There was an impromptu Spaces put together yesterday which focused upon the Hive Backed Dollar (HBD). The essence of the session, which was short, was payments.
Here is the audio if you want to listen.
We have the beginning of a powerful discussion forming. Of course, there is a reason this is a starting point which we will cover in this article. This is why I titled this "Putting HBD on Steroids".
Before getting to that, let us look at the makeup of HBD. There were some valid point brought up in the Spaces worthy of note.
Hive Backed Dollar (HBD)
HBD is an algorithmic stablecoin. This means it is not backed by a reserve. The proper term is "asset backed", which most coins of this nature [claim to be. When we look at Tether or USDC, both claim to have a reserve of both cash (USD) and short term securities (T-Bills).
In the audio, we hear the discussion about centralization when it comes to stablecoins. This occurs in a two-fold manner:
- the coins are backed by assets which have to be held by a custodian, hence counterparty risk is introduced. We have to trust the entity that is holding the assets.
- the blockchain the stablecoin resides on is controlled by one or two players. TRON was the chosen example in the Spaces.
HBD has neither of these.
The blockchain is decentralized both in coin distribution (no single entity owns more than 4%) and block production (less than 5% by any single node).
So, if there is no reserve, what is HBD backed by?
Digital Real Estate
The value of [all currency ultimately comes down to the economic productivity tied to it. This is the case throughout history. It is why the leading empires always have the most desired currency. We see a host of other features such as liquidity forming as a result of this. It also breeds confidence.
That said, early stages require something else. In this case, HBD is convertible to HIVE. This is not a backing as such but, rather, the ability to swap from one asset to another at a fixed rate. Here we are looking at each HBD convertible to $1.00 worth of HIVE.
We must note this is not backed by USD. There are no dollars in the equation. Under this scenario, the USD is a unit of measure, nothing more.
Now, we get to the interesting point.
HIVE can be viewed as digital real estate. It is an access token that is tied to the blockchain. If one wants to write to the database, this is required.
What we are really talking about a decentralized, permission-less, fee-less database that stores text information. It is transparent as well as immutable.
Hence, the utilization of the concept of digital real estate.
Payments - The Tip of the Iceberg
The audio discussed the idea of using HBD for payments. This certainly is the best known use case. When it comes to cryptocurrency, most ask "what can I buy with it?". To me, the challenge is they are often discussing a coin or token that isn't really suited for medium of exchange purposes.
On this point, HBD is ideal. It is a terrific medium of exchange due to price stability. That is an essential requirement. merchants do not want to keep repricing their items for sale due to volatility in the currency. To see this lesson in practice, notice how Turkish businesses are pricing their goods and services in USD since the Lira is all over the place. To not do so would require changing the prices on an hourly basis.
Hence, we cannot stress the point of price stability enough. The USD has more assets, debt, and financial transactions denominated in it, meaning it is by far the largest unit of account. Contrary to what some might say, size does matter.
Of course, the idea of a stablecoin is stability so this only makes sense. We want HBD to operate as a payment mechanism.
Here is the starting point.
HBD on Steroids
In this section, we are going to have to take some liberties with how the monetary and financial systems really work. There will be a future article that will outline what really drives things such as repo, collateralized lending along with its relationship to global trade.
The key point all of this leads to is the idea of collateral. It is one of the reasons why U.S. Treasuries, especially T-Bills are always in high demand. When it comes to the financial system, this is the creme de la creme of collateral.
Here is where we will state the obvious:
- This system is highly centralized and completely exclusionary.
Remaking the existing system means more than just offering another form of money as a medium of exchange. There is an entire world of networks that allow the system to operate. Understanding what these networks do and how they interact is essential.
Sadly, most of that is outside the scope of this article.
However, what we do have is a situation where HBD can be put on steroids by turning it into a mechanism of collateral.
To recap the advantages:
- tied to a decentralized network with a node system not controlled by a single (or small) party
- not asset backed removing the counterparty risk of a custodian (no auditing required either)
- convertible into "digital real estate" which provides a degree of scarcity long term
- price stability
So far this is the making of something very powerful.
High Quality Collateral
HBD on steroids means high quality collateral.
The entire system runs on collateral. One of the reasons why we are seeing economic sickness all over the world is that, since the Great Financial Crisis, the last of high quality collateral is glaring.
To start, mortgage backed securities (MBS) blew up, removing them from the equation. This was followed up by most of the central banks nuking their bond markets with negative interest rate policy (NIRP). Finally, the Fed joined the party by raising interest rates to the point where many of the older bonds collapsed in value.
All of this affected collateral. It also presents a major opportunity for HBD.
Over the last couple years, we proposed the Hive Financial Network. This is something that has HBD as its core.
To quickly summarize that:
- the base layer has the ability to lock HBD in time vaults. This provides a specific rate of return form a set period of time. Since it is transparent, i.e. everyone can see the transaction, we have the potential for an asset.
- the HBD in the time vault is tokenized, similar to a bond. This is an asset that is created out of the HBD and future payments. Preferably, this operates at the base layer to ensure decentralization and remove counterparty risk.
- an exchange(s) are built to trade the 'bonds". This would provide liquidity along with the ability for individuals or entities to gain collateral as needed.
- second layer (sidechain) lending platforms are set up to offer the financial service to the marketplace. Ideally, the currency used to pay out (and make payments) on the loan is HBD.
Here is there the numbers get enormous.
The estimate total for digital payments is around $4 trillion globally. Source
Now we will look at this chart. It shows around the same number.
The major difference is the Repo numbers are daily. We see almost $4.5 trillion in collateralized lending taking place each day. What makes this interesting is this is only the tri-party agreements; it omits the bi-lateral arrangement financial institutions make between themselves.
In other words, the number is higher than what is being presented.
It is also why payments are just the tip of the iceberg. They are a starting point upon which something much bigger can be developed.
HBD has the potential to operate in a manner unlike most of what is out there. Others could copy this model but they would present the same challenges.
What is presented here is a market driven initiative. The expansion of HBD would be based upon demand. If more is required, the purchase of HIVE, which has a free floating exchange rate, would be purchased and converted. This provides the market with liquidity on HBD to create the bonds.
If there is a collateral shortage, it is easily solved by market participants.
Of course, the best part is anyone could use this. It is not an exclusionary system.
Do not sleep on HBD. While it is going to require more building, the potential is enormous. It is one of the few items I saw which could fill the void that exists in the global financial system.