversion rate 3% to account for inflation. How HBD is worth $1.03 instead of $1.

Easy.

Increasing the value of HBD will make a lot more people want to hold it. In fact, it would make HBD the all-time go-to stable coin, as it would be the only stable-coin that increases in value over time to account for inflation. It would be more stable than USD itself, and everyone would want to be a part of our network.

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What are the drawbacks?

By raising the value of HBD, we further Tether our unholy alliance to fiat. Imagine demand for HBD goes way up because everyone wants it because it's the only stable coin increasing in value. Imagine we print 100M HBD or even 1B HBD.

Now imagine USD starts hyper-inflating and loses 90% of it's value. If Hive agreed to increase the value of HBD x10 to $10, all of a sudden our debt increased by x10 all at once. Now ten times as much Hive would get created from HBD liquidations as before. Obviously this is an extreme example to show the dangers, but also it is more likely that our network would vote to not allow this to happen.


Nothing stops us from putting a cap on how much we are willing to bump up the value of HBD during a given year.


Only works when combined with CPD loans.

Raising the conversion rate only works if anyone on the platform can create more HBD to make up for demand. If we vastly increase demand for HBD without creating a decentralized way of supplying that demand dynamically, the system will break.

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Massive synergy!

Another dynamic of major note is the fact that if we increase demand by HBD substantially, we will also increase the value of Hive exponentially. Let's say a few whales with a few billion dollars in other stable assets decide to jump ship and come over to Hive. We do after all (at this point) offer a stable coin that is superior to all other stable coins and their value will be protected from inflation dilution.

Well, if a couple billion (or even 100M) dollars flow into HBD, that demand will increase the value of HBD. In response to this liquidity drain, Makers of HBD using CDP loans will be highly incentivized to create more HBD and sell it to the whales looking to hold HBD. Assuming a collateralization requirement of 300%, the 1 billion HBD that get's bought will end up being collateralized by 3 Billion dollars worth of Hive. Let that sink in for a bit.

Right now our market cap is $114M, so you can see where I'm going with this. Simply fixing HBD and making it more stable will more than x10 the value of the entire network. I guarantee™ it. In addition, exchanges would automatically start using HBD as a base-pair to other currencies because it would be so popular to use. It would be easy to get businesses to want to use it as well. Remember, it's literally better than USD because it's more stable over time.

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Modification #3

More options to burn HBD for other benefits.

We can already burn HBD and other assets on our posts to get paid promotions on our content. I would argue that we could do a lot more on this front, but I'll save that for another time.

The real thing I wanted to talk about is creating tokens by burning HBD. My vision is to create hard assets on the blockchain by forcing users who want those assets to send HBD to @null. This would be a completely different kind of token and have nothing to do with SMT technology. Because the only way to create them would be to destroy HBD their likely would not be other SMT-like mechanics like creating inflation with upvotes and the like. This kind of token would end up using a lot less resource credits because it would be easier for the witnesses to manage with more basic rules of inflation and zero curation.

I think having both SMT and a system like this would show the cryptosphere that we have real diversity with two totally different types of tokenization systems. I've also thought of a model that would reward any node that generates these kinds of tokens. ANYONE (not just witnesses) would get a little reward for hosting these services. Someone uses your node and creates these assets, that node gets a little cut of the action. This would make running a node much more profitable for everyone and could stand to greatly decentralize the network, increase security, and give us a lot more options when choosing where to get our data from.

Again, the more HBD we destroy, the higher the value goes up from a lack of supply. The more that value goes up the more incentive CDP Makers have to mint more tokens and sell them. The more tokens get minted the more Hive gets locked up and increases the market cap of the entire network. These systems all work together in harmony and create a lot of synergy and value.

Conclusion

Obviously this is a lot of work but if more people get on board with these ideas I think they could get completed pretty quickly. From my point of view, CDP loans and interest rates to the bank account are a no-brainer. Ditto for tokenization via burning HBD.

The truly contentious thing I've talked about here is increasing the value of HBD to mitigate inflation dilution. This puts a little extra burden on the network as far as increasing our debt levels, but I believe the value it would bring far exceeds the price we'd have to pay. This is something we need to think about now more than ever due to the increasing chance of hyperinflation.

At the same time, let's assume that USD does hyperinflate and loses 90% of it's value. This same hyperinflation would make it look like Hive increased in value x10, so as we can see, increasing the value of HBD x10 in response isn't really a big deal. It's simply a metric we can use to have the most stable asset in the world as long as we are correctly estimating how much value USD lost.

