There is a great deal of discussion about stablecoins and what needs to be done to give them value. In the aftermath of the UST/LUNA collapse, people are wondering if algorithmic stablecoins are prudent. Even Vitalik and CZ are weighing in on Terra's new plans.
A lot is being made about whether stablecoin should be asset backed like Tether and USDC claim to be. However, much of this discussion enters around the fact few understand how the existing works and what truly gives value. Most, if not all, of that comes from really not grasping the US Dollar and why cannot be penetrated.
Over the next series of articles, we will discuss how to give a stablecoin value. We will cover the different areas where focus is required. If something like Hive Backed Dollar (HBD) is going to be a legitimate player, which it can be, we need to understand these different concepts.
The first we will cover is collateralization.
In the past we discussed the idea of creating a Hive Savings Bonds. This is a crucial step in the progression of HBD in terms of establishing value.
Much of the stablecoin conversation centers around the idea of backing these assets. The idea is to provide collateral in case the peg breaks as it did with UST. Of course, that was backed, in part, by Bitcoin and we see that did not work out so well.
So why is this a flaw?
Understanding bonding will help to clarify this a great deal.
With HBD, the idea is to have time vaults on-chain. This centers around having the ability to put HBD into a savings account for a certain period of time. In return for the "lock up period", a different rate of interest is paid by the blockchain.
Once this is live, second layer solutions could be built that create tokens ("bonds") to reflect the HBD that is in these vaults. Here we see the ability to provide liquidity to those who are opting for this approach. Just like any other asset, the bonds can be traded on exchanges.
More importantly, the Hive Bonds can be used as collateral.
Here is where things start to get very interesting. It is also where the entire conversation changes regarding HBD.
To illustrate, we will use US Treasuries. When it comes to collateralization, these are the most pristine. They are highly liquid, stable, and distributed globally. They also are trusted by the banking and financial systems.
This brings up the question of what is a US Treasury? What is it backed by?
We start by looking at how one acquires a Treasury bond (or T-Bill). Basically, the person puts up USD to purchase the bond. The asset is good for a certain period of time until it redeems the money. There is also a rate of interest that is paid along the way.
So far, this sounds a lot like what a time vault on Hive would look like.
At redemption, the individual who purchased the Treasury Bond will have the initial investment paid back plus all the interest. This all comes in the form of USD.
In short, a Treasury bond is future USD.
Bonding is only a step in a more advanced process. Once Hive Bonds are created along with the establishment of a tradeable market, the potential for collateralization opens up.
This is a crucial concept to understand, one that completely changes the entire picture.
Going back to US Treasuries, when it comes to the financial industry, this is the highest form of collateral. The reason for this is it hits on three important areas:
When collateralizing something, the lender needs to know a couple things. To start, if the collateral has to be taken, can it be sold. Here is where having liquid markets is crucial. It is why T-Bills are the best form of Treasury collateral because they are never off-the-run (lacking liquidity).
The second factor is stability. This is crucial for short-term lending. With something like Bitcoin, the volatility is death for this purpose. A slide of 10% overnight means that a lender might end up buying the asset at a 10% loss, something that it didn't want to begin with. To alleviate this, overcollateralization is required. Whereas a T-Bill might only require 1.5%, with Bitcoin it might be 12%-15%.
With Treasuries, volatility tends to be a lot less. Therefore, it is the preferred security when putting up collateral.
I once sold a machine to a start up bank. It was a lease program and the purchaser had to fill out a credit application. He said that was impossible. Simply, banks do not have credit, they issue it. In other words, I was asking the wrong questions.
This is a similar situation. When people ask what is backing the USD, they are asking the wrong question. People are looking for collateral to back the currency when the currency is the collateral.
We just showed how US Treasuries are nothing more the future dollars. They are also the most pristine form of collateral. No need to back the USD with collateral when it is collateral.
Here is where we can see the transformation of HBD. While others are trying to figure out how to collateralize their stablecoin to give it value, we build the value of HBD by making it collateral.
Many are fearful of the fact that HBD is debt. This is true. However, we need to look deeper at that.
The situation with HBD depends upon the perspective. Whereas the issuance of it is debt, when bonded, it is transformed into an asset. The HBD now has a stream of payments over a certain period of time. This places it in the center of the fixed income market.
Of course, just issuing out debt without any control is bad. It is a situation that we witnessed with UST.
Ultimately, value, in part, comes down to utility. Over the next few articles we will delve deeper into this. For now, we just need to see how turning HBD into collateral is a major value proposition for the coin. We do not see this as part of the conversation around stablecoins because, once again, few truly understand what it takes to develop something like this. Most are effectively trying to create money market tokens. While this is worthwhile, it is something vastly different.
Debt is meant to foster growth. That is the ultimate goal. For that, Hive needs to use the debt as a vehicle for expansion. Unfortunately, there are no shortcuts. It will take time to build the depth and liquidity required. However, to ascend to the top, it is worth it.
To see what we are dealing with, here is an interview with Jeremy Allure, CEO of Circle, who claims stablecoins will be a $120 Trillion market.
In the next article, we will discuss the second way to give HBD value: derivatives.
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