If you are reading my blog, you are aware that I recently submitted the HBD stabilizer proposal to the DAO, both the original proposal as well as supplemental funding have been approved, and for much of the last week, the stabilizer has been buying nearly 10K USD worth of HIVE (almost 30000 HIVE) per day, taking it out of the liquid market, and sending it to the DAO. In the process the HBD stabilizer also performs its namesake function, helping to stabilize the price of HBD by selling HBD when it is trading for more than the 1 USD worth of HIVE that it costs the DAO to create it, and not selling (or occasionally buying) HBD when it is trading for less. Both of which result in an immediate profit to HIVE stakeholders.
In addition, I am encouraging witnesses to set their HBD interest rate parameter higher than zero for the first time since shortly after Steem (Hive's predecessor chain) launched in 2016. The goal is to encourage some additional holding of HBD, which will reduce the potential for HBD to drop below $1, in turn keeping the HBD stabilizer operating in a mode where it continually buys HIVE and sequesters it in the DAO. This, in effect, transmits demand from investors looking for yield (of which there is ample and widespread demand in the world today) into buy pressure for HIVE. This interest is sustainable, and indeed profitable for Hive stakeholders, to the extent that HIVE appreciates, over time, at a higher rate than the interest. To the extent that Hive is successful, this should be self-evident, and in some sense may also be self-fulfilling.
I have set the HBD interest rate on my (backup) witness to 3% and I encourage other witnesses to do similarly. A moderately lower rate, of say 2% might also be appropriate, it is hard to know for sure (and market conditions are sure to change, meaning the best rate will change as well). But, in general terms, the rate should be high enough to encourage holding HBD which means offsetting the costs of USD inflation, as well being attractive to investors given the risks of holding an investment in any blockchain (all of which are properly viewed as experimental in some sense). At the same time, it should not be excessive beyond what is needed to create robust demand for the entire, currently limited, supply of HBD, which would be an unnecessary cost. I believe 2-3% is appropriate at this time.
100% beneficiary to @hbdstabilizer (which in turn donates 100% to the DAO)
At 3% with hextech. Nowhere near the top but maybe someday :)
cheers to you !BEER
View or trade
BEER.BEERHey @rishi556, here is a little bit of from @manniman for you. Enjoy it!Learn how to earn FREE BEER each day by staking your
BEER.✅ Supporting with a 3% interest rate
https://hiveblocks.com/tx/84bd3b370d42e4faf4807b5290709e1598e5380f
nice, my Witness
I've updated my rate to 3% to start with - great work with @hbdstabilizer :)
You are everywhere om HIVE at the moment, awsome
Hi @smooth, I have been doing a lot of thinking about this. I don't think the HBD proposal will benefit us long term unless we use it in a clever way. There is a solution though.
Before the proposal
Before the DAO proposal, HBD used to go above $1 in the bull market, then back down in the bear when speculation was gone. This means that people buying above $1 were making direct capital losses (if they didn't sell) on their HBD trade. That's fine. Content creators also made extra profit from the HBD price, and that profit came from large capital losses from speculators on HBD. Some speculators sold the top possibly.
The problem with all of that is the bear market. When it comes, speculation dries up, HIVE and HBD dump. The HBD supply goes above the debt ceiling (10% of hive's marketcap), and we get into the negative feedback loop: HBD no longer becomes worth $1 in real value, so its usecase as a stablecoin fails, so people sell it even below its real value. Traders then arbitrage HBD below its real worth, by buying and converting to hive. This causes more hive selling and inflation, which lowers the debt ceiling even more, and the loop continues.
This loop is very dangerous and may kill hive, or at the very least will cause massive losses to stakeholders as they get inflated away. (Unless they are the ones doing the arbitrage, unlikely for most people)
New proposal arrives
With the new proposal, we are forcing back the price down to $1 by printing, which sounds awesome because the DAO profits from the capital loss that speculators make. This means that we replaced the profit made by content creators and speculators who sell the HBD top, with pure profit for the DAO. That is perfect.
However, by adding interest on HBD held, we are making a very bad mix of incentives. Adding interest means creating inflation out of thin air for HBDs (if I'm wrong correct me on that, it would make my reasoning invalid). So we are going closer to the debt ceiling, much faster than in the previous bullrun, especially if this is successful and we raise interest rates even more. While last time, the price of HBD went down from double digits to $1, this time around, we won't even get that cushion. We will instantly enter the negative feedback loop caused by an undervalued HBD, precisely because we are using the DAO to profit from HBD > $1.
