There's a lot of discussion and debate with HBD.
And if I'm being honest I talk about it too much so I'll try not to rehash anything that I've already been over a dozen times. However, as the biggest threat vector I do believe it is worth isolating the debt ratio and expanding on the current ideologies.
Is HBD even debt?
What is the "debt ratio"? In reality it is simply the ratio between Hive tokens and HBD tokens. However, in this case Hive is measured in dollars; using witnesses as oracles to provide the price feed. And thus, the debt ratio is the ratio between the dollar value of all Hive in existence vs the total amount of HBD in existence (minus the @hive.fund). We conveniently assume that 1 HBD = 1 USD in this case, which is fine but also noteworthy.
But does that make sense?
HBD is considered the debt of Hive because HBD can be converted into Hive when the peg drops lower than $1. This conversion process dilutes the value of Hive by printing more Hive tokens when HBD is lacking organic demand and users are trying to cash out. In theory every single HBD could be converted back into Hive, and so there is a certain expectation that the Hive network owes 'real' money (aka collateral) back to the users when it issues HBD.
That's why this concept is so problematic.
If you go to a bank and take out a loan, the bank is basically going to print USD out of thin air (using collateral reserves), give you that money, and then charge you interest with the expectation of eventually being paid back with interest on top to turn a profit.
Secured vs Unsecured
Secured debt is debt that is issued to buy something very expensive that has value. That 'object' becomes the collateral for the loan, which in turn secures that loan for the bank. 99% of the time these loans are going to be secured by either a car, house, or business. If the borrower (you) doesn't pay back the lender (bank) then the lender is legally allowed to commandeer your collateral. It is in this way that we might interpret the situation as the lender technically owning the collateral until the debt is fully paid off.
The expression, "He bought the farm," (meaning to die) comes from instances where the farmer's life insurance was able to completely able to pay off the debt they owed to the bank in exchange for the property. With the word 'mortgage' itself literally translating to 'death pledge'
An unsecured debt is one that has no intrinsic collateral. A credit card is unsecured debt because the only collateral provided is a pinky-promise and perhaps a credit score. When the only thing backing the debt is the reputation of the borrower we call it unsecured (because overt slavery is technically illegal).
Funny story: the money you put into the bank is unsecured.
When you deposit money in a bank, you surrender the legal title to the cash and it becomes the bank's asset. As a result, you become an unsecured creditor to the bank. That is, the bank doesn't give you any security as protection in case it defaults.
So how is HBD debt?
- Who is the debt owed back to?
- How much interest is owed?
- Who is the borrower?
When we ask these basic questions (that should be easily answerable) it becomes clear that HBD is arguably not debt in a lot of different ways. If anyone is the borrower it is the network itself. Hive is borrowing the money. And they are borrowing that money from... the user? However that's not exactly true because this "debt" only needs to be paid back in the event that an HBD to Hive conversion occurs, which will never happen for the principal amount of tokens (floor demand). Meaning millions upon millions of this "debt" is never going to be paid back by design, making it not debt, but rather new money in the form of a derivative.
How much interest is owed?
When Hive issues HBD it is making a promise that users can convert each HBD for $1-worth of Hive. The interest rate on this conversion is 0%. So again, framing HBD as debt makes absolutely no sense because issuing a loan at 0% interest rate by default makes no business sense. That's not how debt works.
What is the debt ratio for fractional reserve banking?
In the legacy banking sector we're lucky if a bank even holds 20% in reserves (collateral assets) compared to how much they owe others (libailities). The idea being that this is plenty of buffer to pay out debts over time and assumes that everyone isn't going to ask for all their money back all at once (aka a bank run).
In any case a 20% reserve in a bank is equivalent to a 500% debt ratio (five times more debt than collateral), and that works out just fine the majority of the time. Today Hive's debt ratio is 6.5%, with an ultimate hardcap of 30% when factoring in the haircut mechanic. Arguably Hive could increase the haircut quite a bit and still be perfectly fine, even in the case of it being over 100%.
