UST: Just Another Centralized Stablecoin

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It appears that UST is no different than any of the other stablecoins that are out there. While it is true that it is driven by an algorithm as opposed to simply being dollar backed, we are not getting news that things are changing.

For this reason, it appears that the Hive Backed Dollar (HBD) is still the only one when it comes to creating a stablecoin outside the reach of governments.

Of course, the rapid ascension of UST caught the attention of everyone. Many covered the fact that UST is backed by LUNA. There is the relationship between the two tokens, similar to how HBD and HIVE operate.

However, that is where it ends. Ultimately, this is just another form of the sale ole thing.

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Terraform Labs Backing UST

It appears the idea is to back UST with Bitcoin. While this might look like a positive step on the surface, one that many within cryptocurrency applaud, it shows how many do not truly understand what is taking place.

To start, there is nothing wrong with backing an asset with Bitcoin. That is a sound approach. Collateralization is a powerful mechanism. Therefore, the value of the Bitcoin is always being put to use, even if it is not leveraged.

However, when it comes to producing a stablecoin that is not able to be controlled by governments or their regulators, then we have a situation where UST is falling way short.

On March 14, Do Kwon, the founder of Terraform Labs, announced UST was going to be backed by a $10 billion reserve of bitcoin (BTC). Terraform Labs created the Terra protocol that issues the stablecoin terraUSD (UST) and luna (LUNA), the latter of which algorithmically backs the former.

Do you notice the problem with the cited paragraph? The term "Terraform Labs" is a point of vulnerability. Here is a target governments can go after.

There is certainly nothing wrong with UST being centralized in this manner. Some seem to think that decentralized is the only thing that is worthy. That is not realistic. We are always going to have reasons to centralize things. The issue arises when it is the only game in town.

When we dig deeper, we see this:

The Luna Foundation Guard (LFG) was set up in January. LFG is a nonprofit organization with a mission focused on promoting a “truly decentralized economy.” Its primary focus is Terra and providing a reserve backstop in case the UST/LUNA incentive mechanism fails.

So why would the incentive mechanism fail? Isn't that what incentive mechanisms are for, to motivate people into particular action? If it is to fail, that means it was poorly designed.

Fully Regulated

It appears this move is being done to avoid the need to audit. One of the biggest problems with the typical stablecoin is that nobody truly knows what is backing it. While Circle can claim to have $1 worth of backing for each new token created, how do we know? Without an audit, we cannot be sure.

In fact, many surmise that Tether is really lacking. This could present a challenge when it is finally audited. It is something the regulators are itching to do. They want stablecoins under their domain. That means companies backing these will have to come under the banking laws.

Terraform Labs is going to face the same outcome. The fact that they are collateralizing the token using Bitcoin, which is transparent, does not really matter to the regulators. They will sweep them up also.

This should appeal to anyone who pays attention to crypto. The main criticism of collateralized stablecoins is that their need for “attestations” (not quite the same thing as audits) by accountants cut against the ethos of crypto. “Don’t trust, verify” pulses through the veins of lovers of decentralization, and just taking what Circle or Tether tells us about their backing at face value seems wrong.

If successful, UST could become a dollar stablecoin backed by a completely auditable, transparent and decentralized digital asset. That’s a big deal. You won’t need to trust Do Kwon that the collateral is there, nor an accounting firm that will qualify its assurances with weasel words. You’ll be able to see for yourself on the blockchain.

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Wasn't this the point of backing UST with LUNA? Isn't that fully transparent?

Hive Backed Dollar (HBD)

We are seeing more of the same thing. The further we process along this part, HBD starts to stand out.

This is a coin that has full transparency. The blockchain tells us both how much HBD is in circulation along with how much Hive is available. We can look at the market caps of each to know exactly what the backing in. Finally, the haircut rule is coded into the blockchain, something that anyone with the technical expertise can look at.

Nothing is hidden.

Hive is also run by 20 consensus nodes along with 100 back up that process blocks on a rotation basis. This provides the decentralization in the sense nobody, either individual or entity, is in control of the network.

There is also no company, foundation, or laboratory behind any of this. Community members are responsible for the development and operation of the network. This is funded through a DAO which allocates payments for this work.

