This is a topic that is very intriguing and worth of some discussion.
In the weekly update put out by @blocktrades, there was an interesting idea put forth. It refers to the next hard fork (HF26) that is likely to take place in a few months.
Here is what is on the "to do list" at the end of the article:
Investigate possible changes required to increase haircut limit for Hive-backed dollars (HBD) in hardfork 26. Public discussion is still needed as to the amount to increase the limit (personally I'm inclined to either 20% or 30%, with my preference for 30% to allow for a robust expansion of HBD supply).
Before going any further, we must be clear. This not a discussion about raising the interest payment on HBD put into savings. That is something in the scope of the Witnesses and can be changed at anytime based upon the medium they set.
Instead, this deals with the ratio of HBD-to-Hive which is presently set at 10%. It is a feature that is in place to protect the blockchain from the possibility of becoming overweight with debt.
For those who are not familiar with this feature and why HBD stops printing, read this article by @arcange. It does a great job explaining the mechanics of what takes place and why HBD stopped being distributed last week.
Source
HBD As A Stablecoin
The ultimate quest for many is for the Hive Backed Dollar (HBD) to operate as a stablecoin for Hive. It is set that each HBD is backed by $1 worth of Hive (note that it is not backed by USD, that is only a unit of measure). The goal is to get the HBD price pegged to the $1 level so that commercial activity can take place.
For merchants to start accepting HBD as a payment token a few things needs to happen. The first is obviously to have the peg hold, or at least operate within a very tight range. Over the last couple months, we did see the range go from about $.90 to $1.20. This is greatly improved yet still not satisfactory.
One of the key developments was the @hbdstabilizer. This project is designed to enter the open market and alter the supply/demand balance to help move the price closer to the peg. This is funded through the Decentralized Hive Fund and the proposal can be viewed here.
Another key component, if HBD is going to truly operate as a stablecoin on Hive, more needs to be available. For widespread commercial activity to take place, a lot more HBD is required on the market.
At present, there are 28 million HBD in circulation, a number which also includes the 6 million in the @hive-fund account. This is the wallet for the DHF and that HBD is not really in the floating supply. The code is set up that only 1% is distributed daily thus having 99% locked up.
While 22 million is a healthy number, it is not suitable for large scale commercial activity. Ultimately, if Hive becomes popular, we will need hundred of millions (or billions) of HBD available.
Moving The Ratio To 30%
The idea behind increasing the ratio is to alleviate these issues.
As it pertains to the peg, one of the beliefs is that a lack of liquidity is an factor. Since there are so few HBD on the market, traders do not have an opportunity to arbitrage, at least in the numbers required to hold a peg. Also, in any asset class, volatility flattens out as more is available. The fact that most of the HBD is held on one exchange doesn't help this situation either.
In addition to the volatility, we will also see the scarcity of the token reduced. Printing up to the 10% level does put a hindrance on the expansion of HBD. While many in cryptocurrency believe this is a good thing since they look at things like stocks, it is vital to have enough liquidity to ensure the price does not go up. Having HBD priced over the peg is not a good thing. It cannot be emphasized enough this is meant to be a stablecoin. We want people using it for transactions and as a "parking place" when they want to opt out of their speculative tokens. This requires price stability.
A final potential benefit of HBD as a stablecoin is that fact that it runs on the blockchain itself. With all the threat of regulation, we see how some of the major ones are at risk. They are put forth by companies or development laboratories, all of which are a point of vulnerability.
HBD is generated by the blockchain, which is run by witnesses all over the world. There is no single individual or company who is in charge of it. This could be a vital point as we move forward.
Risks Associated With This Switch
The main reason why this ratio was put into the original code was to protect the blockchain from becoming too debt laden. The idea is that as the value of Hive (the asset of the blockchain) moves higher, we can produce more debt in raw numbers and still maintain the stability.
We actually are not changing this concept. What is being discussed is whether the 10% figure, which appears to be pretty arbitrary, can be altered to 30% (or more) without putting the stability of the currency at risk?
