Hive Advantage: 20% APR Without Counterparty Risk
This is the second part in a continuing series about what makes Hive stand out as compared all that is out there.
Here is the first part.
In this article we will discuss one of the most important topics in the world of finance, counterparty risk. Few consider this yet Hive has the opportunity to offer a wide array of financial features while reducing this radioactive bomb.
So let us embark upon this and see how Hive provides a better solution.
image by @doze
It is best to examine what this is and how Hive makes this much safer.
Counterparty risk is best thought as the entity one entrusts to get paid. For example, when we put our money in the bank, we trust the bank will be there when business next opens. This means when we go to withdraw our funds, we will have access to them.
Under this scenario, the financial viability of the bank is important. Very few consider this these days since many governments in the developed world provide some type of protection. In the United States, the Bank Act of 1933 introduced the Federal Deposit Insurance Corp (FDIC). This means that deposits up to a certain level are insured should the bank fail. At the moment, that is set at $250K.
There is a similar situation with brokerage accounts. Investors and traders are protected against a brokerage firm going under and taking all ones assets with it. Again, this is part of the protection mechanisms governments put in place.
We also have this with the currency itself. Who is issuing it is very important. A government's ability to operate, in this era of deficits, is tied to its ability to sell bonds. The physical currency, banknotes, is dependent upon the managing of the balance sheet by the central banks. Finally, the overall currency is related to the viability of the commercial banking system to manage its loan portfolio (the expansion and contraction of the money supply) in a way that encourages not only lending, but the repayment of said loans.
The reason for this is the concept of a liability. Basically, it is essential that an entity be able to make good on that. Going back to the deposits, individuals and business know the repayment will be made, i,e the ability to withdraw, when the time presents itself.
Obviously, this is not something that happened in cryptocurrency.
The Blockchain As Counterparty Risk
We see how the world of decentralized finance (DeFi) was misleading. Ultimately, it was highly centralized, exposing people to enormous counterparty risk.
With most DeFi applications, one takes a coin or token and deposits it to the platform. This is the moment where the risk enters the picture. Whether it was Celsius, BlockFi, FTX, or a host of other companies, when dealing with a centralized entity, they are the ones who require trust. This is especially true in cryptocurrency where there are no protections in place.
The key here is that even though a coin is tied to a blockchain such as Bitcoin, the entity it is deposited on is not. Now we are adding a second level of risk to the equation. Even though Bitcoin is decentralized with miners all over the world, and it is almost guaranteed to keep operating for decades, the company entrusted with the coins through the farming process is not.
This goes back to the idea of the financial viability and practices of the entity itself. As FTX showed, there is much we often are not aware of.
It is easy to see how this can cause massive loss.
With Hive, the only counterparty risk is the blockchain itself. Through the savings of HBD, we have the ability to yield farm without the need for a centralized entity. One sill retains full control over the coins when moving it into savings. This is a major difference between Hive and most of the other projects out there.
Hive is offering a very interesting option to the cryptocurrency industry. It is here where we see the potential to create an expansive base layer, fixed income market which, by default, adheres to the not your keys, not your crypto. The only way to access the Hive savings is by using one's private key. Nobody else has access or control over the money.
When we couple this with the Hive account management system which provides true account ownership, we see how powerful this combination is. There is no way to for a rug pull or a lack of financial viability to sabotage the return. Hive's balance sheet doesn't matter (it also doesn't exist).
New Financial System
The new financial system is DeFi. What we saw created so far is really nothing more than an offshoot of the existing financial system. Hive is operating differently by ensuring the node system underneath is not controlled by any entity.
When the blockchain is the only counterparty risk, we are dealing with something that is radically different than what we are accustomed to. In the wake of events this year, it is something that should be on the mind of all.
Hive already has this solved. While the offerings at the base layer are rather limited, the opportunities with HBD and Hive Power are both coded into the blockchain. There are no terms of service to adhere to or company executives that are making decisions that could affect the safety of the assets on the platform.
People do not value safety until it is lost. Hive is the safest form of yield farming there is in cryptocurrency simply because there is no counterparty risk other than the blockchain.
Since we are dealing with an entity that is decentralized, we can see how it is impossible to bilk one's funds.
This is not happening with most other blockchains.
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