With all the discussion about Hive Bonds, it was mentioned that perhaps we should have an article of how they will work.
There are a few different ways they can be structured since the bonds themselves are actually on a second layer. We also could see this done on multiple sidechains. That is totally up to the developers.
In this article we will go through a basic structure of Hive Bonds along with the different components.
This is the foundation.
Time vaults will reside on the base layer. This is decentralized finance (DeFi) on Hive. There is no counterparty in this equation other than the blockchain itself.
It is similar to the Hive Savings. The difference is there is a number of options providing people with a decision between time and interest rate.
We can think of these as certificate of deposits.
People can deposit HBD into one of the time vaults, locking the money up for that period of time. The idea is that one will receive a higher rate of interest for a longer commitment.
For example:
Savings - 2%
1 month - 3%
3 months - 5%
6 months - 7.5%
1 year - 12%
3 years - 20%
5 years - 25%
10 years - 30%
The numbers aren't important at this point and will be set by the witnesses. One key point is that whatever rate is present when one enters the vault (think buys the CD), that it is. The rate is locked in. Any changes in the future, up or down, are not applied to that transaction.
We are simply looking at an extension of the savings program. Front ends that have Hive wallets will simply show more options.
Like a CD, this is not liquid. If desired, there could be a early withdrawal to allow people access to their funds. That could either result in the HBD being burned or distributing to Hive Power holders as a way to increase the return.
The time vaults are the foundation for the Hive Bonds.
This is build on the second layer. It is tied to the application. In fact, it is not limited to just one project.
Bonds provide the same benefits as the time vaults with the difference being liquidity.
Under this premise, one deposits HBD through the application into a specific vault. The wallet will be one set up by the application, most likely using multi-sig and other security/decentralization options.
The application records the transaction and creates a layer 2 token (bond) that is deposited into the individual's wallet.
Interest is distributed to the individual by the application. The base layer operation does not change, hence the individual distribution is up to the app.
The token is a NFT. This is tied to the deposit on-chain. Like a bond, there is the amount (1,000 HBD), the yield (12%) and the timestamp (Aug 24, 2023). Thus, we have all the parameters that are contained in a bond.
This could be set up by 3Speak, Leofinance, PeakD, or Ecency. It could be open source software that someone writes. Since it is layer 2, it is up to the applications to design how this works.
We also have to consider the node system. SpkNetwork is laying the foundation for decentralized nodes that can scale. This might be an option for applications. HAF might also be able to host this service. This idea is to have these tied to a multitude of nodes, reducing the centralization.
Now we start to get into the basis of the Hive Financial Network.
What do we do with the token once we have it?
The first option is simply to collect the interest. One might bond to have the option of liquidity yet not use it.
Option 2 is to sell it. This will require an exchange to swap the NFTs. Again, SpkNetwork is setting up an exchange meaning another layer would be added for NFTs.
Over time, the goal is to develop a market where investors are swapping the bonds. We know people have different goals. Some might be seeking a greater return by hunting bonds that have a better yield because people are selling at a discount.
If someone is selling a bond at a 20% discount, the 12% APR just went up to 14.4% since a 1,000 HBD asset is going for 800.
The third option is to use this as collateral. Now we are entering the lending market.
Since the token (bond) is tied to a financial transaction with a stated return, this has a value that is quantified from the start. Here we see the foundation of collateralization.
This is not much different than some of the cryptocurrency lending platforms. We often see people taking out loans against their bitcoin.
Under this scenario, the 1,000 HBD token) would be posted as collateral against a $500 loan. The individual would be free to use the money as he or she saw fit.
The advantage to this versus using other cryptocurrency is volatility. Bitcoin is subject to large price moves. This causes the situation where people have to provide more collateral if prices drop a great deal. This is a risk that many either do not understand or find themselves short of resources.
Hive Bonds are tied to stablecoin. That is the foundation. We also have an asset that has a stream of payments. At the end of the lock up period, or maturity, we see the HBD returned to the individual along with the final interest payment.
Now we are dealing with an asset that tends to have more price stability than a speculation asset. Thus, we are dealing with a higher quality of collateral.
The advantage to finance is the numbers can get very big.
Global commerce is roughly $100 trillion per year based upon GDP. The repo market through the NY Fed does $4.5T-$5T per day.
With the time vaults, HBD is going to be locked up for varying periods of time. The bonds give users the option of having liquidity to access the funds if needed. It could evolve where investors and traders are swapping these assets, providing market liquidity. Then, through lending, another form of liquidity is provided.
Here is where we could see another use case for HBD emerge. When getting a loan, what does the person receive? How is the loan paid out?
Platforms could create a derivative by wrapping HBD. This means HBD is placed in a Hive wallet with a layer 2 token produced (on a 1:1 basis). The loans are paid out in the wrapped HBD.
To me, this is one of the main advantages to having our own stablecoin. Anything built in terms of financial services can simply incorporate what is at the base layer. When operating on sidechains, a wrapped version will create even more demand for the coin.
Hence, we have HBD used in the creation of the bond and in the payouts for lending.
There are some other pieces to the equation, especially in terms of further expansion but this provides the overview of how it basically could look.
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