So we have a combination of two fcators now:
1- increased HBD inflation from the interest rates, bringing us close to the debt ceiling.
2- No cushion from HBD crash because it is capped at $1 through the new proposal.
This is very bad for hive, because it will get us closer to the debt ceiling of 10%. When we get there, HBD sell pressure causes a negative feedback loop once it becomes undervalued. By undervalued I mean trading below what it can be converted for, could be $1 or even less than that.
As the supply of HBD increases, we need a 10 times bigger increase in the hive marketcap. For every HBD printed, we need hive's marketcap to grow by 10$, FOREVER. I don't count the HBD coming out of the DAO as being printed, because those are just converted from hive inflation. Interest rates, on the other hand, are additional inflation and debt. Again, correct me if I'm wrong on that point, because it is central to what I'm saying.
If the marketcap doesn't grow as fast as needed, the 10% debt ceiling will be reached, putting massive sell pressure on hive and causing a higher hive inflation.
Therefore, the proposal will end up making profits in the bull market, but will make everything worse in the bear market, to a very high degree. This might sound counter-intuitive, but this is the reason why it's happening: we are converting, through the proposal, current buy pressure on hbd into buy pressure on hive, which gets converted into HBD (without sell pressure!). If the HBD is then spent by devs using the DAO during the bull market, we will have massive hive inflation problems when the speculation goes away and both HIVE and HBD go down in price. The hive sell pressure will come at the worst possible time, when no one wants to buy.
Even if we are burning the profits right away, this also makes everything worse. Again, it's counter-intuitive. But technically, we would be issuing debt to buy expensive and highly sought after hive tokens(in the bull market), to eventually repay that debt with cheap hive people want to get rid off (in the bear market). Massive losses can be made like that, if the price of hive crashes. And it will happen at some point, because we have to repay that debt when the debt ceiling is reached.
If instead, devs don't spend the profits before the bear market, and the profits remain as HBD in the DAO without being burned, then that HBD will just be "imaginary money" as it can never be spent. When HBD is already trading below its real worth, spending the HBD in the DAO will only make worse the negative feedback loop on hive. And it will be worse overall, because we would be spending hive which have a lower real value, in dollars.
The Solution
HBD makes the hive run up more explosive and the hive downward spiral worse as well. With the proposal combined with interest rates, the run up is even more explosive and the downward spiral is again much worse.
What if instead we used that proposal to prevent the negative feedback loop from happening? Here's how. (we can even keep the interest rates if we do this)
Step 1 - As HBD goes above $1, print and make profits.
Step 2 - This is the crucial step. Get all the money OUT of the hive ecosystem. If you need to sell HBD for hive because of liquidity, instantly sell the earned hive for other stablecoins such as USDC or DAI.
Step 3 - We now have a treasury outside of the hive ecosystem, built purely from speculator capital losses on hbd, which is NOT exposed to risk on hive, such as bear markets and negative feedback loops.
Step 4 - If at any point HBD trades below $1, before the debt ceiling is reached, use the funds to generate extra profits from the arbitrage or even let the market arbitrage that, not necessary to maximize profits here as it can be risky.
Step 5 - Wait for the debt ceiling to be broken when hive crashes, i.e. wait for HBD supply to be greater than 10% of hive's marketcap. This will cause HBD's real value to be worth less than $1. For instance, suppose HBD supply reaches 20% of hive's marketcap. HBD real value is now $0.5. This is a perfect opportunity to repay hive debt without causing massive inflation and negative feedback loops.
Step 6 - Use that opportunity to buy HBD with the treasury funds above its real value. Using the previous example, buy HBD at $0.6 and convert back to hive. Obviously this is a losing arbitrage, because it will only provide $0.5 worth of hive per HBD bought, but essentially what we're getting rid of the excess supply of HBD, with profits made during the bull market.
Burning that excess supply is essential as it prevents us from going into the negative feedback loop. Also, it cost us nothing because we earned those profits by dumping on speculators who buy HBD for random reasons, hurting the value of HBD as a stablecoin and hive as a whole.
Once excess supply is removed and HBD is back below the debt ceiling, it will naturally rise up to 1$ and the sell pressure will now stop because it is functioning as a stable coin again.
