More on Increasing the Peg of HBD to Account for Inflation

in #hbd9 months ago

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As predicted...

I've ruffled some feathers with my claim that we should be increasing the value of HBD to account for inflation and make our stable coin more stable (essentially a stable store of value). Apparently my responses to criticism had a dickish, entitled, and know-it-all tone as they often do. This is not my intent but is a common occurrence. My ability to deescalate is very poor, to say the least.

Ultimately, I wish to understand these issues in their entirety. This is clearly impossible, as macro economics are impossible for anyone to understand as there are far too many moving parts and variables. However, we do the best we can and try to make the best guesses we can based on our knowledge of the situation. This is all we can really hope for.

Some misunderstandings I'm trying to clear up.

What is the definition of a "stable-coin"?

My definition of a "stable-coin" is a coin that doesn't gain or lose value relative to other assets. It's value comes from the extreme volatility of crypto. Most crypto projects are subject to extreme gains and losses, so stable-coins are required to provide a safe haven for those not looking to gamble.

@donald.porter writes:

Not a good idea. That would no longer make it a stable coin by definition.

This was in response to me saying that the value of HBD would go up over time relative to fiat. I wonder if the same argument could be made if I had simply worded the sentence differently:

Instead of:

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.

I could have wrote:

Stabilizing the value of HBD relative to goods and services (rather than fiat) will make it a lot more tempting to hold.

There, now we see that HBD hasn't gained or lost any value and it fits the definition of a stable coin. Nothing has changed except for the semantics of my wording.


Furthermore burning capless coins (worse stable coins) to raise their value is where tokenomics gets quite misleading.

I found this argument to be extremely problematic. HBD is already being sent to @null for paid post promotions. Even the whitepaper confirms that the ability to send money to @null is a feature that we should be striving to build around.

More reasons to send money to @null are going to pop up. That is a fact. These reasons are going to appear on frontends and 2nd-layer solutions, so even if the network wanted to stop it from happening, they would not be able to. No one needs to ask permission to create these services. This is not a consensus issue.

If this network does not provide a solution to dynamically generate HBD supply to meet demand (CDP loans) HBD absolutely will break its peg and trade vastly over $1, completely undermining its own stability once again and breaking the whole system. This is guaranteed to happen again if we don't do something. It's only a matter of time. Another round of dumb money into crypto will prove this over the next 12-18 months.

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 system I propose has infinitely less 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.

You see, I'm really struggling with these arguments because we have a history of SBD going to $13 and then crashing to $0.50. This is not "tried, true, and battle tested". This is a joke. Honestly, to make the claim that implementing my system could somehow make our 'stable-coin' even less stable than it already is? Like wow, that's pretty offensive. You can't have a worse track record than we do. HBD/SBD is the laughing-stock of stable-coins. That is a fact.


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Let's move on.

@apofis writes:

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.

Okay well that is an extremely short-term hackish solution that can not be sustained over long periods of time. Although I really do value this information because I forgot that this strategy could be employed. Pretty cool.

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.

Exactly! Yes! This is exactly what I am proposing! With extremely overcollateralized CDP loans we can indeed create a stable asset that cycles with the economy to inflate and deflate the currency as is required to maintain stability. I truly do not understand why this is such a novel concept, and the extreme value of such an asset is undeniable. Trust me, if we don't do it first someone else will, and then we will copy that project and miss out on first move advantage. Maybe that's for the best to let them be the guinea pig, who knows. I personally want to be on the forefront.

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.

Okay this is the crux of the situation.

The statement above is the most valid argument against raising the conversion rate of HBD. Although I'm beginning to realize that both of these problems are not going to happen. We would not increase the debt ratio unless the debt ratio was clearly lowered by USD inflation. We would not destabilize the inflation schedule because we still have a haircut limit.

Example

Hive is trading at $0.25, HBD at $1. Rampant hyperinflation hits USD and pushes the value of all relative assets up by x2. Apples cost twice as much. Cars cost twice as much. Hive costs twice as much, now trading at $0.50. Assuming our debt ratio was 4% before inflation, after hyperinflation our debt ratio is now 2%, because HBD is still trading at $1, we haven't printed more (in fact users might burn it because it's no longer safe), and our Hive market cap has doubled while the HBD market cap is theoretically static during this time. Increasing the peg of HBD to $2 in this situation simply brings us back to the debt ratio we're supposed to be at and allows users to keep holding HBD without the worry of USD continuing to hyperinflate.

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.

Okay so I really just can't even with this statement. In this scenario, EVERYTHING in the world has increased in price by double due to rampant hyperinflation capitol injections... except Hive... because... reasons. Capitol is flying everywhere, except into Hive because "extra USD money supply has to flow to Hive" to increase the market cap. The statement itself is inherently false.