The first thing I'll be working on as far as this list is concerned is creating assets based off burning HBD. This is the one thing I could do on a centralized database first without anyone else's approval. The rest are up to the community and witnesses to implement, should anyone else feel this is the direction we should head in.

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I humbly disagree with some points here.

Increasing the value of HBD will make a lot more people want to hold it. In fact, it would make HBD the all-time go-to stable coin, as it would be the only stable-coin that increases in value over time to account for inflation.

Not a good idea. That would no longer make it a stable coin by definition. Furthermore burning capless coins (worse stable coins) to raise their value is where tokenomics gets quite misleading.

By use (and experience), Stable coins attract merchant services and puts Hive in position to facilitate business operational costs ie safely storing staff and supplier payments without speculative risk.

The current setup is tried, true and battle tested. Major changes and burning may lead to more problems than solutions. Introducing speculation ("it may rise") will also imply risk, making it less attractive as a stable coin.

What do you mean it wouldn't be stable by definition? Just because every "stable coin" you know of loses value over time doesn't mean ours has to. It would become more stable than every fiat currency. Meaning in 100 years You could still buy say a pound of apples for say 3 HBD while it would cost at least $30 USD. It would be stable and store value. They aren't mutually exclusive.

This works because crypto captures value from technology and distributes it to everyone rather than letting a centralized entity siphon all the gains of progress. Just look at the Feds interest rates 30 years ago.

I don't understand why you think there is speculative risk here. I'm saying the speculative risk is using fiat and we can make a superior product. The value of HBD will only go up compared to fiat and stay even with goods and services. Zero risk; all demand minted by CDP overcollaterized loans. That's the opposite of fractional reserve banking. You can't get any more stable than that.

I do not think you would take this stance if we had been in a bull market for the last 2 years.

Truth be told, the most problematic thing you said is that it's not a good idea to burn HBD for other perks. No one can stop this from happening. I'm going to do it, and if not someone else will. This system must adjust accordingly, this network has no choice in the matter. To say something shouldn't happen because that would be bad when that thing is definitely going to happen no matter what... I don't even know what to say to that.

It's literally already happening with paid promotions for the trending tab. This isn't a consensus issue. It's a frontend issue and a layer 2 issue and it needs no permission and cannot be prevented. I want the network to get in front of the bullshit before it hits the fan. This isn't something that gets wished away.

Started with I humbly disagree.... but obviously you know what you're talking about by mentioning merchants so many times while referring to a stable coin. Have you ever pitched blockchain tech to corporations and/or groups like local chambers of commerce? I doubt it. Not with that speculative view on how things work.

I'd like to add natural (losses and mistakes) and built in use cases ie the promo button can not be compared to consciously burning tokens with the intent to raise value. Wake up. The tokens are burned because they have been 'used' not burned because someone thinks burning a capless coin ultimately affects supply/demand.

Your lack of experience off of Steem/Hive shows every time.

Have a day dude, wish you a lot of rewards 😀 lmoao

I'm not trying to be rude and act like I know everything.
I want to talk about this more so I understand the issue better.
But you still haven't said anything to me that I find particularly enlightening.
In fact it seems you're doubling down on misinterpreting my words, so I'm confused.

Let me be clear:

There is no speculation. Coins are not being burned to increase the value of HBD. In this scenario HBD always trades near the peg because supply is provided dynamically with CDP Maker loans.

We can not stop users from using frontends and 2nd layer to send assets to @null, and we wouldn't want to. It's there for a reason.

Your positioning in this argument is extremely concerning to me because I know many other people share this view. Which means either I'm wrong (fine) or lots of other people are wrong and have no idea what they are talking about and we are leaving gobs of free money on the table (that would be a pretty bad situation, wouldn't you agree?)

I humbly request that you provide an actual example with numbers and math to show the worst case scenario, because I don't think you can.

Here's a thought experiment for this topic:

Hive has just gone x100 in value from various factors including hyperinflation of USD. Several business on the Hive blockchain are now crying out that we increase the peg of HBD to make up for their losses.

Let's say before the hyperinflation our debt ratio was 10%, now after going x100 our debt ratio is 0.1%. What are we going to tell those businesses? "Sorry! Fuck you! We don't have the money to subsidize the failure of USD!"

We clearly do have the money.

As a show of good faith we should obviously subsidize and increase the peg.
HBD is our stable coin, and we should clearly work to stabilize it.
Assuming that we should 100% rely on the monetary policy of fiat for stability is a mistake.
Why would we not invent our own policies to create a more stable asset?
You've made the claim that such policies go against the very definition of 'stable-coin'.
Again, I find this highly frustrating.