Even better solution (although some might be opposed to that)
Use the treasury which consists of stablecoins to generate yield. With 50% APY in DeFi it would be a waste not to do that. even if it goes down to 6% or so in the future, it's not bad. This will grow the treasury and give us even more money to fight the negative feedback loop on hive. I got the DeFi treasury idea from @nealmcspadden 's proposal. Link to his proposal [here].(https://peakd.com/dhf/@nealmcspadden/dhf-proposal-ethereum-price-support-for-hive)
In his proposal, @nealmcspadden wants hive to be burned. I think it's better to wait for hive to enter the negative feedback loop before burning excess HBD, but I like the idea of extracting value from ETH and bring it to hive.
The external treasury idea is okay, but a lot more complicated that in sounds to implement in practice.
I would disagree on this point:
I don't think even higher interest rates are particularly significant here. It would take many years to increase the HBD supply by enough to matter, and that is assuming that over that period of years the increased supply wouldn't be offset by other factors (most clearly decline in demand for HBD as its supply gets too large), which is probably false. And as I mentioned in the post, a growing level of HBD is still sustainable for a very long time if not permanently, as long as the value of HIVE grows even faster. In the short term this is unreliable, but over a period of many years it is a reasonable expectation as long as Hive doesn't just fail (in which case HBD doesn't matter either).
I also think the 10% debt ratio cap should be increased. It was introduced hastily (by Steemit) without much consideration or discussion. Even in the original white paper. I believe debt ratios of 20% or 30% were mentioned as being okay, and that might even be low.
Under most conditions the market should dictate how much HBD is sustainable, since if there is too much and it is insufficiently backed by value of the underlying token, its value would drop. A cap is perhaps needed to prevent frothy "bubble" market situations from far exceeding what a more sober analysis would support, but it doesn't need to be 10%.
You are ignoring the effect proposal has. Your proposal will massively increase the amount of HBD in circulation by not allowing the price to pump.
Without it, I agree inflation is fine and wouldn't be able to ever catch up. Both the proposal and inflation together are very destructive.
We have to accept the fact that cryptos still go through bubbles. Hive collapsed by 99% last cycle. Who knows how much it will be the next time, but we have to be ready for that.
When SBD crashed form $15 to $1 in 2018 it had no negative effect on Steem. However, if we manage to sell and recycle profitably enough HBDs to keep the price at $1, an equivalent sell off will take us well below a dollar very quickly, and hive will be crashing at the same time. On top of that, there are interest rates.
We need a way to offset the negative feedback loop HBD creates.
You're assuming that a non-pumped HBD will crash as much or as easily (or at all) as one which is pumped to $10+. I believe this is false.
Yes, HBD has an amplifying effect on HIVE price changes, both positive and negative, this is the nature of leverage, and can't be "mitigated" away. You take the bad with the good. The idea is that over time, the good outweighs the bad.
In reality the leverage ratio is currently tiny (1.1x max, given the 10% cap), and even if the cap is increase the ratio will still be relatively low. Yes cryptos boom and bust, but the leverage effect of HBD is always going to be a relatively small part of this.
The benefit here is attracting net demand of capital into Hive coming from demand for yield. Again, that's a large net benefit over time, but it won't be a straight line up (and you can't make it so), it never is. There will be volatility to withstand (or not, as one chooses).
This is a very important to get right. Here is my reasoning.
People buying HBD right now at $1.25 are just speculating.
People buying SBD at $6.5 are also speculating.
When we enter a crypto bear market, SBD speculators will get scared and sell, that's easy to imagine. We already saw that in the past.
However, hive's case is now different (since the proposal). Speculators buy HBD at $1.25, expecting it to go up. We use the DAO to bring the price back down to $1. As long as we don't succeed because of increased demand on HBD, we recycle the HBD and the profits made to sell even more until HBD reaches 1$.
At that point speculators lost 20% on their trade (still assuming $1.25 per HBD originally). When the crypto bear market comes, similar to SBD speculators, HBD speculators will be looking to sell and put their money back in their bank accounts.
Since HBD is already at $1, the sell-off will cause it to go below $1, especially considering how sharply panic selling occurs in crypto.
If the profits that were made by the DAO stay in there in the form of HBD, they become now worth much less (following the market price) and its hard to give them out to people if there is low buy liquidity without crashing the price even more. Hence my term, "imaginary profits".
If instead the HBD were already spent while we had a lot of demand for HBD, at least we benefit from that, but we still get a problem with HBD and hive because of the negative feedback loop. But, it is unlikely that we'll spend everything before then.
If instead the HBD profits are burned, this is equivalent to burning the HIVE bought before being converted. Again this is bad, because we are burning bad when it is highly valued in a bull market by issuing debt and then repaying that debt (which doesn't change in dollar terms) with hive that are worth less in a bear market. This is simply money lost.
