Hive Backed Dollar Rate Hard Coded Into The Blockchain

We all watched what happened with Silicon Valley Bank (SVB) and other smaller banks. While we hope the carnage is done, it is likely to continue. The liquidity crisis before us is still in tact and the Fed appears to be intent on raising interest rates even further.

Over the last 18 months, we discussed ways to build an alternate financial system tied to Hive. Much of this has the Hive Backed Dollar (HBD) as one of the main features. Utilizing the base layer stablecoin means we can establish a financial network that operates outside the control of any individual or group.

This is a powerful starting place. With recent events in the banking system, how can we prevent a similar situation from arising>?

Before answering that, let us look at what happened. We can use SVB as an example.

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The Value of Bonds

SVB made some mistakes. There is no doubt those in charge of the bank bought securities based upon yield with little thought to their liquidity needs. Using deposits to buy bonds means that consideration is required as to when those deposits will be needed. Naturally this wouldn't hold up during a bank run but it might have counteracted it somewhat.

The basic issue was the collapse in the value of the bonds. When the Fed moved off its zero interest rate policy (ZIRP), it send the value of older bonds plummeting. The historic increase, at least in terms of pace, killed the long end of the yield curve. Inversion took place in March of 2022 and only continued to get worse.

This meant that SVB was rich in assets, with billions in bonds. However, it could not access the liquidity due to the fact the bonds were useless as collateral. Even when the bank tried to fire sale them, it was too late. The ability to raise the necessary capital when bonds were worth 40 cents on the dollar made things near impossible.

We are confronted with a situation of how to we ensure that the value of an asset doesn't plummet on the market due to interest rate changes?

Code Is Law

One of the main tenets of cryptocurrency is code is law. Do not leave things to human chance. Get it programmed into the blockchain and let the circumstances take control.

We covered Hive bonds on a number of occasions. The idea is to create a token based upon HBD that is locked up. Preferably, this would be tied to some type of time vault where one is making the commitment to lick the HBD in for a period of time. We will say a year.

This asset is similar to any other bond. On a second layer, the bonds can be traded on a DEX providing market liquidity. It can also be used as collateral for loans. This is the true value of Hive bonds. Since it is tied to a transparent financial transaction, all the characteristics are available for all to see. This includes amount in the transactions, date, and APR. Hence, anyone knows the maturity date and return.

At the moment, the rate on Hive savings is set by the witnesses. This is adjustable by them. This is no different than the central banks being able to change interest rates. It certainly goes against code is law.

What is the witnesses decided to rapidly move interest rates. This could cause problems with the value of the bonds. Price stability is an important component in the financial world. Certainly asset thrive on volatility and is desired. This, however, has to be countered with those that can be used other purposes and provide a hedge. Here is where stability is vital.

For this reason, the APR on the HBD that is locked up tied to Hive bonds should be written into the blockchain.

This means the stability is provided due to the code dictating how things will be. It makes the most sense that this would be tied to the time vault.

Monetary Elasticity

What is so powerful about HBD is there are a number of ways elasticity is created. On the surface, the idea of licking the interest rate into the blockchain will put people off. If this was the only way to influence the amount of HBD, then that view would make sense.

That said, when we look at the factors involved, we see this is not as crazy as it seems.

To start, we already adhere to code is law to a degree. The haircut rule is programmed into the chain. When the ratio of HBD versus $HIVE in market cap gets out of whack, an adjustment is made. The system ceases to create HBD and pays out in liquid $HIVE. This remains in place until the ratio gets below the limit.

Another factor is the conversion mechanism. Here is where the inflation or deflation of HBD is really felt. We already saw the impact of this over the last couple years. Due to market activity, there were a number of times where $HIVE went deflationary for the month (or even a year) due to the conversion to HBD. The reverse also is true. We can see how HBD can be dried up if conversions are creating more $HIVE.

The final piece comes from the hard fork. We have periodic upgrades to the base code. The APR on the time vault could be adjusted in later hard forks if desires. This would have the same impact as what the Fed did, albeit at a much slower pace.

Fixing Banking

Overcoming the issues with the existing financial system means taking steps it is unwilling to approach. Price stability is often talked about (and is vital) for many aspects of banking. It is also crucial for commerce and even a major portion of finance.

Yet, while this is a goal that is discussed, it is rarely achieved. Certainly, in relation to goods and services prices will always move around. This is the nature of the business cycle. This does take on a different meaning when it comes to the digital world, which is near limitless. That said, when it comes to collateral, this is something the blockchain can solve.

By constructing Hive bonds based upon a fixed APR that is hard coded into the blockchain, the ability to create high quality collateral jumped to another level. While markets can set whatever prices they want, the removal of interest rate adjustments from the equation is a big one.

From this point, we can then expand into the rest of banking and financial services, but do it with an asset that is stable.

While the HBD is savings could keep moving around, based upon the decisions of the witnesses, Hive would offer collateral that removed that from the equation.

After all, when code is law, the human element is minimized.

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