Each HBD is backed by $1 worth of HIVE. There is the collateralization mechanism in plain view. The HIVE is not held by a company but depends upon the free market. Whatever the pricing by market forces determines how much HIVE is backing each HBD. Yet it always converts to $1 worth.

Great pains are undertaken to ensure the mechanism does not fail. The haircut rule is one factor that provides confidence in the backing. If it does fall out of alignment, the blockchain stops producing HBD until the ratio drops and each one is then backed by a dollar worth of HIVE.

Once again, the more we travel around the stablecoin universe, we see the enormous potential of HBD. The characteristics of this coin are far superior to what else is out there. It should not be overlooked what an algorithmically driven stablecoin that is on a decentralized network can provide.

Down the road, the world is going to realize the value of this. For now, we just need to keep developing the use cases for it and generating more so that liquidity is available.

This is going to be an enormous driver in terms of the value of Hive.


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41 comments
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Excellent article once again.

And I see it the same way you are with our ecosystem having some incredible tools and opportunities for all of us.

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It is just a matter of developing them and expanding the reach. Right now, Hive has some limitations. Fortunately, some of them are being addressed.

We will see how things look in the second half of the year.

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Again I have to concur with your analysis.

However we might be able to get all this fixed and then we can really do quite a bit more.

Love your content thank you very much for your continued posting.

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However we might be able to get all this fixed and then we can really do quite a bit more.

Agreed. It all builds upon itself. The more we get straightened out, themore we can build on top of it.

That will lead to even greater growth.

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Thanks for a very interesting post

!1UP

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(Edited)

I was thinking I needed to do a deep dive on terra/luna...
but when I found out they were talking about using Bitcoin as collateral,
it became obvious that it was all complete bullshit.

There is no way to incorporate Bitcoin in a decentralized manner that makes any sense whatsoever.
All HBD is missing is liquidity; we are in a good spot.
Especially considering AMM provides near-infinite liquidity.

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Well actually the problem with HBD is not enough tokens out there. Hard to have liquidity when it doesnt exist. Even an AMM would have difficulty without the tokens to begin with. We need to see a major expansion of that.

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An AMM creates the liquidity instantly by exponentially accelerating demand for the HBD token, pushing the price past $1.05 and making Hive >> HBD conversions worth it. In fact, we have already seen what happens here: demand gets so high that price of HBD goes up to around $1.25 and whales and liquidity providers like Blocktrades bots will aggressively convert Hive into HBD to cash in on that free money.

Then all that HBD that got created goes into the AMM, creating permanent liquidity.

This is actually like really frustrating at this point because whales and other prominent individuals on Hive keep talking about how 12% interest rates on the savings accounts are awesome... and how we should implement bonding. But adding yield to savings accounts and bonds time-locks HBD and makes it even more illiquid. I truly do not understand the logic here.

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The 1.05 threshold isn't set in stone. It was done that way at first to provide a wide safety margin on a new feature and recognizing that HBD was so prone to pumps that even 1.05 would be a huge improvement. The longer HBD stays much closer than $1.05 and the more confidence we have in the mechanism the more likely it is we can tighten the band.

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Sure, the 5% gap is a little high, but my real concern is instant gratification and user experience as it pertains to acquiring large sums of HBD within seconds of pulling the trigger. If things keep going how they are going, orderbooks are not going to be a valid way to do business in 5-10 years. I'd prefer to get ahead of the curve on that front.

I'd actually be very interested to hear your thoughts on the 3.5 day moving average.
Realistically what's the shortest moving average that could be used?
I assume the answer to how much we can shorten it is: "not much".

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(Edited)

I think for the purpose that the current operations exist, they don't need to be shortened, and it wouldn't be a good idea to shorten them much. They're not well designed to be used for instant liquidity. That should be addressed other ways.

The issue with the 5% fee is requiring the peg to break in order to increase supply. Making it tighter would improve that. Also, we don't see it now because there is little enough demand that the printing for post rewards mostly satisfies it, but $1-$1.05 peg would tend to float in the middle, not right at $1. So we'd tend to see overvalued HBD a lot, were it not for all the post rewards being dumped.