If the money was kept in a stable coin outside of hive, it would be real profits.
That's not true, unless you don't care about repaying debt. The leverage ratio is 1.1 max because HBD goes down to match that ratio. That means that we'll never have a debt problem if we also accept that HBD will be valued below $1, and that it will fluctuate along with hive's marketcap. In that case why have a stable coin at all?
And who would ever want to hold such a coin? I would sell all my fluctuating HBD, because they have literally no value. I assume everyone would do the same. Therefore, HBD will constantly go below the 10% threshold, and constantly provide opportunities for arbitrage.
And everytime someone takes advantage of the arbitrage, he pushes the price of hive down, which again lowers the ceiling, and pushes HBD down even more.
Calling that anything other than a negative feedback loop is wrong.
In the end, what matters most is not the leverage 1.1x, but the total supply of HBD. If we have tens of millions of dollars to be repayed, then hive better be worth much more than that. The fear is that we create too much HBDs while we all think HIVE is going to $100, then find ourselves with tens of millions to pay back and hive back down below 100 million in marketcap.
Call it a negative feedback if you like, but it's also positive feedback when the price goes up. Again, that's the nature of leverage. Everything you wrote about the downside applies analogously to the upside.
At the same time, the demand for a stable asset with yield is very large and very powerful, has lasted since the dawn of time, and will likely continue forever. A very large portion of the capital in the world is invested in this manner. Being able to accommodate both speculators and yield farmers with their own targeted products, each of which benefits from the other, is a net positive for everyone.
I do think it is clear that literally nothing is perfectly stable. There has never been a currency with perfectly stable purchasing power and there never will be. But relative stability is very useful, very valuable, and a relatively stable asset with yield is something that has always had large demand and likely always will have demand.
We can accommodate both yield farmers and speculators, and doing so has a synergy.
100% agree, this is why I think we should keep and even increase interest rates, but instead use profits from the DAO to build a treasury which will be used to burn HBD when it's needed.
If that treasury can generate 50% APY returns on top of that, it would be even better.
Let's recycle all the HBD without taking anything away from the DAO, only use the extra HBD to build the treasury. Even if we end up losing those, Hive stakeholders would have lost nothing.
And they will be very useful in hard times.
I disagree with that. The market will dictate that HBD debt is unsustainable by making both HIVE and HBD drop. Unless witnesses decide to hardfork so that HBDS can't get converted to hive anymore.
In that case they save HIVE by defaulting on debt which we are unable to repay.
Edit - The reason is that as HBD drops arbitrage starts taking place and hive drops. This is the negative feedback loop.
It is leverage. Works both up and down. Over time, predominantly up.
Calling it a "negative feedback loop" is arguably misleading, at least if you neglect to mention the "positive feedback loop" on the upside.
Yes, there is a leverage effect. That is intended. If you can find the original white paper it is discussed there.
I have some disagreement with the change in monetary policy under the current market value of HBD. It should be self evident that any measure that increases the buying pressure of hive dollars when it is overvalued doesn't help bring the price down to the target of 1 USD.
However it might help bring it down closer to the peg for one counterintuitive reason: The main receipients of the benefit of having interest paid for holding HBD are the exchanges since they hold the majority of the supply (I think). They might decide to cash in on the interest paid on a regular basis.
Although the increase in supply that comes with having a positive interest rate is minuscule so I doubt that it makes any diference especially with such a low APR.
If by "current market value" you mean this instant, then yes it is a bit overvalued, but mostly it just isn't that stable. On several occasions in the past week and even in the past 24 hours, the price has dropped to $1 and the stabilizer has stopped selling (and has even done a tiny bit of buying).
Realistically we can't make changes like the interest rate on an instantaneous basis and need to make a longer term assessment.
Also, when HBD is overvalued I don't believe the interest rate serves as much of an incentive to hold it (of course it does somewhat) for the simple reason that anyone buying or holding at more than a 5-10% premium is clearly speculating, and stands to make or lose a lot more than the interest. In that case, paying it is probably a little wasteful but likely not all that effective or harmful in terms of price action. It's more effective as an incentive to hold when the price is at or near $1 (interest serves as upside and downside is limited).
That is why I said that I have "some disagreement". Overall I don't think that it makes much of a difference in terms of price action. I would even go as far as to say that having a much higher APR (10% to 20%) is not a bad idea in the long term. Well...maybe 20% is too high (or maybe not).
Agree on all points
Wait, I thought your HBD would have to be in your savings account to receive interest?