Liquidty

Liquidity again.

I've been compelled to talk about the concept of liquidity over and over and over again because most people in this space (even super smart and educated folks) seem to completely misunderstand the issue.

Simply put, we don't need capitol to flow into Hive to increase the market cap. All we need is for users to stop selling and providing liquidity to the market at the current price. In fact, if lots of sell liquidity is being provided at a certain level, lots of money can get dumped in at that price and not increase the market cap at all. It goes both ways.

What's going to happen if USD starts hyperinflating? Are you going to sell you Hive into USD? Fuck no you're not. Like me, you'll be running around screaming HOLY FUCK IT'S HAPPENING GET INTO CRYPTO AND PRECIOUS METALS BEFORE YOU LOSE ALL YOUR MONEY!!!!!111@

So not only is money going to flow into Hive in the case of hyperinflation, the value of Hive will go up even more because Hive literally competes with fiat. If fiat is doing bad, Hive gains (or more accurately Bitcoin gains and we gain from Bitcoin). This is a cooperative space, and Bitcoin's gain is every crypto's gain. If USD hyperinflates x2, I posit that Hive will gain x2 just from the extra money floating around, and then another x2 because users no longer want to sell back into fiat. Major price discoveries will have to happen. It could even be as high as x10 to x100. We have no idea. USD has never hyperinflated before.

So you can imagine my frustration when I have smart competent people disagreeing with me saying my ideas are going to fuck up the system by increasing our debt cap too much when exactly the opposite thing is going to happen.

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Hive gains the benefit of exploitative central banking tactics.

The more I come to think about it, the more I realize this fact. Users who hold HBD for stable value are going to get fucked in the exact same way that USD holders get fucked by the Fed: slow inflation devaluing the currency. What I am proposing here is that we pass the savings on to HBD holders rather than exploit them like a central bank.

Make no mistake, I stand to benefit (in the short term) if we don't increase the value of HBD over time to account for inflation. Why? Because I don't hold HBD. Therefore the value that the network leeches from HBD (via the Fed's own monetary policy) is going to put more money into my pockets and everyone else who holds Hive.

However, on the long term I posit that we should end this exploitation. We should eliminate this usurious dilution and create a better stable-coin than any fiat currency could ever hope to create.

What we need to remember is that this is THE ONLY WAY a fiat currency can make money. They provide a product and charge interest for their service and can print more money whenever they want. As long as their product is "good enough" people are going to keep using it and trust in the system.

Meanwhile, on Hive, we literally have programmable money. We have a million different ways of generating value that a central bank couldn't even dream of. Plain and simple: We don't need to be fucking over stable-coin holders and leeching value from them like the central banks do.

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This post is clearly ahead of it's time.

And I'm not saying that because I think I'm some kind of fuckin' genius over here or something; Poor me no one wants to support my amazing idea! No, what I mean by this is that we might have to be in the moment before a lot of what I'm saying makes sense. We might have to confirm for sure that USD is hyper-inflating, that this is adversely lowering our debt cap and making HBD holders abandon ship, that increasing the conversion rate is the only way to keep the system afloat to counterbalance the Fed's failures. Until then, it's all speculation.

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.

Again I would make the exact opposite argument. By increasing the conversion rate of HBD to mitigate inflation we vastly increase the demand to hold HBD. If the demand to hold HBD is vastly increased then it's literally impossible for there to be selling pressure. In fact, the opposite is true. Holding pressure is created on both sides (HBD & Hive).

Because demand for HBD must be met with dynamic supply created by extremely over-collateralized interest-free loans (say 300% collateral required) three times as much Hive must be locked up just in order to supply the demand of HBD. This dynamic skyrockets the market cap of Hive and further lowers the debt cap. The higher the required collateral percentage, the more HBD will be worth due to how many coins are collateralizing them (instead of using bullshit interest rates like everyone else).

From this perspective we could abandon the conversion peg altogether and simply use the collateralization ratio to set the prices. By making this process interest-free (unlike all the other exploitative crypto loan services out there) we guarantee that users will be willing to take the deal and set the network up for first-move advantage.

Conclusion

The demand for HBD at the moment is 6M tokens. That is a joke. To say it is working properly is a joke. We can increase the demand for HBD massively if we work toward stabilizing it. Doing so will vastly increase the value of the network at large.

Sorry not sorry?

I hope that my tone regarding criticism doesn't scare people way, but surely this is wishful thinking on my part. I'm sure a lot of people see my reactions and do have some reservations with what I'm saying but conclude: "I'm not touching that mess with a 10 foot pole."

In the end I enjoy the arguments and find them very enlightening, even if I personally view the points presented as completely and obviously false. For every one person that presents a view to me, I know that 100 others agree. Sometimes perception is reality.

