Debt Kills. The Witnesses Have Listened to the Merchants of Debt

in LeoFinance2 years ago

Sorry about the rambling nature of this post. I've been dispirited since the witnesses raised the interest rate to 20%. This stupid move just might bring the downfall of the whole HIVE ecosystem.

Debt Kills

The Merchants of Debt

The merchants of debt are subtle in their seductions. They whisper promises of unlimited passive income while white washing potential risks and the negative social impact of debt.

During my life I've seen numerous lives destroyed by people doing things like buying stock on margin. Buying houses they could not afford on mortgage. The financial landscape is littered with companies that listened to the merchants of debt. I've seen companies destroyed for holding mortgage backed securities as cash equivalents or taking on debt at from the advice of corrupt financial counselors.

Debt kills. The decision by the witnesses to take on huge amounts of debt felt like a knife in the heart.

Seriously! I beg the reader to look at what is happening on this platform. The witnesses raised the interest on HBD to 20%, not because the platform needs an infusion of cash. The witnesses raised rate to 20% simply because they have some rich friends who want to earn a large passive income.

To express my disappointment, I stabbed a heart shaped box with a scary looking chef's knife.

Austrian economists call the pursuit of passive income "rent seeking." Moralists call the pursuit of debt "usury."

Having studied world history, I tend to side with moralists. Economic history shows that debt throws individuals into poverty, corporations into bankruptcy. The merchants of debt have even brought once mighty nations to their knees.

Having read a few hundred articles about the decision, it appears that the driving force for this decision is that several cryptocurrency millionaires want to find a high interest haven for their crypto holdings.

If this is the case, then the witnesses raised the interest rate to 20% percent because there are people who want to loan out funds at a high interest rate, not because the HIVE platform needs the money.

Several articles indicate that HIVE wants to lend out $5 million in HBD. HIVE will then pay $1 million in the first year to service the loan which will bring the debt to $6 million. HIVE will pay $1.2 in the second year bringing the debt to $7.2 million. The third year will bring the debt to $8.64 million. The debt will have doubled by the fourth year of the loan.

The goal of HIVE is to give a small number of millionaires a chance to double their money.

The formulas used by HIVE guarantee the HBD debt with HIVE. As I understand, the "Convert HBD" button found on wallet.hive.blog and peakd.com will destroy the HBD. It then creates the dollar equivalence of HIVE minus a 5% fee. The process takes 3.5 days. This guarantees the price of HBD at 95% of the dollar; So, in theory, if you bought HIVE at $1.00, the most you could lose is 5% conversion fee.

There is also a program to convert HIVE into HBD. If the price of HIVE jumps over $1.05; then it is worthwhile to convert HIVE to HBD. If it below $0.95, it is worthwhile to convert HBD into HIVE.

I thought that the introduction of 20% interest would have led to a brief period where the price of HBD jumped over 1.05. This would have led people to convert HIVE into HBD. Converting HIVE into HBD would have reduced the float of HIVE on the market which would temporarily raise the price of HIVE.

This didn't happen.

Since the high interest rate is creating millions upon millions of HBD which will eventually be converted into HIVE, the 20% interest rate on HBD is likely to take a heavy toll on the price of HIVE.

The first negative effects of the high interest happened on Hive-Engine, which I will discuss below. Before that discussion, I want to discuss Proof of Brain v. Passive Income.

Proof of Brain v. Passive Income

I joined SteemIt four years ago because I saw the platform as a possible source of revenue for independent web sites. HIVE has funded a few games and there are some cookie cutter tribes, but HIVE has not funded the creation of any high quality web sites.

I stayed because the platform promotes the "Proof of Brain" concept. #POB rewards people for their work. Both authors and curators work for their rewards.

It is a tough market, but it was possible for artists and bloggers to make a little bit of money for their effort.

I never really thought much about HBD. HBD offers passive income. I am not here for passive income.

The decision to raise the interest on HBD to more than the interest on HIVE flipped the POB structure on HIVE.

Since HBD pays significantly more than HIVE, HBD and passive income is the primary focus of the platform.

The witnesses listened to the rent seekers and the merchants of debt and flipped the platform upside down.

Yes, the 1 percenters of the universe want structure that return huge amounts of passive income because the rent seekers know that they can control the people through the rent.

HIVE claimed to be something different.

Interest on HBD is a pure passive income. Raising the rewards on HBD above the rewards for HIVE reverses the structure. The proof of brain work done by majority of HIVE now subsidizes the passive income of a few millionaires at the center of the platform.

We can see the destructive nature of the HBD interest by the collapsing coins on Hive-Engine.

High HBD Interest and Hive-Engine

HBD is an artifact of the original design of SteemIt.