Here is what Blocktrades posted in the comment section of the article:
As to the potential risks, even a 30% haircut rule puts a strong limit on just how much Hive can be created via the conversion mechanism, regardless of how far Hive price might fall in a severe crypto winter scenario. After giving it a lot of though, I think we could easily go to even a 50% ratio without significant risk to long term Hive pricing, but in the end I decided it would be best to demonstrate that a 30% haircut ratio poses no real threat instead of proposing an immediate move to a more aggressive ratio.
Viewed through this lens, we can see the 30% is conservative. Is that correct? This is what the community will have to decide. Nevertheless, there is protection in place in the conversion mechanics that does prevent a scenario where someone loads up on HBD during a massive Hive price spike and then converts it into tens of millions of Hive during a crash.
Taking another step, we can mitigate things a bit further:
For example, with a 30% haircut ratio, we could set the print rate to stop around 20%. In this way, we should only expect to see the haircut ratio hit under one of two circumstances: 1) hive price drops significantly on its own after the print rate hits 0 or 2) HBD price is above $1 and therefore encourages conversions of Hive to HBD.
Ultimately, according to Blocktrades, the goal is to avoid hitting the haircut ratio. This is a game of confidence and the belief is the haircut causes people to lose confidence in HBD. If this is truly the case, then it should be avoided. The market needs to know the liquidity will consistently be available when needed. We saw the response when it went into effect a week or two ago. People were truly perplexed. Imagine that same reaction if HBD was truly operating as a stablecoin facilitating tens of millions of transactions.
What Does The Future Hold?
Part of this discussion has to focus upon the longer term. Certainly, anything done in a hard fork can be reverse in an ensuring one. That said, we do not really want to spend a lot of time flip-flopping back and forth on things.
With the haircut ratio, let us ponder what things look like down the road. For simplicity sake we will forgo the formulas and just take raw USD numbers. It is something we can understand and gives us an idea of what is taking place.
If the market cap of Hive hits $1 billion, then we can see a HBD supply of $100 million at the present level. Raising this to 30% would enable a float of $300 million of HBD to exist on the market.
Again, that might sound like a lot yet is low when we consider there are well over 1 trillion EUROs (let alone USD) floating around. Thus, we can see how much liquidity is require to facilitate global transactions. We also have to account for the amount of HBD that people hold in their wallets as savings.
We can go one step further and push the market cap of Hive to $10 billion. This will enable a "print" of $3 billion HBD. For a comparison, there are almost 69 billion Tether and 32 billion USDC. The potential of 3 billion HBD pales in comparison.
Yet this drives home the point: here we see the level of liquidity that is required to operate as a stablecoin. It is not very effective if people cannot get a hold of it to utilize.
Therefore, it seems to make sense to implement what is being considered. It does not appear the currency (Hive) is at risk of being destabilized by this increase. We also can see how massive expansion of HBD is required if commercial activity is going to take place on a large scale.
What Are Your Thoughts?
Should the haircut ratio be increased? Is the idea of the 30% level with a 20% print rate stop a good move?
Are there other risks that are not mentioned here that are worthy of consideration? It is always best to imagine the black swan scenarios.
Is the 30% rate too aggressive a change or conservative?
Let us know what you think in the comments below.
If you found this article informative, please give an upvote and rehive.
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@blocktrades is very risk-averse so it's nice to see that the 30% target is at the top of the list. Even though this is likely the safe play, it's crazy to think that it is x3 higher than the current limit.
At the end of the day the 10% haircut is an embarrassing crutch that we need to remove ASAP. It should only kick in during the most dire of circumstances, but instead we are using it all the time. Very good to see that it will be raised in the next hardfork. Couldn't have hoped for a better outcome.
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He also said that AMM for Hive is currently really difficult to implement. Is anyone working on that? Just mention it because I think it would help stabilize HBD and you made a post about it
I'd be curious to know why AMM is hard to implement.
