Does the high APR on HBD reduce curation rewards for Hive?
There was a post made by @gadrian about the choice between Hive Power or HBD that triggered a lot of discussions in the comment section first and then in some discord chats.
Mainly, there was a discussion about the sustainability of 20% APR on HBD. In these discussions, I have heard a lot of things that made me think and I believe it's worth to try to talk about it.
I have to say that not all related to this topic is totally clear to me. So it's possible that not everything is accurate in my post.
About inflation and APR
One thing that I want to define is that the inflation and the apr aren't the same thing. The inflation is coded on the blockchain at 6.5% for 2023. This is the monetary increase for one year and it will be different next year going down year by year until it reaches 2%. If I'm not mistaken it will then stay at this level.
When people speak about APR, it's the return they can get on curating or for interests on HBD in savings accounts.
Different forms of Hive
To determine how the money is distributed, we first have to understand the different forms of money that we have. Because hive comes in different forms.
- We have liquid Hive that doesn't generate any return
- We have powered up Hive that generates a staking return of a bit less than 3%
- We have HBD that is a different form of Hive because HBD can be transformed into hive. If HBD is in savings, it generates at the moment 20% interests.
If you transform all the HBD and take all the liquid and staked Hive together, at the end of 2023, you should have 6.5% more Hive than at the end of 2022.
These 6.5% is what can be considered the reward pool of Hive. This reward pool is distributed in many different ways:
- As author rewards
- As curation rewards
- As staking rewards
- As witness rewards
- As DHL rewards
- As interests on HBD savings
Of these payments, I would say that witness and DHL rewards are rather fixed in amount. All the other rewards are however quite dynamic and that's where things get interesting.
Do High APR on HBD reduce curation rewards on Hive?
To answer this question, I try to take two different situations. For both situations, I will make some assumptions that the proportion of powered up hive and actively voting stake stays the same in both cases.
Situation 1 is how things are now with 20% APR on HBD
Thanks to the interests on HBD, the demand for HBD is quite high. HBD is another form of Hive. If there is a lot of HBD in circulation, this means that there is less Hive in circulation. Of the hive in circulation, a part is in the form of liquid Hive and another part is in the form of staked hive. Only this staked hive generates staking rewards and only the staked hive that is voting, generates curation rewards. In this situation, the amount of active HP that is voting is rather small because a lot of Hive is captured in HBD. This means that the voting Hive Power has a relatively high curation and staking return. However, the pot for curation is reduced by the high interests that are paid on HBD in savings.
Let's now check a situation 2 where there are no interests on HBD
Without interests, there are no incentives to keep HBD. People make the conversion from HBD to Hive. This means that the amount of Hive in circulation increases. We have more hive power and more hive power that is voting. The curation return for voting and the staking rewards are lower because there is more overall HP to share the pot. On the other hand there is no reduction of the pot from interests on HBD.
I would say that in terms of APR both effects (more return with smaller pot vs less return and bigger pot) are kind of compensating each other. Therefore, I belive that a higher APR on HBD doesn't have a major influence on the APR for curation. But of course this is just an approximation and the detail can be more nuanced.
What is the impact on price?
When we look however at the aspect of prices, the situation looks different. In situation 1, we have a big demand for HBD and therefore a lower supply of Hive. This means that both tokens get a boost. HBD gets a boost because of the high APR and Hive gets a boost because less Hive is in circulation.
In situation 2 with no interests on HBD, nobody wants HBD and there is more Hive in circulation. In such a situation, the Hive supply is bigger and the probability is in my opinion that prices for hive would go down.
What about the real numbers?
If you go to https://hiveblocks.com/ you can actually see the real numbers of the moment.
At the moment we have 396M Hive in circulation as Hive. Around 166M of that Hive is powered up. There are also 79M Hive in the existens in the form of 31M HBD.
What would happen if the part of HBD becomes too big?
Let's say that HBD with 20% apr becomes so interesting that people flock towards it. This would mean that the part of Hive in the form of HBD would increase. With the assumption that price of hive wouldn't move, this would mean that the amount of HBD in respect to Hive would increase. If it reaches a point where HBD represents 20% of hte supply of Hive, the first haircut would be activated and rewards would start to be paid in hive instead of hbd.
If you want to know more about the Haircut protocol, check out this great post by @dalz that explains it in detail.
To keep things short, the haircut would make sure that the amount of HBD in respect to the supply of Hive would be reduced by depegging HBD once it reaches 30% of the whole supply. It actually sounds scarrier than it really is. It's a good mechanisme to protect the chain and Hive.
