The Hive Backed Dollar (HBD) is a strong coin that has enormous upside. This stablecoin resides at the base layer, providing a mechanism that is not common throughout cryptocurrency. For this reason, there is no smart contract or (and) company associated with it.
This last part is crucial.
When it comes to investments, people always discuss returns. Rarely do they mention risks.
Naturally, these are build into many models. Risk can be defined as the potential of losing money. Here we see the idea that the price could go down.
What is almost never discussed is the potential of losing all of one's money.
Counterparty risk is one of the finance terms that is rather uninteresting to people. Granted, discussing mooning and Lambos is a great deal more fun than this topic.
However, it is essential since this can cause all your money to instantly vanish. This is akin to a rug pull.
Counterparty risk is the risk associated with the solvency of the financial institutions or intermediary that one is dealing with. Again, this is not exciting stuff but when things go awry, it is a nightmare.
Think back over the last 18 months. How many projects, some very large, did we see go under? What happened to the likes of FTX and Celsius? More importantly, look at how many people were (and still are) separated from their money.
We see this outcome because people did not consider the counterparty risk. The same is true for Lehman Brothers, Silicon Valley Bank, and MF Global Holdings. Of course, this is not relegated to individuals. Many hedge funds and Wall Street institutions got tied up also.
Under the existing financial system, there are some protections in place. For example, by law, $250K was covered with Silicon Valley Bank. Beyond that, we saw how companies were going to lose if something wasn't done.
With cryptocurrency, the are no protections. Hence, counterparty risk is something that is crucial.
Stablecoins are a growing segment of cryptocurrency. The challenge is we have the two leading tokens being backed by companies. This is first vulnerability. What happens if these entities go under?
Most presume their assets are safe. That was what people thought with FTX. What if your holdings in USDC, as an example, blew up overnight? Could it be possible that Tether does not hold what it claims?
Ultimately, if we are holding these tokens, trust is given to the entities behind them. The situation gets compounded if we put them in a liquidity pool or application for staking.
Smart contracts add another layer of risk. We have seen many hacks, especially tied to those written in solidity.
HBD eliminates this. By not having a company or smart contract associated with it, none of these problems exist. The counterparty for all HBD activities is the blockchain.
This means that while the 20% APR gets all the attention, it is really the reduced counterparty risk that is appealing with this. When HBD is placed into savings, no third party is introduced. At the same time, the only thing stopping one accessing his or her money is for the blockchain to stop running (the nodes go down).
Consider the power of this for a moment.
Anything tied to Tether, by default, has more risk than HBD. Then we have the question of whether the backing is really there. Even if audited, we have to trust that entity.
With HBD, this does not exist.
HBD is backed by $HIVE. The haircut rule is in place to protect the backing, something that anyone can figure out simply by looking a site such as Hiveblocks. Nobody is questioning whether the coins are actually there to back the HBD. We all can see it.
In the past we discussed the idea of creating Hive Bonds on Hive. This was a collateral mechanism that was also designed to add liquidity to HBD in savings. Through this, we could establish longer lock up periods which would further stabilize the ecosystem.
Many look at bonds as debt instruments but, from the blockchain perspective, it already exists. HBD is debt to Hive. Thus, a bond is not adding more debt, simply changing the form. In this situation is really just an extension of the existing debt. Another liability is not created for the blockchain since this is "backed" by HBD.
The idea is to set a new standard where the blockchain is the counterparty risk. This eliminates a great deal of headaches. Also, unlike US Treasuries, Hive Bonds cannot simply be produced. They are tied to HBD being locked up. Of course, HBD can only be generated, in large numbers, through the conversion of $HIVE.
When trying to create pristine collateral, one of the key factors is to eliminate the risk. The other is liquidity, a problem that that Hive Bonds seeks to solve.
One of the main premises of Satoshi Nakamoto when Bitcoin was brought out was to eliminate counterparty risk. He (she, they) focused upon the banks yet the idea can be extended.
Here we are looking at the ability to reduce counterparty risk basically to the point where the barometer is whether the blockchain is running or not.
That is a standard that most could get behind.
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