We have some powerful opportunities with cryptocurrency. The ability to construct a financial system that benefits large groups of people is upon us.
With Hive, we have the potential to formulate something rather unique. By combining two base layer coins, one that captures value while the other is designed for transactions, we can leverage the two in the development of a strong economy.
At the same time, we can create resiliency by taking advantage of derivatives. This is something that is often abused in the existing financial system since the idea of speculation is the main function. However, as we will see, there is a beneficial reason to turn to derivatives as a means of enhancing what we are constructing on the base layer.
Through this combination, we are establishing a truly decentralized financial system.
Cryptocurrency Derivatives
A derivative is basically a financial product that derives its value from something else. This is a rather simply concept to understand. An easy example is with stock options. Here is an asset that has no inherent value on its own. All value is tied to the underlying stock.
There are many reasons to create derivatives. It is best to remember the financial system is nothing more than a system of moving risk around. Essentially, it take risk from a person who is unwilling to hold it and transferring it to one who will. People have different reasons for being in markets, thus creating different risk profiles.
Derivatives are a means to do this. For example, the stock holder might sell options to hedge (reduce risk) in their investment. This provides an immediate return. Of course, the one buying the option is taking on more risk by betting on not only the movement of the stock but the velocity which it takes place.
Another way of looking at this is as a transformation. It is converting as asset from one form to another. An example is how a US Treasury bond is really just future dollars. Within Hive, we have the ability to create bonds from HBD, thus transforming it.
Not all cases involved creating something different. In fact, wrapping is a derivative creation process. When HBD was wrapped onto BSC, resulting in bHBD, we see a derivative generated. Of course, it is similar to HBD in its properties. Nevertheless, bHBD is not HBD. They are two distinct assets although there is a correlation due to the 1:1 backing.
Using HBD Derivatives To Push Risk Out
By developing layer 2 forms of HBD, we end up pushing risk further away from the base layer. This is a concept that few discuss yet it vital to the long term sustainability of the ecosystem.
A wrapped version of HBD instantly becomes a transactions token. This can be used in a similar manner as HBD. Yet, because it is a derivative, it does not pose the same threat to the ecosystem. A wrapped version cannot be converted to $HIVE. This is reserved only for HBD.
Certainly, one could unwrap the token back into HBD and then convert it. At that point, one is encountering the built in security measures of the blockchain. For example, there might be a 3 day unlock period if the HBD is in savings. This time factor allows for mobilization of a defense if there is an attack.
That said, the idea here is to make the wrapped token the focus. It is at the second layer where the applications are constructed. It could have wrapped HBD as the centerpiece of the payment system. All transactions could be tied to this. Hence, the network effect is actually taking place on the derivative, not HBD itself.
Of course, as the utility grows, value is pushed to the base layer. The value of HBD explodes without the threat being posed to the ecosystem. It is as if all battles are taking place outside the walls of the city. If that is the case, the castle is safe.
HBD Transformation
When HBD is transformed, it also provides another defense.
We discussed the idea of Hive Bonds. Here we see HBD locked up and morphing into another token. Under the present financial system the creation of a bond is debt. However, one Hive, the debt instrument is HBD. Thus, we are not creating more debt through bonding, simply changing its form.
In this way, a Hive Bond can be thought of as future HBD. Since the HBD is locked in some type of time vault (or savings), it results in a payout of HBD. In addition, at maturity, the HBD is released.
Here is where game theory enters the picture. Investors who are involved in the bonding process are likely to continue. There is a reason one creates a bond. Obviously, the return is there yet that is achieved simply though the staking of HBD. Under this scenario, a bond might be used as collateral. Hence, if one is engage in the process of taking out loans for specific financial purposes, this will continue.
We now see how there is incentive to keep HBD in the form of derivatives and not operate in the base coin itself.