The math is absurdly easy (x * y = k) and we already have time-locks and contracts of that nature.
I've actually already programmed this functionality myself and it seemed trivially easy.
I must be missing something big.
Unless the problem is that no one wants to print more Hive to support it.
I could see how the politics would fail but not the technicalities.
Also Blocktrades is a liquidity provider so he has a direct financial incentive not to do it.
Kind of silly, nobody is making big money off of being a Hive service provider at this point with the low total market cap, low profile, and small base of users and investors. The only game worth playing is to hope the token price goes up and/or work to make the token price go up.
That makes sense but I've yet to witness a single dev on this entire platform that just works for free trying to build value without worrying how they are going to get paid. The original question still stands: what technical barriers stand in the way of scrapping the internal market for Hive/HBD AMM? Why deflect the conspiracy theory instead of just answering the question?
Ah, see what I did there?
Doubled down on the conspiracy.
Now you're in on it too.
Damn I'm good.
Never claimed his service was free by any means.
Already answered this in another reply.
He didn't say really difficult, just too much for the next hard fork (months away, and probably not that many). For completely new functionality like that it would need to be carefully designed, implemented, and the code extensively audited and tested. If we want to do that we need to start planning in advance of an upcoming hard fork. It's a matter of time, not so much difficulty.
great to hear!
He does believe 50% can be done without much of a threat but stepping up the levels appears to make some sense.
I am for 30% this HF and then spend the 6 months after that analyzing how things are working. If all goes well, perhaps add another 10% or 20% to the 30%.
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I'm fairly certain we will be higher than 100% in ten years.
Banks have been getting away with 500% just fine for decades.
500% haircut rule?
That would mean 10B MC = 50B HBD in extreme.
Could end up one crypto winter kills hive tokenomics with 500%.
I don't know...
This community has already endured a 99% loss $8 to 8 cents.
The haircut did nothing to stop this: in fact the haircut made it worse.
Thanks that made my day :)
We are not here to earn any money, lol :D I love that. But I think the reason for a stable coin is a bit different, haha.
Really made my day!!!
Not sure HBD has much of a part to play in any of that.
This token is only now getting some attention after being ignored for so long.
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but 30% on a moving price is really risky.
if Hive has 1B MC ( and I'm sure we become sooner as we think) we would generate 300M HBD.
To be fair, Hive can be also fall back to 100M MC.
so we would have 300M HBD. With that in mind, I think we should remove HBD and replace it with a lock-up mechanic than increase the limit that can influence inflation.
BTW, 300M would mean by a crypto winter, people lose a massive amount in value of HBD. Even if you only have 100$ in it. The experience of that 100$ becomes worth 30$ is really bad.
Except in that instance, people would likely start to convert HBD to HIVE, providing a floor in how far the price of Hive could drop while also reducing the supply of HBD.
Just like we saw "massive" printing of HBD when it was at $1.20, we will likely see the opposite on the downside as the price drops in relation to Hive.
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Wrong logic.
No floor.
Converting means more supply into more dump.
Special if the haircut is close to coming into place. Market movements would become more extreme because this is like leverage trading.
If we have 30% or 20% and we jump to 10$/ Hive, we will see hive will be the first failed chain in terms of stablecoin. If we are increasing it by more than 30%, tokenomics would bust. Think about 50%.
Price goes to 10$. Stays there some days. Pumps to 12 because of massive demand for hive to converting.
Price falls back to 2$. MC would be at this point 800M so we could have 400M HBD.
Could be 200M Hive by converting. Dangerous as hell if we think DAO only holds 70M and we have around 130M powered up.
I see only negative effects. Special it will never work with the peg to an dynamic asset.
Collateral versions are dangerous too, but would only affect the collateral. Not the hole chain.
I think 25% haircut seems to be better. It's in between the 20% and 30% number. At least we would be able to keep things with 4x of HIVE's market cap.
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In favour.