There already exists a mechanism that can modify the conversion rate of HBD, it's called the Price Feed Bias:

One of the tools that witnesses have the option to use is a price feed bias. Essentially they can intentionally tell the blockchain that the price of STEEM is higher or lower than it actually is.

If they tell the blockchain that the price is lower than it actually is, then SBD->STEEM conversions will typically results in more than ~$1 USD worth of STEEM. The blockchain will also generate less new SBD tokens when paying rewards from the rewards pool.
If they tell the blockchain that the price is higher than it actually is, then SBD->STEEM conversions will typically results in less than ~$1 USD worth of STEEM. The blockchain will also generate more new SBD tokens when paying rewards from the rewards pool.

https://peakd.com/sbd/@timcliff/sbd-explained

On another note, I don't think that the creators of steem operated under the asumption that fiat is a stable form of money. In this case the "stability" that is referenced in the white paper is conceptualized as relative to the fiat currency in question...USD.

For a currency to be a stable store of value it neither has to be inflationary nor deflationary, in other words the amount in circulation has to increase or decrease with the cycles of the economy.

Since the economy is a caothic system the best that you can do is have a predictable issuance rate and influence the circulation via interest rates (or let the market sort it out).

For the above reason the best that you can hope for is to have relative stability. Unfortunately any attempt to peg HBD to the inflation rate of the USD will either deteriorate the debt ratio or will destabilize the inflation schedule for HIVE.

I am more inclined to have a conservative HBD monetary policy:

  • Cap the issuance of HBD below the Hair Cut rule, maybe at a debt ratio of 8%.
  • Start Increasing the liquid hive ratio at a lower point (6%) so that the liquid portion of the author rewards start paying hive instead of HBD in a linear fashion before the debt ratio gets to 8%.
  • If HBD starts trading above 1.00 let the market sort it out.

Posted Using LeoFinance

Unfortunately any attempt to peg HBD to the inflation rate of the USD will either deteriorate the debt ratio or will destabilize the inflation schedule for HIVE.

I think it's pretty obvious (as stated in OP) that if USD experiences inflation then Hive gains in market cap and the debt ratio stays exactly the same even if we raise the value of HBD. In fact, our debt ratio is clearly being lowered by doing nothing.

It also won't destabilize the inflation schedule because again, if Hive goes from $0.25 to $0.50 from inflation of USD and we modify HBD from $1 peg to $2... what has changed?

Our market cap doubled and our debt doubled. Same ratio. Someone who converted 30 HBD at $0.25 gets 120 Hive. Someone who liquidates 30 HBD at $0.50 again gets 120 Hive only if we account for inflation by pegging HBD to $2. Otherwise their value is leeched away to 60 Hive. Just like a real central bank does it.

I think it's pretty obvious (as stated in OP) that if USD experiences inflation then Hive gains in market cap.

I don't see that the USD inflation and the HIVE marketcap are directly correlated. For this to happen some of the extra USD money supply has to flow to HIVE but it's more plausible that it will go to BTC instead over a long enough period. Once the hive inflation schedule stabilizes at 0.95% (in about 16 years) theoretically HIVE should start to appreciate against the dollar.

In reality the money supply by itself has little effect on the relative price of any coin. For the difference between two currencies' inflation rate to manifest on the exchange rate the demand side of the market has to change in tandem. But the demand of any item is also influenced by other market forces.

My reasoning is that since the price of hive is not directly correlated to the inflation of the US dollar changing the peg to match it will create an incentive to permanently convert HBD to HIVE at an increasing rate which is not in the best interest of HIVE holders as this creates extra selling pressure on it.

Creating sinks for HBD is an interesting proposal for destroying part of it's supply as opposed to converting it to Hive.

Very nice! This is the best argument so far against attempting to account for inflation. However, I would be pretty surprised if the price of everything in the world doubled from inflation but Hive didn't. Wouldn't you?

For this to happen some of the extra USD money supply has to flow to HIVE

I believe this shows a fundamental lack of understanding when it comes to liquidity, supply, and demand. A coin can double in value without any money being put into it. All that needs to happen is for the sellers to decide they aren't selling anymore. Markets can shift with zero volume. Of course this idea probably exists in a vacuum and has never actually happened IRL.

In any case, thanks for getting back to me.
I have a lot to think about.

Market dinamics a very complex, both supply and demand are sensible to a host of factors which are difficult to account for in the short and mediam term. Especially since we cannot apply the same models to tokens/currencies that operate under different designs.

Note: when I say supply I mean what is placed for sale on the market and not just the amount that is "physically" in existence. Anyway, this has been a stimulating conversation.