Debt ratio stability
In this regard it is not the actual debt ratio that matters, but the volatility of the debt ratio. For example if the market forces simply demanded our debt ratio be 50% from basic supply and demand we would be obligated to increase the cap to at least 50% or else 1 HBD would break the peg upwards and be valued higher than $1. This would be an especially messed up situation because being at the haircut limit means no HBD is being printed from the reward pool even though demand for it is absurdly high.
Is this even possible?
Yes, of course it is. The demand for our debt is completely out of our control as Hive is a permissionless system. What would happen if an entire country decided to adopt HBD as legal tender but didn't really care so much about Hive itself? The demand for our debt would skyrocket out of control, and this is where things get tricky.
Many assume that a situation like this would result in the price of Hive spiking way up, which would in turn balance out the ratio, but that logic only goes so far. Yes, Hive price would go up from Hive >> HBD conversions. But that doesn't magically increase our spot liquidity or stop Hive users from taking gains and dumping coins into the high price.
This is why debt-ratio going up in a bull run is the most dangerous outcome.
For one, everyone on Hive is making money hand over fist so we are less likely to care that it's a dangerous situation. We will justify this apathy with statements like, "This time is different." and, "How much could price possibly collapse?" The answer to that question is something like 99%. If we let Hive get into a situation like this it will crash 99% during the next bear market, which cripples overall long-term network adoption and destroys the dreams of every user who onboarded during that cycle. It's not a good place to be.
In addition to that we've seen what happens with the haircut. HBD can easily break the peg down to 50 cents in a situation like this, and morale is so low that even though everyone understands we will probably bounce back and that's just free money sitting on the table... very few users actually have dry powder on the outside waiting to capitalize on these moments when the network needs liquidity most. It's something we see happen during every signal 4-year market cycle. We all tend to overextend our positions due to overconfidence and greed.
Economics is a guessing game.
We have to make decisions today based on what we think the market is going to be like a year from now. In a very real sense it really is just outright degenerate gambling by those with their hands on the levers of power. Should we ever increase the debt ratio higher than 30%? Only if we think we can reasonably create a high floor and demand for the token in the middle of the bear market. Making a decision like that during peak FOMO is unacceptable, but ironically is also the most likely time that we would all come to consensus to make such a move. Beware such hubris.
Conclusion
Economics are surprisingly complex and unpredictable systems. There are many on Hive who believe it's impossible for the debt ratio to go up given extreme demand for HBD due to conversions burning millions of Hive and pumping the spot price. We already know this is false: it's actually the exact reason why LUNA crashed to zero (part of it anyway). Greedy VCs dumped their money into the debt to farm 'free' 20% yields without understanding the collateral it was being pegged by.
Steady lads; deploying more capital!
Demand for LUNA's debt mooned the price of the governance token. The lack of demand and liquidity for the governance token created a death-spiral that was catalyzed by a bad-actor shorting the network during this moment of weakness. Even the BTC backup collateral wasn't able to support the $1 backstop.
Systemic failure can not occur on Hive in this way for various reasons (3.5 day moving average on conversions; debt cap; haircut) but that doesn't make us immune to an x200 into a 99% loss pump and dump with a completely depegged stablecoin and a huge loss of reputation and respect.
I would challenge several ideas presented as fact. HBD is not necessarily debt in the first place. It doesn't act like debt. It isn't owed back to anyone and there is no interest rate in play when converted back into Hive. HBD is new money governed by free-market supply and demand. It may be a derivative pegged by collateral, but that doesn't make it debt in the traditional sense. Only by looking at HBD from the most obvious threat vector (conversions) can one interpret this asset as such. In every other way it's something else entirely, and we should pay very close attention to such a unique asset class without making too many assumptions along the way.
Wow how well have you covered that in language that we all can understand?!
It is perhaps a faith in the mechanics and a hedge between hive and hbd as my stake that I figured we were safe. I do think about the craziness of crypto greed and the (relatively) low market cap and liquidity from time to time while I glance at SBD in the peripheral as how things can go wrong. I discount those thoughts by imagining my hbd savings being worth 2 or more times what it is at $1 as not a bad thing for me. There is that greed I project onto others though.