Could it be a witness parameter? So that it could be trialled at 30% and then moved to 50% without needing to wait for another hard fork?
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It could be if that was the decision but it might provide a security vulnerability. If the haircut started to bounce around that might not be the best thing either.
We have a hard fork roughly every 6 months so scaling it up, if that is the decision, is not too long to wait.
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I really don't know how to assess what debt ratio would be "safe". I understand the reasoning behind increasing the debt ratio, i.e. to make it possible to have more HBD in circulation even if the price of Hive is low, and I agree with that. How much to increase it, I have no way to assess.
It would be interesting to have some community brainstorming on possible ways to maintain the HBD peg when it comes to the downward direction, i.e. not let it fall much below $1. It does seem that we have been under $1 for some time now, even though we are in a bull market, and even though Hive just had a huge pump. Keeping the peg, to my mind, would also help with the chain security since the amount of debt from the chain's point of view would be more or less the same as the amount of debt from the market's point of view, which should reduce risks.
Hard to know exactly. One thing I think is in play with the Peg is the fact there is not a lot of liquidity out there. Expanding the amount of HBD available could help to keep the range of the peg tighter.
Right now there is a lot of HBD on one exchange which gives it a lot of power to maneuver it up and down.
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Initially I thought 20% would do for an initial update of the max debt ratio. But I guess we can't do them too often, so we need to start more aggressively to have a better impact. So I'm ok with 30%.
Nothing it set in stone it doesnt seem. But it is being tossed out there in both these posts.
We will see where people enter the mix at. It seems from those that commented that 30% is favored.
I will be curious to see what threats people do see, if any. Security should always be of utmost concern.
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If it is a witness variable, we can change it as needed
No it's not, otherwise Blocktrades wouldn't talk about changing it via a hardfork. The yield for HBD in savings is a setting for witnesses. Maybe you mistaken them because they are both currently set at 10%.
I meant it should be coded as a witness variable in the upcoming hardfork so it can be quickly adjusted as needed.
You are correct. Not sure if it should be added as a witness parameter though. Kind of sensitive stuff (although so is the price feed and others), but yet again maybe I'm paranoid, we've been through JS takeover and puppet witnesses.
30% sounds like safe ground here.
Correct me if I am wrong and I know that this is not a part of the topic here, but would a higher percentage of 10% not draw more investment in HBD?
It could. That is in the hands of the witnesses. I do not know why they havent raised the interest. Perhaps it is a situation that the haircut level needs raising first.
I havent seen conversations on that regarding what many of the witnesses are thinking.
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Well I think that with a great interest rate, HBD can become a big sales tool as a stable coin.
An ideal situation for marketing Hive.
10% is not going to inspire many.
That is true but there is a fine line. Right now it is not too much of an issue since there arent too many use cases for HBD.
However, we need to balance the incentive to hold versus the incentive to use as a currency.
If, for example, the interest was 90% (going to the absurd to make a point), then HBD would never be used as a currency since most would save it and just let it grow.
Plus, keep in mind, this is at the blockchain level. There is nothing preventing an application being built on layer 2 offering whatever rate of interest it wants.
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Oh yes and all that you say here is true as the actual use of HBD is an essential part of it's make up.
I am sure that the witnesses have given this great thought, so we will wait to see what happens in the future.
Very nice read about an important topic for all Hiveans ! Thank you for making it accessible and sourcing other great articles
I think the 30% rate is absolutely necessary because if HBD is going to be a stablecoin, there needs to be enough available for people to use just like you said. 3 Billion HBD is a good place to start.
Well, I’m all up for experimenting things that can put Hive on a higher commercial level because why not? As long as it won’t break the chain. And the 30% haircut level sounds logical enough. Another thing I wish was considered is using Hive for market making as edicted has stated severally.
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I have a feeling the marketing is going to be taken care of in the next 6 months. While everyone wants the chain promoted (which is sound to developers), I have a felling a few applications are going to join @splinterlands in getting some attention. Once we have a few, the will set off a snowball effect.