SBD involved an attempt to create a currency pegged to the US dollar. The peg worked well enough to help pay the fixed costs associated with developing and hosting the platform, but it never worked well enough for people to use the coin outside HIVE.

So, the original SteemIt ecosystem had just two coins: STEEM and SBD.

During the kerfuffle with Justin Sun, HIVE developers launched Steem-Engine and Hive-Engine. Steem-Engine collapsed. I just looked, Steem-Engine has under a hundred dollars a day in transaction. Justin Sun destroyed Steem Engine.

Hive-Engine did a little better. The platform has several hundred alt-coins and usually does several hundred transactions a day. The total number of swaps and transfers that take place on Hive-Engine probably exceeds a million a day.

Most of the tokens are associated with Hive Tribes. Offerings on Hive-Engine support numerous games and financial products.

LEt's face it. Many of the offerings on HIVE engine are weak. There are far too many generic tokens on the the platform. Few of the tribal sites are developing a strong niche market. Many of the coins were falling and a few coins like PAY and BLOG appear to have failed outright.

The act of raising the interest on HBD to 20% had a predictable effect of setting up HBD as the primary focus of the HIVE ecosystem. People rushing to buy HBD dumped their alt-coins and most of the alt-coins on Hive-Engine have declined sharply in the last two weeks.

The decision to raise the HBD interest to 20% has already resulted in substantial harm on HE.

I admit, for the last several months I had been transferring all of the HBD earnings in to HIVe engine. Since the alt-coins are unlikely to recover from the HBD interest rise, I have to write off the money I sent to HE as a loss.

The witnesses claimed that the 20% interest was supposed to lead to a pop in the price of HIVE. HIVE was trading around $1.20 . HIVE is now around $0.90.

The true negative impact of the 20% interest will come in the future when the platform has to start paying interest the HBD loans.

Conclusion

I was extremely sad when the witnesses made the decision to raise the interest on HBD. I felt like I was being stabbed in the heart. It is funny. I was wandering through a local park trying to decide if I should waste anymore effort on HIVE when a Pitbull broke its leash and bit my leg.

I admit I had fallen for the claim that HIVE wanted to create a platform that would help common people enter the crypto world.

The truth is that the witnesses are looking to sell out the platform to a new class of crypto-millionaires seeking rent.

Setting the interest on HBD at rate higher than the interest used for authorship and curation makes HBD the primary focus of the platform.

The coins on Hive-Engine have been in a nose dive since this ill conceived decision. The price of HIVE also appears to be weak. The witnesses are destroying the platform for nothing.

I guess that I should conclude by pointing out that HBD sets up a potential catastrophic failure for the platform.

The formulas at the base of the blockchain were designed to guarantee the price of HBD with HIVE. So lets imagine a drop in the price of HIVE to say $0.50. The people holding HBD are apt to panic. So, lets say HBD holders decide to convert a million HBD to HIVE. This would lead to the creation of 2 million HIVE which the HBD holders would dump on a weak market.

Imagine the price halved a second time and panicking HBD holders converted another million HBD into HIVE at 0.25. This would create 4 million HIVE that they would drop on a weak market.

By raising the interest rate to 20% interest rate, the Hive Witnesses created the potential for a cascading failure.

The move to raise HBD interest to 20% has me quite depressed. The move will transfer a large amount of money from people who are trying to make a little extra cash by authoring and curating posts to a small number of millionaires who are seeking large returns on passive income.

I feel like I've been stabbed in the heart ... and like I've been bit by a vicious. What the witnesses have done feels far worse than what the irresponsible dog owner did.

Of course, my saying anything is just a waste of time. HIVE has never been anything more than an echo chamber where people brown nose the whales hoping to get little upvote rewards.

Unfortunately, it is in echo chambers like HIVE where the merchants of debt are able to do their worst damage because will not question the political forces at the center of the platform.

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Hey man, interesting overview of things :)
First I don't think you should take this situation with such a heavy feelings.
In the broad crypto markets, this is just a drop in the bucket.

Now about debt.
Debt is a double edge sward. When used properly it can be extremely useful. When miss used it can crash you. Most of people miss use it. Example of good use for debt is buying a good property that in time appreciate. When paid of, the property is valued more then the debt and the interest.