The debt vs new money discussion is fascinating but I never thought about the possibility of the peg being broken, or the consequences of that happening. Being a lifer, I would probably just take the opportunity to buy more hive to increase my power and influence here for the long term.
Your safe advice is caution here but what would you suggest we do as tactics to help protect our investment and do our part to preserve the peg for the greater good?
Seriously thanks forvlayong this all out for us!
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
The commercial banks truly print money from nothing.
For hbd as debt, wouldn't every stakeholder be on the hook when inflation dilutes their holdings?
Irrespective of what the price does, if a large number of hive are created from previously burned hive then each hive I hold becomes a smaller percentage of the whole?
Well... first of all you don't seem to be factoring in that HBD printed from the reward pool and issued to blog posters was supposed to be Hive in the first place (and that option is available in the form of 100% HP rewards). If it never gets converted back into Hive that's free money for Hive, and if it does get converted back into Hive that's exactly as much inflation as we agreed to in the first place.
One must also factor in that Hive can be aggressively burned to create more HBD in a pinch ($1.05 HBD price and beyond). On top of all this, we must also factor in that USD is losing value every year, which brings me to my final point.
Nope: veto
You don't get to say that because USD going down in value from inflation inherently increases the value of Hive which is the underlying collateral for all the debt. When the value of USD goes down: Hive will go up against it and we owe back less debt. I'll be talking about this a lot after the fed gets forced back into infinite QE and a bunch of easy money floods back into the economy. The value of our collateral is one of the biggest determining factors across the entire discussion.
Yes, the price at issuance is what determines the math from there.
Yes.
More of that, please.
Sorry, can't be vetoed.
One hive equals one hive until more hive comes into existence.
1 hive is 1/~450 millionth, and declining, of all hive existing.
Printing more hive makes 1 hive less of the whole.
When I got here, 1mv was ~250hive, now it is ~550hive.
Excellent for the holders, less so for the buyers.
Some of that is inflation from hbd being burned.
All of it dilutes my 1 hive.
As for the dollar, when the frn collapses we should go back to constitutional requirements, 371.25 grains of pure silver or ~17 frn's, what happens to the price of hive at that point is anybody's guess.
Until the dumpening plays out, hbd should assume the new value, imo.
Presuming exchanges are still operating.
Really? Interesting.
Have you tried looking at your own wallet?
It generates HBD.
When a central bank prints money out of thin air are they thinking "hm maybe I shouldn't do that because it will dilute the value of my other assets"? No they print the money because fucking obviously. And yet here you are printing HBD and having the audacity of making that exact argument. Have you even considered the possibility that it's actually you that's devaluing the stake of others on aggregate? Nope.
You are operating under the provably false assumption that printing money has zero value and a 100% dilution rate. You've decided that printing a million dollars creates one million dollars of dilution, and you are wrong. Inflation is an investment, and only in the absolute worst case scenario is that investment going to have a long term value of $0.
This is an easy fact to prove. If Hive had zero inflation (or even worse: deflation) the value of the network would be zero. The money we are printing is the only thing giving this place any value whatsoever. Nothing is being diluted; this so called dilutions is the foundation of everything being built. What you say is not how it works for like half a dozen different reasons. It's a grossly reductive take that oversimplifies a complex issue. So again: veto.
I am in the top 20 most highly paid bloggers on this platform. It's mathematically impossible that HBD printing from the reward pool could dilute my position. It's also mathematically impossible for me to be diluting others because I've brought more value to this network than I've extracted. Your theory doesn't account for any of these variables and chalks everything up to "money printer go brrrr". It's truly difficult to express just how incorrect that is across the board from a fundamental standpoint .
I didn't expect that HBD would be this complicated to understand.
"Debt" and derivatives get weirdly complex when mixed in an ocean of economic principal.
By the strict definition of debt that you employed, of course, HBD is not considered debt. However, we can easily find examples of debt that somewhat resemble what HBD functionally is. For instance, if you open a non-interest-bearing checking account the bank is obligated to pay you back the amount in deposit upon request up to a certain amount, as defined by the FDIC (in the US).