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Billion?
Thanks. Corrected.
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Though I suppose it is not exactly the same thing, a good debt ratio in the corporate world is generally seen as 40% or below. Anything 60% or above is high risk. Using the same metrics, I would think 30% is perfectly safe though I don't think we would want to go as high as 50%.
I wouldnt think they align but as a loose rule of thumb, not a bad idea to follow.
The major difference is corporate debt sits on the books whereas HBD can be used for transactions very easily and without friction.
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This seems fairly reasonable to me. I am in the market for a good stable coin to move some of my gains into and I am giving HBD a long hard look. I actually bought some WLEO so I can eventually move it into HBD, but I am waiting for the funds to move over now before I can make the purchase. I was hoping to grab it at the $.94 mark, but I guess I am going to have to be happy with whatever I get now.
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I flipped some Hive into HBD during the pump. I have it sitting in that ready to enter when the price (of Hive) retraces to the level where it was before, which I believe it will.
That said, HBD can be a fantastic stablecoin if we can really figure some of this out. I am also of the mindset that greater printing of HBD would help to reduce the volatility, helping it to hold the peg better.
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That makes a lot of sense. When I get my LEO finally, I am probably going to move it into HBD and just leave it in the savings so I can earn some that way. I'd love to eventually have about 4000 HBD in savings so I can be earning at least 1 HBD per day. As long as the rate holds at 10% of course.
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I am filling up some of my HBD stake also. At some point, we might see more interest paid.
But for now, we just keep filling our bags. It is a great option to have. If we can truly have a stablecoin native to Hive is amazing.
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Additional lock-up mechanics to generate HBD would bring higher benefits IMO to Hive and HBD than simply increase the debt limit.
30% would end up in a disaster I'm sure.
Why do you say this?
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3x the amount from now.
We have now some people ( include me) that think we will see after hive price drop a lot of panic in the HBD market.
So I would run the worst cast with 10% before I would increase it in any way.
There is no natural demand for HBD. It is only greed because of the 10%.
If hive would fall another 20%. We come in the haircut range. 30% would mean you cant convert 1$ of HBD into 1$ worth of Hive.
Can you imagine 28 Million HBD loss there value? How sad Holders become?
Now 3x that and you know why i think it will end up disaster.
And btw. Think now about a 10$ hive and you can convert 1 Hive into 10 HBD.
Then the 30% would end up in 30% more inflation.
Under 1$ = deflation over 1$ massive inflation.
Simple because of the swings and how likely they are.
Increase the debt is like play with dynamite IMO.
I guess we keep an eye on the market cap as well.
Can we count HBD as stable coin? is there possibility to fall HBD to 0.5$ ?
Right now it is stablish. Would I call it a stablecoin at this moment? No, we still operate in too wide a trading range.
Yes it is possible. However, if that were the case, there would likely be some heavy buying. That is the key.
Right now we do not have enough traders involved. At $.50, we would get a lot of people taking Hive and picking up HBD knowing they could double their HIVE at some point.
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Well, HBD is then no more stable coin. BTW i am waiting too to buy more hive and hbd at 0.5$
I think the safest approach is to have it be a variable the witnesses can set. That way, if things look bad, it can quickly be changed back without a hard fork to revert to a new %. Similarly, if 30% is not enough, it can be adjusted higher. This approach would allow blocktrades to make the changes now while the community has a discussion on the best percentage, which then could experimentally be determined through trial and error.
I would disagree on that being handed over to the Witnesses. It is a fundamental premise for the stability of the currency, hence the blockchain. To make arbitrary decisions is risky in my opinion.
With it requiring a hard fork, this is something that gets discussed and requires some planning. We can see if it is valid or not while also analyzing the downside.
As Smooth mentioned, there are some things that the witnesses can do to alter things if need be.
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That’s true. I might not fully understand how the stability would be affected.