It becomes obvious to me that if I really want some of these things to happen, I need to do them myself in a contained centralized environment at first to prove their usefulness and reliability, and that's fine. Either that or I have to prove myself in other ways so more people on the network take me seriously. Fair enough.

Thanks for giving your two cents!

Apologies to both @donald.porter and @apofis for my tone!
I will never make the claim that I'm good at talking/working with others.

That being said, I challenge anyone reading my suggestions to come up with real-world examples with actual math showing how my implementations could break down on a fundamental level. I'm currently not seeing any of that; simply vague speculation as to why it might not work based off of uninformed opinions that may apply to economics at large but not this network in particular.

Here's an example of an example I don't want to see:

USD hyperinflates, but somehow Hive has not gained in market cap and the network wrongfully and blindly disregards this information and votes to raise the conversion rate of HBD. This causes our inflation schedule to be disrupted and too much Hive to get printed.

This was literally one of the arguments used against me, and it is not an example that will ever materialize in the real world under any circumstances. Speculate better, please.

Again, thanks for the input and sorry for the tone. The opinions thus far against my proposal are enlightening, but I still feel that most of them are not based in reality or they simply lack the kind of vision I'm looking for when connecting all these moving parts together (CDP loans, interest rates to bank account, increased conversion rates, burning HBD to create hard assets or gain reputation/visibility).

Thanks for putting up with me :D

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No need to apologize man, I enjoy reading your stuff 👍. One of the ideas that has been floating in my head is to create a smart contract sidechain for hive to takle several use cases (one of them is having assests backed by other cryptos). But I lack the know-how 🙁.

In my simple mind the sidechain would replicate the public keys of all hive accounts and also have atomic swap capabilities. Along with that the nodes would be able to broadcast transactions to the main chain. The difficult part is getting a trustless interaction between both chains.

I know that currently we have hive-engine but that is a far cry to what I am envisioning.

Wow that sounds pretty crazy.
Seriously though this network will be completely unrecognizable in 10 years time.
I think we are on the verge of an explosion of innovation.

We might have to confirm for sure that USD is hyper-inflating

Given the Fed has been accelerating fiat creation for several years now, and the super acceleration most recently it's coming. They've masked it for years between import slave labor coupled with immigration and spreading the misery worldwide as the world currency. Those tricks are used up.

I've never studied the math behind the chain, but I've always wondered why a stable coin would fluctuate as that seems to defeat the designation/purpose of stable. I really should understand the mechanisms they employ. I never bothered as my sole focus has always been on the Hive (Steem before) coin. I always viewed HBD as a nuisance for the most part, lol.

I never thought about it the way you framed, when you pointed out that we too are chaining ourselves to the inflationary dictates of the Federal Reserve. I'm not sure what other framework one could use, and understand the use is due to people wanting to have a value comparison both familiar and practical, as fiat is what is used to purchase most everything. Even something like gold, which is also manipulated, would be subject to the whims of outside influences.

Will be curious to read more informed/knowledgeable back and forth so I can shed some of my ignorance on this.

I never thought about it the way you framed, when you pointed out that we too are chaining ourselves to the inflationary dictates of the Federal Reserve.

Okay so originally I was thinking this as well. By piggy backing on USD we tether ourselves to the Fed and are at their whim, correct? However, this is only true for those who hold HBD. If the Fed hyper-inflates USD they are the ones that get fucked over.

Meanwhile, because HBD is also tethered to Hive, we actually gain the same benefits of leeching value from the HBD holders just like the Fed leeches value from USD holders... the more I think about it the more crazy these dynamics are.

In the example above, if USD loses half it's value HBD loses half of its value, but because HBD is the debt of Hive all Hive holders just lost half of their debt! Like... WHAT?! It's weird. It's also a good reason to keep things the way they are as long as USD remains a "good enough" solution for the world.

but I've always wondered why a stable coin would fluctuate as that seems to defeat the designation/purpose of stable

Well, there is no such thing as a stable coin, all currencies fluctuate relative to each other and we shouldn't expect anything different from HBD. The best we can hope for is for it to fluctuate within an acceptable range.

As of late it has been tracking the value of the dollar very closely (except on 4/30 and 5/1) but the price is very sensitive to the debt ratio:

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I think the mechanisms you talk about could very well be adopted to fix HBD once and for all. DAI works on Ethereum so why couldn't we have a system like that here. It's a no-brainer.

The thing I HATE about DAI is the needlessly exploitative interest rate for Makers. You don't charge someone interest on a loan they are collateralizing for 300%, that's just common sense. More on this tomorrow.

MKR - DAI would be future... You never know!!

can you please use the leofinance tag :)
Make my life easier

Posted Using LeoFinance

oh? What difference does that make?