Why I believe that high APR on HBD will not favorise the haircut
As I said before, I think that the 20% interests on HBD are actually positive for the price of hive. So if Hive is strong, people will want to have it. That's what we are seeing at the moment. Each time there is a correction of hive prices, people convert HBD into hive. This means that people want to have Hive and they want to profit from low prices.
To conclude, I believe that the fact that we get 20% APR on HBD is actually beneficial for the whole blockchain. The more people want to park their money in HBD, the more the supply of hive will be reduced. This won't impact the apr for curation but it will support the value of hive.
This is my personal opinion and shouldn't be considered as investment advice. Also it's possible that I see some things wrong. Feel free to correct me in the comment section ;-)
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Well, I have always thought about this and I got the right answer now.
If I may ask, the 20% interest on HBD, is it monthly or when?
When you put HBD into your savings account, the interests are accumulating regularly but you can withdraw them only once a week. The 20% are calculated on a yearly basis.
The haircut protocol serves as a safeguard to maintain HBD's peg to the dollar and Hive's stability. Triggered when HBD reaches 20% of Hive's supply, it reduces HBD's proportion by depegging and switching rewards to Hive. This mechanism protects the blockchain from over-concentration of HBD while maintaining a healthy balance between HBD and Hive in the ecosystem.
Honestly speaking I am not really certain how or what may happen if Hive market cap will be quadrupled but I am not scared but rather excited to see that day :)
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A lot of people get a kind of panic when they hear about the haircut. In my opinion it's what protects hive from stuff like luna. It's good to know that it is in place and as you said, it doesn't have to be a bad thing :-). Thanks a lot for the curation!
I'm not deep into this calculation, but I think there is a definition somewhere of how much HBD is allowed. I don't know exactly, say 10% of the total Hive. As soon as it is more or less, the @HBDstabilizer is activated whose function is to regulate this ratio between HBD and Hive and of course keep HBD at a price of $1. This is of course also related to how much APR can be set.
At least that's my understanding, but I could be wrong. It won't be the first time. 😁
You are right the HBD stabilizer is another tool that tries to make sure that everything runs smoothly. I still don't know how it works exactly :-)
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Very good explanation! I also think that the current APR is positive for the chain. Later it will be seen and there is always the possibility of changing it for another type.
The good thing is that the apr can be changed by witnesses without any hard or soft fork.
I think it makes sense that parking more money in HBD and earning 20% APR in savings is beneficial for the whole chain. I see it like giving Hive more structure, if that makes sense.
A nice return on HBD will have a as a result that people want more HBD and therefore there will be less hive in circulation, pushing hive prices rather up.
I am still under 2 minds about HBD, I think it is a great tool in the hive ecosystem, but the % rate is too high.
After my internal reflection, I belive that the apr is sustainable, as long as it pushes hive prices up in the long run and that HBD supply is not getting out of control. It's a complex mechanisme and it would be wrong to consider it a magic machine that can't fail :-)
I could understand the high % APR if the funds were locked for a period of time like 1 or 2 years, but to earn 20% APR (22% APY) without any contribution to the eco-system doesnt make sense.
I agree it's alarming that anyone could pull their HBD anytime (only three days to withdraw) and dump it on the market for HIVE - but the idea is the interest rate is so high it would persuade big investors to NOT do that. But if HIVE went to $0.10, it would be tempting to speculate and potentially ride the wave back up for a quick buck, potentially much more than 20% apr. This will help boost the value of HIVE back up.
What is missing is to see the complete picture. Holding Hive Power does also yield ~20%, but this is split between the curator and author. With HBD, there is no split. Therefore, those holding HBD are being unfavorably benefitted at the expense of HP holders with better conditions.
Therefore imo the rate should be reduced back down to 12% on a par with HP holders unless they agree to lock in their HBD for longer periods.
I agree that the 20% seem to defavorise the people actively curate on Hive. I also believe that 12% would be a fair amount. On the other hand, I consider that HBD is just another form of Hive that is at our disposition. By owning HBD, there is also a risk involved. If Hive goes to 5$, people will make a big comparable loss if holding HBD...
That's true, I've been betting on HIVE going to $5.00 - $10.00 for a number of years now - it may still do that! But in the mean time, I like collecting 20% on a relatively risk-free investment, which continues growing whether I blog or curate at all. If it were lowered to 12% I wouldn't cry, but I might invest elsewhere.
