It appears that UST is no different than any of the other stablecoins that are out there. While it is true that it is driven by an algorithm as opposed to simply being dollar backed, we are not getting news that things are changing.
For this reason, it appears that the Hive Backed Dollar (HBD) is still the only one when it comes to creating a stablecoin outside the reach of governments.
Of course, the rapid ascension of UST caught the attention of everyone. Many covered the fact that UST is backed by LUNA. There is the relationship between the two tokens, similar to how HBD and HIVE operate.
However, that is where it ends. Ultimately, this is just another form of the sale ole thing.
It appears the idea is to back UST with Bitcoin. While this might look like a positive step on the surface, one that many within cryptocurrency applaud, it shows how many do not truly understand what is taking place.
To start, there is nothing wrong with backing an asset with Bitcoin. That is a sound approach. Collateralization is a powerful mechanism. Therefore, the value of the Bitcoin is always being put to use, even if it is not leveraged.
However, when it comes to producing a stablecoin that is not able to be controlled by governments or their regulators, then we have a situation where UST is falling way short.
On March 14, Do Kwon, the founder of Terraform Labs, announced UST was going to be backed by a $10 billion reserve of bitcoin (BTC). Terraform Labs created the Terra protocol that issues the stablecoin terraUSD (UST) and luna (LUNA), the latter of which algorithmically backs the former.
Do you notice the problem with the cited paragraph? The term "Terraform Labs" is a point of vulnerability. Here is a target governments can go after.
There is certainly nothing wrong with UST being centralized in this manner. Some seem to think that decentralized is the only thing that is worthy. That is not realistic. We are always going to have reasons to centralize things. The issue arises when it is the only game in town.
When we dig deeper, we see this:
The Luna Foundation Guard (LFG) was set up in January. LFG is a nonprofit organization with a mission focused on promoting a “truly decentralized economy.” Its primary focus is Terra and providing a reserve backstop in case the UST/LUNA incentive mechanism fails.
So why would the incentive mechanism fail? Isn't that what incentive mechanisms are for, to motivate people into particular action? If it is to fail, that means it was poorly designed.
It appears this move is being done to avoid the need to audit. One of the biggest problems with the typical stablecoin is that nobody truly knows what is backing it. While Circle can claim to have $1 worth of backing for each new token created, how do we know? Without an audit, we cannot be sure.
In fact, many surmise that Tether is really lacking. This could present a challenge when it is finally audited. It is something the regulators are itching to do. They want stablecoins under their domain. That means companies backing these will have to come under the banking laws.
Terraform Labs is going to face the same outcome. The fact that they are collateralizing the token using Bitcoin, which is transparent, does not really matter to the regulators. They will sweep them up also.
This should appeal to anyone who pays attention to crypto. The main criticism of collateralized stablecoins is that their need for “attestations” (not quite the same thing as audits) by accountants cut against the ethos of crypto. “Don’t trust, verify” pulses through the veins of lovers of decentralization, and just taking what Circle or Tether tells us about their backing at face value seems wrong.
If successful, UST could become a dollar stablecoin backed by a completely auditable, transparent and decentralized digital asset. That’s a big deal. You won’t need to trust Do Kwon that the collateral is there, nor an accounting firm that will qualify its assurances with weasel words. You’ll be able to see for yourself on the blockchain.
Wasn't this the point of backing UST with LUNA? Isn't that fully transparent?
We are seeing more of the same thing. The further we process along this part, HBD starts to stand out.
This is a coin that has full transparency. The blockchain tells us both how much HBD is in circulation along with how much Hive is available. We can look at the market caps of each to know exactly what the backing in. Finally, the haircut rule is coded into the blockchain, something that anyone with the technical expertise can look at.
Nothing is hidden.
Hive is also run by 20 consensus nodes along with 100 back up that process blocks on a rotation basis. This provides the decentralization in the sense nobody, either individual or entity, is in control of the network.
There is also no company, foundation, or laboratory behind any of this. Community members are responsible for the development and operation of the network. This is funded through a DAO which allocates payments for this work.
Each HBD is backed by $1 worth of HIVE. There is the collateralization mechanism in plain view. The HIVE is not held by a company but depends upon the free market. Whatever the pricing by market forces determines how much HIVE is backing each HBD. Yet it always converts to $1 worth.
Great pains are undertaken to ensure the mechanism does not fail. The haircut rule is one factor that provides confidence in the backing. If it does fall out of alignment, the blockchain stops producing HBD until the ratio drops and each one is then backed by a dollar worth of HIVE.
Once again, the more we travel around the stablecoin universe, we see the enormous potential of HBD. The characteristics of this coin are far superior to what else is out there. It should not be overlooked what an algorithmically driven stablecoin that is on a decentralized network can provide.
Down the road, the world is going to realize the value of this. For now, we just need to keep developing the use cases for it and generating more so that liquidity is available.
This is going to be an enormous driver in terms of the value of Hive.
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