In the case of HBD, the network guarantees that you will receive approximately one US dollar's worth of Hive for every HBD converted, up to a certain amount. That amount is defined by the "debt ratio". In this sense, HBD is debt...kind of.
In my view, HBD is a derivative...plain and simple. The value of that derivative is supported by the collateral that the network is willing to deploy. Someone reading this statement may say that HBD is not the same as DAI (for example), where you put up collateral to mint them.
That is true; however, the network itself uses collateral to support the value of HBD. Even though that collateral is not tracked in any block explorer it is a logical consequence of how the code works.
I'm pretty taken aback by the prospect of this definition of debt being "strict".
Do you think anyone on the street is going to disagree with that and call it too specific?
I think you'd be hard-pressed.
This is actually just another reason why HBD is not debt. Thanks for reminding me. Depositing USD in a bank incurs a 1 to 1 debt. You deposit fiat and you are owed fiat. That is not comparable at all to our system with two completely different assets connected by 3.5 day price feeds and haircut limits.
HBD allows us to outsource some of our emissions and create value on its own merit. To assume that HBD is debt is to assume the network can't grow as fast as the inflation rate. Seeing as the inflation rate for HBD is less than like 3% of the network's total market cap this is quite obviously not a problem. The demand for HBD will almost certainly increase faster than the inflation rate and continue generating value seemingly out of thin air.
Nice work
You point out yet another reason why neither of these assets are debt. They are both overcollateralized by 300% or more. In fact HBD is 1500% collateralized. Imagine trying to tell someone that the $100 they created from $300 worth of collateral is somehow money that doesn't exist that needs to be paid back later from some other source of income. The fact that DAI forces users to pay interest on their own money is absolutely mind blowing. It's a testament to how early in the game we are and how poorly the tech is understood.
I don't understand your response. I clearly stated that I think that HBD is a derivative and, therefore not debt. I just pointed out that the definition that you are using is a strict one. If I lend a friend some money I expect to be repaid but I am not necessarily expecting interest on top of that. Anyone will agree that my friend is in debt. That falls under a wider definition of debt.
My point is that under a wider definition, someone may argue that HBD is debt. I do not agree with that argument...not entirely. I remember Dan Larimer stating in one of his posts (way back on the legacy chain) that the network was lending the value of a dollar to SBD holders. That statement struck me as really odd, especially from the guy who designed the chain. I don't think that he understood what he was designing.
The argument that HBD is debt stems from the fact that the holders of the token can (at any point in time), broadcast a conversion operation that compels the network to issue the dollar value of HBD in the form of HIVE. That is the argument. Arguing that HBD is not debt because it doesn't fit a strict definition misses the point.
On its own, HBD is an instrument to short HIVE. If you buy HBD with HIVE and, later on, convert it at a lower price, you end up with more stake in the network. The risk of doing this (in theory), is that the price of HIVE does not go below the initial buy point or that the "debt limit" is surpassed and you end up where you started (or worse). You can get the same outcome by simply selling high and buying low on the open market but, with conversions, you do not run the risk of moving the price too much, especially if you are dealing with big amounts.
Yes but can you really short a network by going long on a derivative collateralized by the short?
Again, none of this is very simple.
It very much depends on where the money is coming from.
If the money is coming from outside the network (selling BTC in HBD) then Hive gets pumped.
If the money is coming from inside the network Hive trades flat.
In both situations Hive was never dumped on external exchanges so the price can't go down.
However, price can go down if the "short" was successful and HBD is worth more Hive than it was when we started. However, in that case we not only have to transfer the HBD back into Hive but we also have to sell that Hive on external exchanges to make the price go down. People like me would just power up the Hive and call it good. That gets us into another discussion: what about if I sell the curation that the powered up Hive creates? It also opens up another path as to how much our bandwidth is worth and governance powers.
Judging by your response I guess I'm just in an argumentative mood.
Happens.
My bad.
I feel smarter after reading this.
A very technical and really well written post. Maybe now I can at least understand why during the Bull Run some crypro tokens increased the value of the token, while HIVE remained almost stagnant.