Savings is just a security feature, about allowing you to have time to deal with your account if it gets hacked. SBD/HBD has had an interest rate since launch, before the savings feature was created. Witnesses set it to 0 after SBD became overvalued, and most of them never touched it again after.
For now tm... things might change ;)
Nope, you just have to hold it. The idea of using the savings account in order to accrue interest is just that...an idea that has been suggested by several people.
✅ Supporting with a 3% interest rate
https://hiveblocks.com/tx/501b75d5d8d1f0c044fc5ca0a61fd47b60311eb0
Transmitter, the tool I used to set the HBD interest rate.Thanks to @emrebeyler for making and maintaining
t toujours vivant?
I think 3% is too conservative a place to start. I don't believe the risk of the market overvaluing HBD is as big as you think it is, and the HBD stabilizer can mitigate that to an extent as well (while creating extra buy pressure for HIVE as well). I've set my rate (as a backup witness) to 5%.
Not disagreeing here. Even though it is different from my initial suggestion, I'm happy to see you setting a meaningful rate.
BTW, I'm not that concerned about interest causing a large overvaluation. Once HBD is overvalued at all, the interest is only a very weak incentive to continue to hold it, since you can easily lose much more than the rate by the price going back down to $1. The main reason I would see not to set a higher rate is simply that it is more than necessary to accomplish the goal of attracting enough demand for all of the HBD we are able to supply, given current blockchain rules, while keeping it at or above $1. Any more interest than that is in a sense wasted, but within reason (and 5% or even higher is still within reason), it's a small cost relatively speaking, not a huge concern.
It is certainly not possible to know the exact right number, and we shouldn't get stuck on trying to do so.
I was initially considering 2%, but 3% is probably better -- changed witness properties. 9 people in Top 40 using 3% at the moment. Nice.
In the long term, if we can get more projects popping up utilizing HBD and we basically successfully peg HBD to $1, no matter what... I am actually okay with increasing it all the way up to 7%.
Will be setting ours (ocd-witness) to 3%.
Donezo.
I fully support this great initiative and have set my interest rate to 3%.
Looking forward to seeing how it will evolve and adapt it if required.
3%. updated.
Long term, an interest rate should keep the HBD from getting too high in value because its supply must increase to account for USD inflation(Austrian definition) and actual demand for HBD as people join the platform. A SBD is 5 USD right now.
P.S.
Isn't it time you change your recovery account from @steem?
It's good to see this experimentation starting. Personally I doubt I'd look to hold it at 3%.
This all sounds great - just one question - if all HBD holders are going to be paid interest, where does the interest money come from?
It creates new Hive in the virtual supply. The initial inflation expected this, it started at 10% interest in 2016.
Whether or not it actually creates inflation depends on how it affects HBD conversion - which is by far the largest source of excess inflation in Hive. If it reduces HBD conversion at low Hive prices it may actually reduce inflation overall.
https://hive.blog/hive/@demotruk/inflation-in-hive-and-steem-why-it-is-higher-than-people-say-it-is
It also reduces inflation if it contributes to a long term increase in the HIVE price. HBD and conversions increase inflation when HIVE is declining in price (a situation all too common with Steem and Hive over the past five years) and decrease inflation when HIVE is increasing in price.
Of course this is all somewhat circular.
good idea
I'll do the same, I often look at the HBD interest parameter and think.. hmm this should probably be set above 0.
Hi smooth
A bit of a normie question with regards to the interest rate parameter.
Is it only the top 20 witnesses parameter that counts, and is the % then set to the average of the consensus witnesses?
Cheers.
My understanding is that it's the median value from the top 20 witnesses only (which is why it's still 0 until the majority update their setting).
I think that is about right (possibly exactly right). I'm not sure without looking at the code whether the scheduled backup is included in the median or not.
On the @hbdstabilizer topic, I guess we will find out more on how well the project has performed at the end of this bull cycle, possibly using the chain across the road as a comparison? (SBD currently around $5.7 and has been over 11$ recently)
Would success criteria be watching STEEM fall like a stone with a more gradual decline (and the bottom being not quite so low) for HIVE?
It's impossible to separate the other factors involved in the price of either tokens. It's not a controlled experiment so it's unlikely that you can draw direct conclusions at all.
What might be more measurable is the impact it has on inflation.
But since inflation is dependent on the price that is also hard to separate out.
We will at least be able to determine in retrospect if inflation from HBD conversions has reduced or increased.
Thanks. Could be a while until we see this coming into effect then!
HBD
Precisely.