Now for Hive.
The one very important parameter will not be the APR on HBD but the debt limit. At the moment 10%, soon to be 30%.
If you should be worried about something that should be the debt limit :)
The debt limit is the ultimate stop for HBD expansion. When it is reached HBD is no longer valued 1$ from the blockchain when making conversions. The higher the debt the lower the price of HBD. This is how a death spiral is prevented. Everyone holding HBD should have in mind this mechanics and that at least HBD is honest with it self and it is not guarantied a 1$ hard peg all the time.
At the moment the debt is only 2.5% so we have some room for expansion.

https://hive.ausbit.dev/hbd

If I understand the equations correctly, the high interest rate is the thing that creates more debt. The Ausbit page says that the current HBD market cap is $9,078,966. I've read other pages saying the witnesses want 5 million in HBD savings.

The 20% interest on 5 million HBD will create 1 million of debt in the first year.

As I understand, the debt limit simply lowers the price when the HBD haircut kicks in. The ausbit page says it currently kicks in at $0.2234 . HIVE is at $.85 right now.

It is conceivable that HIVE could dip to $0.22. It was there last year.

Tripling the debt limit should divide the haircut price by three; so the haircut would kick in at $0.75.

It is likely that HBD holders will convert their HBD to HIVE if there is a huge price drop. So, I don't think the debt limit will come into play for the next couple of years.

Anyway, the damage is being done by the high interest rate, not by the debt limit.

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I've read other pages saying the witnesses want 5 million in HBD savings.

The witnesses cant set what will be the amount in the savings it is up to users how much they will put in. Leofinance put a goal of their own to have 5M in HBD liquidity in their USDC-pHBD pool on Polycub. This is totally different from HBD in savings.

The 20% interest on 5 million HBD will create 1 million of debt in the first year.

Yes, at the moment there is around 3M HBD in savings. For context ... at the moment there is around 26M HIVE equivalent printed per year, or around 2.2M per month ...

Debt is a double edge sward. When used properly it can be extremely useful.

If debt is used to create something that is worth substantially more than the interest on the debt; then it can play a positive role.

The kicker is that HIVE does not need the money being borrowing. We are incurring 20% interest because the witnesses want to earn 20% interest on their HBD.

Essentially we are borrowing money at a high interest rate because the bankers (aka friends of the witnesses) want to loan money at a high rate, not because we need the money.

Private equity firms are known to play a similar game. They will saddle the companies that come under their control with huge amounts of debt at high interest because they like lending money at junk bond rates.

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a bit pathetic, but also good questions in it. I would be interested in @dalz's opinion on this. He wrote this beautiful post:
https://peakd.com/hive-167922/@dalz/what-is-the-inflation-from-hbd-interest-how-high-can-it-go-and-is-it-sustainable

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Just did :)

These are so catastrophical and so early conclusion it makes entire article unreliable in my eyes. Multiple accusations without support of data don't help too.

I'd love to see some big power-downs, large drop in posting activity or reverse in conversions proportions to support such concerns. But I don't want to see these in general.

As somebody stated already, debt is a double-edged sword and in crypto everything is experimantal, simple transferring historical ideas about economy is not fully valid. Also please, take note that we are all in the wnvironment of constant high inflation, this should be taken into account when considering interest rates everywhere.

It's important to take into account all the petspectives, hence, I appreciate this one, even more in the environment of incentivised optimism. Please, follow the data and share with us, if this is what actually is happening I'm sure people with large stakes (HP, not HBD) will act to fix it. There are a lot of people who care on HIVE, 13 weeks power-down period is designed for such cases.

I hope your leg will heal fast!

These are so catastrophical and so early conclusion it makes entire article unreliable in my eyes.

FWIW, I carefully watched the effects of the interest increase on HIVE and HIVE-Engine for 14 days before writing my post.

If you look at the price of coins on Hive Engine; you will see that most of the coins tumbled after the increase in interest rates. For example POB dropped to 0.009.

If you look at the history of honey.swap, which is the primary mechanism for moving funds between HIVE and HIVE-Engine; you will see that accounts started pulling large amount of funds from HE after the announcement.

HIVE is the base currency of HIVE-Engine. So the HBD interest is the most likely cause of the drop in the price of the coins on HE.

BTW, the price of HIVE dropped from $1.20 before the announcement and is just $0.85 . This drop might be explained by an overall drop in crypto.

I looked at the prices on HE for a long time before wr9iting my post.

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I read your article and I can see the same effects, but in general I cannot agree on the analysis of cause.

The price of basically every crypto asset droped during last weeks. It proves nothing. Still, the timeframe is to short to pull such big claims. Please, take it as a friendly critics.

And HE tokens? I'm engaged in these and the drop of price is not change of the trend either. And POB specifically might be dropping from lack of leadership not HBD APR growing.

We would see a bunch of different metrics going crazy in such case.

Thank you for confirming my thoughts that prevented me from investing coins in HBD. Not being a specialist in the field of economics. It was hard for me to articulate them. but, I admit the idea that the witnesses calculated this option and they have sidings. Don't you think so?