I think it is likely a good idea. However, as you illustrated with the $1 Billion and $10 Billion market caps for HIVE, the number of HBD in circulation would increase along with HIVE valuation. It's nice to have more HBD in circulation. However, the core problem is that HIVE itself is still greatly undervalued. CoinGecko has us at $323 Million this morning, which is the main problem.
Still, it makes sense to prepare HIVE now for when the time comes that HBD gains greater circulation.
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True but I do not think that will be the case forever.
We will have to wait a few more months. There is a lot happening that should help the overall market cap.
But it is a valid point. That is why raising the haircut level would be beneficial.
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Thank you for the explanation, as such discussions usually go over my head.
Funny as I was looking at something similar today with the crytpo volatility index and it is a big thing to get something to remain stable. I don't know what the answer is but we have to try somehting to get this right. I do agree more HBD is required as the current volumes are just too small. If everyone stakes HBD for the 10% APR then how much is really in circulation. I know we have too few people here right now, but say in 5 years time how much HBD liquid will be available and why something needs to change.
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At this moment, it isn't a major problem since the use cases for HBD are minimal. However, over time, the goal is for Hive to have a true stablecoin. For this reason, to transact in a commercial manner, more than 22 million will be required.
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Will businesses still accept stablecoins when hyperinflation kicks in? 🤔
If hyperinflation or wild fluctuations in value happen and undermine traditional fiat currencies then HBD can be pegged to something else, such as an index of commodities or an index of consumer prices, to retain purchasing power. This doesn't even require a hard fork, just agreement by the witnesses to change the price feed.
Most people expect stability in all sorts of stable coins including HBD
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Most people expect witness to actually look after their witness node.
Totally agree with you.
Assuming you're talking about my witness node, I had to take some time off from everything including Hive to deal with my personal life problems. A few weeks ago I mentioned in my post my decision to disable my witness node.
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What are we defining as "a very tight range"?
Personally I'm thinking like 5% ($0.95 - $1.05).
This would be competitive with credit card fees.
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That is a range that we should shoot for.
Right now, it is too loose I think.
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What do you think about possible regulations of the stablecoin?
https://duckduckgo.com/?q=stable+coin+regulations+are+coming
Some ideas are really scary.
https://www.wsj.com/articles/biden-administration-seeks-to-regulate-stablecoin-issuers-as-banks-11633103156?mod=searchresults_pos5&page=1
Are witnesses ready to be treated like Central Banks? Maybe blocktrades, but not the individual ones. One company running all nodes is not a decentralization. I think that community should be ready to rid of the HBD. We should have alternative code
Why would have to be ready for that? To start, most of them arent in the United States. Secondly, witnesses only validate transactions, they do not create the stablecoin nor do they facilitate transactions (like a case could be made for Lightning Node operators).
Thus, HBD might be the only stablecoin that does not come under the arm of the regulators unlike Tether and USDC which have companies behind them.
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indeed, we have to stop being afraid/intimidated by some people in the government (which is now harder than ever). The people have the power; just seems like this wasn't demonstrated for a long time so people forget that...
Build outside of them and they are no threat.
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You're welcome, wake n bake
MK, you downvoting my commet does absolutely nothing to me. Why? Because your rep is 64 and mine is 74. Nothing happens to my rep. And I don't care about money or reward.
On the other hand if you comment or post, and I DV you at 100% your rep goes down real fast. You are a smart guy, I am sure you know this.
Again, I have a lot of respect for you, but if you want to play this game with me, I have no problem at all.
You have a good day.
PS.
These are the accounts you vote that no one else votes :)
I control much more HP than you do. Also the account that I vote, your $10 DV on them won't do anything to them. Are you sure you want to play this game?
There are other stuff I can do at the blockchain level as well, but I don't want to.
Again I have a lot of respect for you. Please lets not walk this path.
so, you shouldn't worry about it
I'm doing it because you are downvoting my comments
I am not! Cheers!
Just wanted to mention the consequences
I see, when you are downvoting, everything is OK but when you get downvoted there will be consequences