We discuss the idea of collateral a great deal. Someone asked me why it is so important and what is the basis for it. For that reason, let's take a look at how vital this is to the financial system.
Collateral is an asset that is put up to make a loan. This is a rather simple concept. It is what makes lending secure. The most common form of this is type of financing is a mortgage. Under this scenario, a borrower receives money with the asset (the property) being used as the collateral.
We also see this with other forms of lending. A car loan is another example. When one buys a car under this arrangement, the value of the automobile is used against the amount of the loan.
Of course, if payments are not made, default takes place. Here is where the lender will step in to take the asset back. In the end, foreclosure on the property or repo of the vehicle will occur.
This is the tip of the iceberg. Our financial system is heavily dependent upon short term lending. It is a market that changed over the years and is still worthy of attention. Unfortunately, very few pay attention to the off-shore banking system.
Trillions In Daily Loans
The system I am referring to go by a few different names. Whatever we call it, it is one that is now all secured lending. This was not always the case. There were many decades where the banks were able to acquire loans without putting up anything.
This all changed with the Great Financial Crisis. Since that was a bank run undertaken by banks, they started to require collateral among themselves. Before that, it was an open game.
We are now in a collateral crisis. To fully understand this, we have to delve into some of what took place over the years.
Leading up the GFC, even though there was a lot of unsecured lending, what was secured has a lot of collateral. At that time, the market will filled with:
It is important to note that Wall Street rating agencies has MBS rated the same as US Treasuries. This led banks to treating them the same.
After the GFC, the financial world was alerted to the shortcomings of MBS. This means that sovereign debt was the standard. If you wanted the best deal, this is what you showed up with.
Another problem arose as the value of that was destroyed when central banks adopted negative interest rates. This sent the value of the bonds plummeting, causing banks to shy away from accepting them.
In the end, this left US Treasuries. As we sit in 2023, this is the only form of high quality collateral in this system. As we saw, due to action of the Federal Reserve, much of the long end of the yield curve lacks liquidity. This basically eliminates it from the discussion as collateral.
Hive Opportunity
Since there is a collateral crisis, Hive has the opportunity to create high quality collateral that can be used in short term lending. Through the Hive Backed Dollar (HBD), we have the ability to generate an asset that meets a few criteria:
- transparent
- price stablity
- liquid
- elastic
Many feel that Bitcoin is the answer to all the world's woes. Here is a simple example of where Bitcoin will fail. Due to the fact it has a capped supply, we see volatility. Sure, one can point to the fact this will likely diminish as the market cap grows. That said, it will still have issues. Even a 5% move in 24 hours is a problem. We know BTC can drop 10% in a couple hours.
The problem with this is the fact that a borrower could be incentivized to default on a loan if the collateral drops by a massive amount. For example, one borrows $100 million, if Bitcoin is the collateral and drops to $90 million, there is a $10 million profit garnered by walking from the deal. To compensate for the volatility, the lender will ask for more collateral, perhaps 115% of the loan.
With HBD, we have a stable asset at the core. While there are still swings in the market price (much of it due to the size), the asset can still be converted. Also, a bond tied to HBD locked up would have its book value for those looking to hold to maturity. The fixed income component of these types of assets is why there is always liquidity.
This is a major opportunity for Hive. What we are discussing is base layer, no counterparty risk. Bitcoin, on network, operates the same way. However, anything tied to that coin is done through a third party. There is no decentralized finance (DeFi) with Bitcoin at the blockchain level. The additional layer could be fine yet it does add more risk to the equation.
Hive Is Unique
There are certain things that are unique about Hive. The fast and feeless nature of transactions is one. Another is base layer, fixed income DeFi programmed right into the code. This is tied to the second coin, $HIVE, in terms of its backing, which present another aspect to coin valuation.
When looking to create a new financial system, it is vital to understand where the big money is and how the banking system operates. This is where the real action is. When we discuss the idea of money creation (or money printing), forget the central banks. That is not much of the equation.
The true generation takes place in the off shore, Eurodollar system that exploded onto the scene in the 1960s. It also hit a wall in the late 2000s, suffering from balance sheet constraint since that time.
They say find an opportunity and fill it. This is one that Hive can enter that handles trillions of dollars in transactions on a daily basis.
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