We'll all laugh about this when we're fucking millionaires.
When Lambo? Kek.

I agree.
Pegging stablecoin to USD seems fishy

It was always an education thing to me. People just needed to understand that HBD is a coupon for $1 of HIVE. If I can buy that coupon for $0.65, then hex yeah I will! So would a lot of people if they understood it better. If I gaf about USD, then I can buy HBD with my HIVE and that hive will remain the same amount of USD until I convert it (personally, I dgaf about USD and just use HBD as a means of getting more HIVE)

Originally, it was meant to be a USD peg to drive adoption for normies. No fancy conversion needed for HBD like you need to for btc/eth/doge/edictedCOIN in commerce. That didn't play out though, so it doesn't seem to serve much purpose. It doesn't look likely that it ever will, since we'll be on BTC for commerce soon 😂

Glad to see new ideas rolling around. I will def have to come back and re-read this post soon. Got some digesting to do!

Modification fix or ditch: (1) stop HBD creation altogether and focus solely on HIVE (2) decrease the HBD 10% HIVE market cap rule (haircut rule) to 1-2% to avoid excessive debt (3) implement modifications above or ditch HBD, either fix or ditch

If we have CPD loans that allow users to create HBD with Hive collateral we'll find that even the haircut level of 10% is far too low. The collateral requirement for the CDP would have to be at least 1000% to account for the 10% haircut limit. Truth be told, this might be a good level to start it at while testing it for the first time.

However, I think 300% is already a super safe level because it largely prevents (mitigates) users from dumping their loans back into Hive to increase collateral to make more HBD (multiple risky stacked leverage trades). This 300% level would imply we need to raise the haircut at least x3 to 30%.

This is not a scary level if we actually have the demand to maintain it (which we would because CPD loans are much more stable than the way we are doing it now). We wouldn't ever be in a situation where HBD is $13 and isn't getting converted for a year. As soon as Hive started crashing the conversions would begin immediately and users would also buy back cheaper to pay off their loans.

Amazing analysis that brings up some points of view I never thought before. I subscribe to everything you wrote and thanks for tutoring us on this!

Would love to see the HBD get fixed. If the USD ever does hyperinflate and/or lose its reserve currency status then the HBD can be pegged to whatever replaces it. That's probably gold. Worst case we need to hardfork and airdrop to account for the different pegged amount but its not the end of the world if the USD craps out.

What I'm trying to say is that leaving HBD pegged to USD is more stable than pegging it to gold even if USD hyperinflates. All we have to do is account for inflation.

USD loses 99% value? not a problem. Just peg HBD to $100. Hive will have also gone x100 just from the inflation so this is fine.

As long as USD exists and doesn't gain a bunch of value back after having lost it we are fine. Even if it did we could drop the peg back down.

In the end what Im trying to say is that we need to start pegging the value of hbd to our own monetary policy, not 100% relying on fiat.

 10 months ago 

Fascinating concept. If holding 1 USD is losing money, then holding 1 HBD is also losing money.

Replace "money" with "purchasing power" and you are bang on.

We still need a gateway token for the masses to transition from fiat to unbacked crypto. HBD could yet play it's part in that.

 10 months ago 

Good get. I meant 'purchasing power', absolutely right. What do you think of the idea?

I think edicted has good ideas and I'd love to see HBD getting adoption via commerce on the platform.

 10 months ago 

Yeah; I think in a sea of stable coins, you need to do something innovative to really stand out. This would certainly fit the bill.

 10 months ago 

Can you dumb this down a little please?

Hive's worth $1.

I send 100 Hive to my Savings? I can create 33 HBD, which will be worth $35 worth of Hive a few years later.

I can then spend/send this HBD but that 100 Hive collateral stays locked up.

Do I then need to acquire 33 HBD in order to unlock the Hive?

Do I then need to acquire 33 HBD in order to unlock the Hive?

Yes. The only way to unlock Hive is to have a CDP with a higher collateralization percent than the required percent. In this case you are assuming 300% collateral like I did in my examples, but if HBD started trading 'significantly' higher than $1, the collateral percent would be lowered to encourage Makers to create more HBD.

If the network lowered the required percent to 200% you'd be able to unlock 34 Hive without doing anything because your 100 Hive would be fully collateralizing 50 HBD. Therefore in this situation you could either create 17 more HBD or remove 34 Hive, leaving you with 66 Hive and 33 HBD (200% collateral).

Even if the collateral requirement was 300% you'd still be able to unlock 1 Hive (99 Hive / 33 HBD) assuming the value of Hive is still $1.