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Thank you once again for such an interesting post, I am learning a lot from you, for me the whole topic of cryptocurrencies is new, however, I can understand the concepts and please correct me, what I see is that simply what the governments that they are against, of the blockchain and cryptocurrencies, it is to seek to have control or not lose what they have, it seems absurd to me that they want to sabotage a structure that by itself already has everything it needs to operate transparently, effectively, there is no monopoly here Thank you!

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Politicians and bureaucrats always want more power. That is how they are wired and resist any threat to it.

So do corporations by the way.

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This really does have the potential to be one of the most important tokens in all of crypto. It's got a loooong way to go, obviously, but it's also being grown organically. We have to consider that it's only been around for 2 years. There is still a lot of work to be done, but that's true with the entire blockchain. The key is that this work is being done. Every day more and more development is happening on the HIVE blockchain.

I don't know when it will really start being noticed, but as I've said before, I no longer believe it's if it happens, but when. The future continues to get brighter and brighter.

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HBD has a lot going for it and a lot of challenges. Yet, the issues can be worked through. We are seeing some steps taken to move it in the direction where it is going to carry some weight.

It might take another year to full get things to where it is ready for prime time.

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Thank you for sharing great article with us, because I always learnt new things from you anytime you shared a post.

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This is one of the reasons why I feel like HBD would soon overtake the BUSD and UST. Among the race of the stablecoins which are decentralized. I feel HBD has made it's mark. I just hope that more and more exchanges and the commercial places start to accept HBD. :)

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This is one of the reasons why I feel like HBD would soon overtake the BUSD and UST.

I would love soon to be in the cards but I think it is a long way off. Still a lot to do for us to get there.

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HBD has been pretty stable these last few months, I'm betting on it! although I think centralized stablecoins are not going anywhere soon although they are drivers in the market for more investors to become aware of alternatives.

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Correct. The centralized ones will not be going anywhere. They are going to be around and regulated which will make it more expensive for those companies to operate and give up a great deal of conttrol.

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Thank you for the excellent article. This is new territory and we need to keep up with the news

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Interesting perspective. This is why HBD is still my most preferred choice of stable coin even though it presently has its issues which are mostly temporal. Transparency over trust for me

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Adding a little HBD every day will one day add up to something really worthwhile. Low risk has to be desirable for investors and we only need millions more.

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I agree HBD is great and I am adding it to my portfolio. However, it can still be attacked by governments. It only needs to shut down the Hive websites and the Hive mechanism could be badly disrupted.. no more blogs or curation etc..
Is there any defence for this?

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I agree and Terraform Labs is also backed by VCs. So at some point in time, I expect the VCs to take profits and it won't be nice for the people there.

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I also keep asking why does Hive love UST so much?

They really don't tick any of the boxes required to be a truly decentralised, algorithmic stablecoin.

As bastions of decentralisation here on Hive, we shouldn't be as lovey-dovey toward the project as we are.

If Hive ever gets its act together and sorts out HBD's supply and liquidity problems which we keep preaching, then there is really no competition.

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Interesting interesting, I quite like Luna ecosystem too so HBD & UST comparison was useful to me

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I was liking LUNA & UST. Now they've become a joke trying to "fix" something that isn't even broken. It generally makes me pissed at how the whole planet is unaware of Hive & everythin that's built here.

I still don't get why LUNA needs to depend on a completely different crypto that has barely had any tech upgrade over time. BTC is basically a mere brand name. You might even call BTC a type of NFT. As a currency it has no value. We might see a flippening in few years by ETH or something else too.

LUNA should have just focused on tech & incentives. At least we should scream to the world how better Hive is doing these things & we've been around since 2016!
!LUV !PIZZA

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However, that is where it ends. Ultimately, this is just another form of the sale ole thing.

Did you mean "same old thing"?

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I was at the CTTalk when you elaborated on the potentials of the HBD. Truly we are doing something unique with the stablecoin and there is the potential upsides of it being highly sorted after given its alogrithimic nature (unlike what's obtainable with other stablecoin). These are not the sort of conversations we were having some years ago. I guess the elephant in the room for me would be marketing HBD before another project steals it's shine. Can we experiment more with marketing models. I know you've talked about working under the radar but for how long?

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About HBD ... I believe that this coin is important because in the future it will become a useful currency for shopping or for various purchases to live

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