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It is actually smart for you, as an individual, to transfer your HBD into savings.

You will get a higher return on your HBD savings than you would get by powering up your HIVE.

If you put $100 in savings; you would get $20 in interest. If your powered up; you would only get about $7 in curation rewards over the year.

BTW, there is a limited amount of HBD. I would rather see people like you get that 20% interest than some some rent seeking millionaire.

The problem is that it is bad for the platform. By transferring money to savings instead of powering up, you will reduce the value of your upvote.

!beer

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Regarding the benefits of this issue, I agree with you, but at the moment the goal is different, namely, to increase the power of the voice in the short term and return to curating with the same strength. I don't consider 20% something cosmic, on some coins, periodically, I raise a few thousand percent, I won't hold on to it with both hands). Thank you very much and have a great day!

Interesting perspective. It is good to hear apposing views on this and hopefully there can be a more balanced discussion.
I am not an economist but I do know that debt is one of the main evils of this world.

Don't get me wrong here, there's a ton of stuff to be addressed with this system, but both Hive and HBD need more liquidity. Rising the interest rates can help us facilitate more demand for #HBD by providing higher incentives to holders.

I don't think 20% interest will destabilize the economy.

The more money comes into the system, the more competition grows and the products become better.

If we had a 16-bill market cap, trust me, you'd have 10 new apps popping up on a monthly bases, all providing different tokenomics and abilities for you to earn.

Why?

Simply because there's enough money for anyone to take the risk and build something different.

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I don't see any new money coming in.
It's just circulating inside the hive chain. Transferring from poor to rich.
But hey, what do I know? I'm just an oldtimer lost among blockchains.

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The reason my post focused on HIVE engine is that the high interest rate on HIVE appears to be pulling money from HE.

One can see this by the transactions of the honey-swap account.

I had a link to a page that showed the HBD richlist. A small number of accounts held the vast majority of HBD savings. It was the typical thing where 5% of accounts held 95% of the wealth.

The link I had wasn't working. So, I have to figure out how to construct the richlist.

The HBD richlist really damns the high interest rate ... which is probably why the witnesses don't want an HBD rich list.

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Debt is the first step to destruction, this huge rise in the annual ratio to 20 percent is a reckless idea in my opinion.
I used to say that Steemit project will continue and know a sweeping superiority, but the demand for it has declined

Interesting point of view.
Reblogged to read the upcoming comments.

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Interesting perspective. You should have in mind though that this is experimental and can be reversed if it isn't going as expected. Also, 20% is not such a huge increase to warrant the debt spiral you are imagining. If things are not going as expected in year one for instance, am pretty sure the witnesses would do the needful and reverse the decision

I think the witnesses will find it hard to reduce the interest rate.

Reducing the interest rate in a year would result in a massive outflow of HBD and HIVE that the market would find difficult to absorb. Remember, Hive guarantees HBD at $1 minus a 5% fee.

Lowering the interest would lead to a massive flight of HBD from the platform. The price of HBD would fall below $0.95 and people would start converting their HBD into HIVE.

So, lets say the price of HIVE was trading at $0.50. A conversion of a million HBD would create 2 million HIVE that HBD investors would want to dump on the market.

The witnesses are locked in. They have to keep the interest high to avoid the flight of HBD.

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Thanks for sharing these thoughts, yes I can see the picture too and was feeling the same way, when they raised the interest rate it was like to counterweigh what is happening in the world and give more incentive to hold, but actually it will mostly benefit the whales, who always seek a capital return and passive income. Hive should be designed for creators and continue to attract those with outstanding ideas and give them a plattform to do so.

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I don't share your vision of the future, I think getting more hbd in circulation is a positive thing.
Presuming that folks hold it and use it in their stores/games we have nothing to worry about.
I'll check back on that decision when the debt ratio breaches 20%.
I will grant that until we survive a downturn in the market hbd remains untested, and any opinions speculative.

There used to be an HBD richlist.

I can't find the link.

The HBD richlist is the thing that would make your blood boil. The largest holders of HBD were not active on HIVE.

The witnesses are using the value of HIVE to secure large passive incomes for a small number of millionaires.

The High Interest is not putting more HBD into circulation either. People bought HBD on external exchanges. Pulled it into HIVE and transferred it to savings to get the high interest rate.

It is actually reducing the amount of HBD circulating on the exchanges.

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We have to use the tools that we have.
Adding 'bonds' increases the inflation while locking it up in a market.

Getting from here, a few million hbd, to there, a few billion, has to happen some way.
If we just print some the price will dump and those millionaires will make even more between shorting on the way down and longing on its way back up.

How do you propose we increase our exposure in the markets?