For those reading this, it is best to refer back to these articles since they are precursors to what is being proposed in this article:
As we develop a framework for the Hive Financial Network, one of the keys is to establish a lending platform. This is an essential component of decentralized finance, one that we can fill utilizing some of the unique aspects to Hive. One of the core pieces is the fact there is a base layer stablecoin in the Hive Backed Dollar. This is a very important component going forward.
The Apiary is also a vital piece. This is the second layer DAO that can be set up to handle all the liquidity for the applications built in this network. The profits from this organization are also fed back to the holders of Hive Power. Again, reference the first article listed for explanation on that.
Bear in mind what we are dealing with here is a developing mental framework. Over time it is evolving and expanding.
This is an application that specializes in collateralized lending. The idea is simply to provide loans to users in a way that provides what is needed while offering a return to the Apiary (and eventually HP holders). This is all built on decentralized infrastructure both at the base and second layer.
It all starts with HBD. This is placed in a time vault at the base layer on Hive. When this occurs, we have an asset that has time element along with a stream of payments. This allows us to formulate a return that is fixed. By tokenizing this, we have an asset that is tradeable.
In this instance, the value of the future revenue is used for collateral. Just like US Treasuries, we know what will result in both interest payments and maturity. Since this is on blockchain, it is fully transparent. (Refer to the article on Hive Bonds)
With the Hive Lending Platform, we can set up an application whereby people put up their Hive Bond as collateral against the loan they are taking out. The system can be coded to provide some type of over-collateralization level, perhaps 10%. Thus, if one wants a loan for $10K, he or she puts up $10,100 in collateral.
The lending platform can charge a nominal rate of interest, say half of the Fed Funds rate (or none as explained later). Since this is modeling much of the existing wholesale banking world, we are applying the ability to "create money out of thin air". This return is minimal compared to what is being generated on the other end.
All loans are paid out in the Hive Financial Network stablecoin, sHBD. This is a derivative of HBD, operating on the second layer.
The application sets up a payment schedule similar to any other loan. As long as the payments are made, no action is taken. Failure to make the payments results in default, and the surrender of the collateral.
So far, this is pretty straight forward.
Where this gets powerful is in the dynamics of how this operates.
One of the key pieces to understand is that sHBD is a 1:1 backed derivative. With each created, 1 HBD is placed in savings. Some percentage would have to be liquid since people might want to swap back to HBD. However, the more the financial network is built out, the less likely that will be as the use cases for sHBD grows.
This means that the Apiary is earning 20% on the HBD placed into savings. If there are time vaults and longer lock up periods available, this could go higher depending upon what the witnesses decide as an APR. For the sake of discussion, we will use 25% on a 1 year time vault.
On the above example, to get 10K in sHBD, that means the same amount of HBD is placed into savings. This is effectively off the market, albeit short term.
The borrower them places 10,100 HBD into the time vault. This is done to create the bond that is used as collateral. Of course, since this is only collateral, the individual still owns the bond. That means the 25% APR is paid to that individual.
From this, we can see the safety in this type of lending. Not only is the Apiary protected with the over-collateralized loan, the asset used is offering a return to the borrower that is in excess of the rate of interest charged.
We also see how another 10,100 in HBD is locked up and no longer on the market. This single transaction effectively locked up 20,100 HBD.
There is also the added fact that loan repayments are to be made in sHBD. Here is one of the key strengths to the USD. When loans are denominated in a certain currency, that creates demand since payments are to be made.
Hence, the desire to convert sHBD back to HBD is reduced. Operations take place in the former.
Once the borrower gets the sHBD, the money can be used however desired. Through the use of a DEX or liquidity pools, the currency can be swapped into whatever wrapped token one wants. This will allow for use in either the digital world or, if moved into fiat, the physical.
In other words, this could provide real world lending.
The key is that, once the loan is made, any further movement is away from the HBD locked up on-chain. A layer of protection is added by operating in the derivative (wrapped version).
Like the 30 day window on the powering up of $HIVE for governance, the delays via the time vault and the moving out of savings help to deter HBD attacks.
Referring back to the Hive Financial Network, we discussed the governance token (Larva) for the Apiary. That is designed to be airdropped to HP holders. It not only offers governance but is eligible for 6% of the profits (off the top) from the Apiary.
The remainder is distributed as follows:
What makes this so powerful is that unlike traditional banking, which makes money on the interest charged, with the Hive Lending Platform, that is a secondary revenue stream. The true return comes from the utilization of sHBD. Since each is backed by on-chain HBD, most of which is generating a return for the Apiary, we can see how the profits can be outstanding.
In other words, we want more people utilizing the service. This means a greater amount of sHBD is required and in use, each registering more money in the DAO. From there, it is distributed as follows to the different parties, creating a circular financial economy.
One of the vital factors is that all of this is based upon Hive Power. It incentivizes people acquiring the coin and staking it by offering another return on top of the inflation adjustment.
We are applying a similar model to what Circle is doing. For each USDC that is created, a dollar is backing it. However, 80% of their holdings are cash equivalents, i.e. US Treasuries. The interest paid on those instruments is given to the company.
This is a similar mechanism except the Apiary (DAO) is the one receiving the return on the backing asset of sHBD.
Make no mistake about this: even though it is a rather simple model, it is very powerful. This is why the banks have run the world for centuries. Essentially, they controlled the ledger, hence they were in charge of money.
Many focus upon the ability to create money out of thin air which is powerful on its own. However, it move to another level when money is transformed from one form to another. By operating at a number of different levels simultaneously, we see how not only is resiliency built in but also the ability to generate a return. Each layer is of benefit. The main difference is that, instead of the bankers being the ones to the good, it is the holders of Hive Power who ultimately come out ahead.
This is the true essence of DeFi. As we can see, there is no entity in control. The Apiary is run by the Larva holders, which is dropped based upon HP. Ultimately, they can be bought and sold, providing the opportunity for those who want more say to be able to acquire it.
One final idea which can open up an interesting thought experiment:
The lending platform does not actually have to charge interest on the loan. It effectively could be zero since the main return does not come from there. In fact, we could start utilizing negative interest rates.
Why would the Apiary pay people to take out a loan?
The answer lies in the simple idea of locking up more HBD and earning a return. Which is more profitable:
Can you see the power in money transformation? Take this thought process out into the billions of dollars. By incentivizing the use of the platform, the demand for sHBD keeps growing. This means more HBD has to come from somewhere. While the interest will generate a lot, it will not be enough. We ultimately will have to be converting $HIVE.
Simple supply and demand tells us what the impact that is on the price of that coin as it is converted.
Of course, as more sHBD is generated, the profits of the Apiary goes up, most of which is fed back to HP holders providing even further demand for HP.
One thing that is often discussed is the real estate industry and DeFi getting involved in that market.
While not exactly what most are referring to, we can see how, over time, this will take over this realm also.
At present, one applies for a real estate loan. If approved, the person gets a mortgage using the house as collateral. Of course, all that is required is a down payment so it is not a mirror copy.
Using the Hive Lending Platform, one can use the Hive Bonds to buy a house. The loan would be secured by the bonds, meaning the house is effective "bought with cash". If default does occur, the house is not lost.
Obviously, the person requires enough to acquire the loan in the first place. This is where Web 3.0 and people's activity is enhancing their wealth. This can be further leveraged into a real world asset such as a piece of real estate.
Now consider this in light of a flat or even negative interest rate. Take out a collateralized loan to acquire a home and end up paying less than was originally borrowed. At the same time, earn 25% on your collateral.
Do you see the potential as the value of $HIVE increases?
It all starts to feed back onto itself.
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