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No difference at all .... just easier for me when I do the stats, to search for one tag only ... and you are one of the top leo authors :) But I know leo is shorter and easier ... so its up to you

Ha, NP man #leofinance it is

I honestly don't understand hbd at all and just convert as soon as I get any cause then I get more have per hbd while hive is lower in value.

Same.

All you really need to know is that HBD absorbs a lot of our inflation while it has demand. If it loses demand all that inflation floods the ecosystem. I'm looking for ways to stabilize the peg and prevent the flood of inflation from tanking Hive during the next bear market.

So it typically makes no sense to hold HBD long term? Im basically only holding now to get hive at cheaper rate

Pls excuse my noob..

Holding any stable coin is like holding USD.
The value will only go down over time.

Hi @edicted, I sent you the Hivetorch, check your wallet.

With the USD hyperinflation wouldn't be smarter to create a HBD pegged to x amount of satoshis instead to peg it to dollars?. If the dollar would have good health could be interesting to make HBD more stable but as it is now with the FED printing money like crazy I don't see that a good move and in fact the SEC has several issues with stablecoins pegged to dollar seems like they could try to search legal actions against them.

Just asking is not like I know much about economy.

By definition HBD would not be "pegged" to anything but our own monetary policy. We would be constantly adjusting the peg with community voting (collateral requirements and conversion rates) in an attempt to keep the value stable. USD would just be an anchor point that we use to try to determine what the current "stable" value would be given the circumstances. We could just as easily do the same thing with a "peg" to gold or even Bitcoin, but those assets are inherently more volatile than fiat, and are more likely to both and gain lose value (while fiat only loses value most of the time). It's easier to gauge the stable value with a peg that is already stable and prone to losing value slowly or consistently (aka fiat).

I agree with this. USD shouldn't be the ultimate peg of HBD, but the initial anchor point. Of all the stuff you mentioned in the post and in the comments, this made an impression to me. I don't understand some because I'm not an economics major, but this one I understand and agree. Our stable coin (aka HBD) should be pegged to our own monetary policy. Pegging it to other policies which are both volatile and devaluing is counterproductive to our own ecosystem as it creates unnecessary problem in the future.

You might be right, your post is ahead of its time. But it doesn't mean that possible scenario wouldn't happen in the future. There should be mechanisms to be put in place to counter or make us prepared for those scenarios. That's being proactive as opposed to human's reactive nature. I love the discussion. I may be an ordinary user, but I would love to understand the inner workings of this space. The things that are not talked about at the surface. The things that made this space function, but not very much appreciated.

Nice read!

Always enjoy reading your thoughts on token economics.

Don't apologise for having an opinion. Even if people don't agree with you entirely, it's best for everyone here to have different views being shared and openly discussed.

Keep doing what you're doing!

Posted Using LeoFinance

I like your thoughts but you don't avoid the problem of the HIVE crash. If HIVE crashes, HBD's marketcap will go over 10% of HIVE's and then we get into the negative death spiral that brings HIVE lower and lower and lower.

The best way to make a stable coin in my opinion - whether tied to usd or to match inflation - is to do it the way DAI / Maker DAO does it. We could do that here on HIVE but will require some additional smart contracts in the blockchain code, which is not to hard to implement.

However, the current form of HBD is very useful to HIVE users. It takes dumb money from a investors who do not look at what they buy and algorithms that only consider prices. They buy at $5, $10 and $15. Meanwhile content creators here earn tons of money. Also, for the next cycle, this will multiply the Hive DAO payments, increasing the funding for projects that benefit HIVE.

So, I'd say, let the market give us money! Let the idiots help us.

I am not an expert but: why are we tied to the dollar? can we get attached to the average value of dollar, gold, bitcoin?

 9 months ago 

This one's really growing on me.

Why not just remove the entire HBD monetary(because I believe its broken) and cut down the inflation rate of HIVE?

Both of those ideas are completely separate things.

HBD is not broken it just takes a very long time to get back to the peg if there is extreme volatility. There never should have been extreme volatility because users were still foolishly buying HBD and pushing the price higher even at $10. The market knows better the next time around.

Every network needs a stable asset. The value of a stable asset is too great to scrap the idea. Businesses absolutely depend on this certainty because of razor-thin profit margins.

The value this network would create by offering 0% interest loans would send Hive skyrocketing at least x10 (and that's just in the short term). Not only that we'd get the value of the HBD peg hovering at a reasonable level.

The value this network would create by offering 0% interest loans would send Hive skyrocketing at least x10 (and that's just in the short term). Not only that we'd get the value of the HBD peg hovering at a reasonable level

I also see a lot of value in this and I don't get why its not being implemented or further discussed........

Pretty nice lesson and for sure we need a better way to fight over the inflation. If we could iron the HBD at 1$ instead of moving it around it would be a good market and let HIVE flow organically.