I read an article on CoinTelegraph about a new algorithmic stablecoin. It got me to thinking about HBD...wondering how it works. I wrote what's below, am I right?
How HBD works
HBD is an algorithmic stablecoin. This means that it is pegged to one U.S. dollar by normal market forces and automated smart contracts.
One way that HBD remains pegged to the dollar is via normal market incentives of arbitrage (switching between HIVE and HBD)
- HIVE-to-HBD - When HBD is above $1, there is an incentive to change one's HIVE into HBD and earn a small gain. This switch increases the supply of HBD and should thus reduce the value of HBD down closer to $1.
- HBD-to-HIVE - When HBD is below $1, there is an incentive to change's one's HBD into HIVE and earn a small gain. This switch decrease the supply of HBD and should thus increase the value of HBD up closer to $1.
A second way that HBD remains pegged to $1 is through the HBD Stabilizer.
There have been times when HBD has become “unpegged” (it is widely away from the $1 peg). To help draw it back near $1, Hive developers set up the HBD Stabilizer. It is an automatic smart contract with funds provided by the Decentralized Hive Fund (DHF). The HBD Stabilizer automatically makes trades when the HBD price strays from $1.
- When HBD is above $1, the HBD Stabilizer automatically sells HBD. Normal market forces of selling puts downward pressure on the HBD price.
- When HBD is below $1, the HBD Stabilizer automically buys HBD. Normal market forces of buying puts upward pressure on the HBD price.
A third mechanism in place to help keep HBD near $1 is the so-called Haircut Rule.
Haven't had time to dig into the Haircut Rule yet.