This same holds true for the wrapped HBD as a medium of exchange. Through this, we could have gambling, shopping, and other commercial activities all tied to this. Obviously, in this situation, people who are engaging with these sites have incentive to hold the wrapped token. They have no interest (or even knowledge) of the conversion mechanism on Hive. It is not relevant to them.
Now consider this same concept built on a number of chains. It can be integrated in many forms, all providing defense of Hive. If there is an attack, it cannot be directly levied against HBD. First, it must go through the wrapped version and then turned towards the base layer.
To really take this to another level, picture a robust system of finance and commerce using the derivatives. At this point, extreme protection measures could be put in like a 5 day hold on any unwrapping. We also could do something similar on the conversion. This would still allow for monetary elasticity as driven by the market (community) yet make this as an attack vector rather unappealing.
All the activity on the second layer acts as a defense. By building different levels through additional HBD products, we are able to move the focus away from the core. The further out this gets pushed, the safer the core ecosystem becomes.
In the end, we are not reducing risk. That is not possible. What we are doing is transferring it from the base of Hive outwards to other assets that carry it. There might be an implosion of one of the assets on a particular chain but, with many derivatives on multiple chains, the entire Hive based network can tolerate it.
And the foundation is protected since very little of that will move back towards HBD.
If you found this article informative, please give an upvote and rehive.
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Ever all these Decentralized qualities lies in HBD yet world is searching for it... We should do something to list it on big exchanges.. like what approach you think would be Good to aware people I'm crypto outside Hive?
It is always good to make people outside of Hive aware of this. However, the easiest onboard is to show them some of the applications they might have an interest in. That is the hook that can attract people.
Once here, they can learn more about all that is offered. However, we have to have the initial interest to pull them away from where they are now.
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Will start onboarding very soon. Have made own infographics for this purpose and hopefully that would bring some Good people in this platform.
I have some ideas for this.. well, Gonna see which one will work or not!!
We have a working system for us on Hive, having it protected against attacks is vital to keep the ecosystem running and pushing out source of possible attack to second layer tokens, derivatives of HBD sounds like a good idea worth implementing.
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@taskmaster4450 at the end of the article you said " we are not reducing risk it's not possible" can you help me to understand what type of risk Hive and HBD have at base layer level which are not possible to reduce?
There is always a vulnerability to attack. That is why some of the security mechanisms are in place such as the 30 days window for powering up before receiving governance.
The conversion mechanism could be used as an attack vector although that is deterred also. By pushing things further out, it makes it hard to try and manipulate the supply ratio of the coins or the value. It also hinders anyone trying to gain control of the chain through HBD (then converted).
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The Sophistication or the economic concept behind derivation is revolutionary, it's quite fascinating how bHBD is quite distinctive from HBD, but a lot of people would equally think it's the same, not seeing how bHBD totally differs.
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Very true. That is one of the keys to building a strong currency. Sophistication adds layers that really expand thins will building resiliency.
bHBD is just one example, a first step in the derivative expansion. We can go many directions with this.
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What could be the reason why binance, coinbase and the houbi have no support for the HBD?
They dont have a reason to list them. Those entities make money by people trading. With under 10 million HBD in circulation, what type of trading volume can be expected?
There is no financial incentive for them to carry it.
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I guess that it’s proper if HBD is hype on various medias so that people can be aware of it.
Hype does nothing other than bring disappointment. We have to keep building. Right now the supply of HBD is minimal. We also have a lot of infrastructure required to support it.
A few things are falling into place but not all are there yet.
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Oh!! I get your idea.
It’s the best
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when sHBD?
This is from the Hive Financial Network article.
It is just a derivative of HBD that I termed. It is HBD on a second layer.
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I know ;) but when will it be here?
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This is interesting. I'm late to the party, but I'm finally looking into Cub and Poly Cub.
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I like the idea of HBD on the 2nd layer as it offers a layer of protection. Even if something were to happen on that end, the rest should be safe and things could be done to keep it safe. However, I also think we have to consider how things can be safe on the new implementations because it can definitely affect that portion of the HBD locked.
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