I certainly do not see my HBD savings as a bet against Hive, but as a "biding of the time" until HIVE crashes... on the MOON!!!
I like the notes! I agree that offering a passive income opportunity (HBD savings) that is more profitable than active curating income opportunity (Hive Power), would encourage investors to "sell out" and just sit back with a growing savings account. Locking in "savings" for a certain amount of time at 20% would ensure people won't run at any time - but having the savings account semi-liquid (and high interest) may help encourage outside investors to get in on that passive income, which they could easily use to purchase HIVE if it dips, helping bring the HIVE value back up. Getting investors to purchase HBD will help introduce them to the HIVE blockchain and also to various token investment opportunities. They could sell their monthly interest payments (which I plan on doing in a few months) for hive / swap.hive which they can use for various token speculations that could profit them much more than 20%.
The short version: perhaps the 20% interest may be the honey that attracts some whale investors.
Yes, I see that and hopefully it might work! 😉
This is actually quite interesting, I've never thought of it that way. I do feel that this could be a topic where some far better number crunchers than me should come up with a post. Run some simulations and show the figures and we can know for sure if the statement is true.
I agree that buy entering it into a precise algorithm, this question could be answered with more precision. The problem is that everything is related to the behaviour of people (staking, voting) and to Hive prices. So it's a quite complex calculation :-)
For me the 20% is the greatest feature of the blockchain to date. For people who do not have time or skill to "daytrade" the mini-hive pumps and dumps, simply investing HIVE and putting HBD in savings, makes the process much simpler. Key to this is also interacting, curating, posting, engaging - but it's reassuring that in the background, there's an investment that is reliable and denominated in a stable currency.
I agree with you. HBD offers a savings account with very interesting returns to all of us. It's a kind of magnet to attract people to hive and to block hive in the form of hbd.
I think 20 percent APR is not bad. Others who want to be in this project for a long time should buy HD and come on top of this project because the curation reward is also good. The reward of author should do a bit more because people work hard day and night.
The blockchain offers many ways to make an income. Some require more work than others but the work will allow people to change category and build their fortune over time.
There are a lot of assumptions and IFs, ORs, and THANs... :)
That was one of my understandings of how it works and probably the best explanation... All the rest is just speculation, but we all like to do that the most...
You can speculate about this the other way around too... Each time that HIVE drops, people exchange HBD for HIVE to get cheap HIVE... when it goes up, they DUMP HIVE to get their "precious" HBD... And you said it right... They want to PROFIT from low prices... But, for someone, taking profits is to have more HBD, for me, taking profits is to have more HIVE... A different point of view...
When we hit the wall with HBD and lower the interest, people will come back to HIVE... until then, enjoy a low HIVE price... :)
But, in the end... The main currency here is HIVE and you will be always able to get more HIVE, for HBD, it will be different... That's why this blockchain is called HIVE and not HBD... 😃
For me HBD is just another form of Hive. Having a lot of HBD gives some stability but there is also a risk in it. If Hive really takes off, all the people owning Hive in the form of HBD will loose a lot. When this day arrives and there is a lot of HBD out there, the effect will be much stronger because when you swap your HBD back into hive, you will get much less hive. HBD is therefore a kind of leverage effect for Hive prices. The more Hive goes up, the faster it will go up because the overall supply will be reduced much faster.
I totally agree with that :-)
I remember someone saying once...
And there it goes... my today's title for the post :)
I think the 20% is beneficial and the witnesses can always change the APR later when they feel the need to. At least right now, there isn't enough volume and I am not that worried about the haircut rule.
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I think it's a nice way to attract investors, giving a high return on HBD. Even with that the amount of HBD isn't growing that much.
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Interesting post, thanks for sharing! :)
Thanks for stopping by!
You got me thinking about this one for a bit. I looked around, and HBD interest isn't included in what we consider normally the HIVE inflation. That caught my attention because I didn't remember any reorganization of the HIVE inflation categories when the introduction of the interest on HBD in savings was introduced.
So, as far as I understand it, interest on HBD is on top of the HIVE inflation you described in your post (which is slowly going down every year until it reaches a minimum).
As far as I remember, @dalz wrote about it soon after interest on HBD was increased to 20%, and the increase in the overall inflation that HBD interest brings for the time being is small. In fact, there were months when we had deflation. Conversions to or from HIVE are the ones that can move the needle in the desired direction.
I was kind of sure that these interests must be within the organic inflation. If not all my theories seem to be kind of unvalid lol.
These are two past posts from dalz that speak of different scenarios (or situations at given times):