A Critical Review Of 20% APR On Stable Coins

I've said it before stablecoins are shitcoins, the point of bitcoin for example was to get away from fiat, yet it seems most people prefer to remain in fiat and are looking to earn and remain in fiat.

A lot has been made about 20% APR on stable coins be it on HBD and UST. I've always been the type to not buy narratives and I want to know how something works, especially when it sounds too good to be true. Having reviewed UST its APR has Ponzi-like economics to it.

As for HBD, I see a lot of rhetoric but no one has really explained where the yield is coming from.

stablecoinapr.png

You're not getting 20%

Let's get one thing straight before we crack on, you're NOT getting 20%, if the amount of your holds increases by a certain unit amount, but the total amount increases by a higher percentage you're still getting devalued, just less than those that don't risk their capital.

  • Long Bond yield rate - 2.79%

If we look at the highest return in the bond market, then you're only getting a 17.21% return, still a crazy return. To put it into perspective, if pension funds could bag half that return, we would solve the pension crisis.

Note: If the 30 year/Long bond climbs to 4% that means the US current debt interest payments would be 1 trillion a year, which would make it impossible to service. So this has to be manipulated down, they have to peg down the long end of the curve.

  • CPI Inflation rate - 8.5%

If we have a look at "reported inflation rates" it sits at 8.5% but this is a manipulated figure to maintain certain tax rates, bond rates, and obligation payments by the US government. So subtracting that from your 20% means you get an 11.5% return, which is still a crazy return that most people cannot pocket regularly without taking a crazy risk.

  • CPI Inflation rate based on 1980 calculuations via shadow stats - 17%

If we calculate inflation based on the 1980 basket calculation you're sitting on 17% which means you're getting a paltry 3% return, which seems pretty realistic to me.

  • M2 Money supply rate - 20%

If we calculate inflation based on M2 money supply it's hovering around 20% so your return is zero.

So is 20% APR really a valid point to make or is it a marketing gimmick?

Illustrating in real terms

Ask any person who held stocks in the Venezuelan market or Zimbabwean market, their stocks were going to the moon, but this was driven by the devaluation of the currency.

When the Venezuelan and Zimbabwean stock markets were relatively the best performing stock markets in the world, did you see people running to invest? No, because the yield has nothing to do with productivity, but a unit of currency increase.

Now that I've established my arguments on why 20% isn't 20%, let's tackle why I don't consider the yield a yield.

Where does the yield come from?

In a traditional market, to gain an interest rate you make your capital available to a third party like a bank. They assume the liability for the deposit and go out and borrow it to someone else willing to pay them a higher interest rate to use that money.

As the old bank saying goes 3-6-3, borrow at 3%, lend at 6% and be on the golf course at 3 pm.

Now in this simple example, you have someone willing to pay 6% interest on the capital, the bank takes 3% and the depositor gets 3%. If the borrower doesn't find a way to pay it back that is this risk you're getting compensated for by the bank.

If the borrower does pay back the loan, everyone is happy and they've created something with that capital, be it a business or a home.

How stablecoins are gaining interest

In the shitcoin market, most of the borrowing is done by exchanges, they gobble up the depositor's liquidity to either market make on their platforms or to borrow to traders to use as leverage.

The fees earned, the spreads earned, or the liquidations earned are then gathered and a portion of the fees are paid back to those depositors.

This makes up the majority of the fees, while another use case is people locking up their stablecoins to borrow against it to use that value to take a position now and lock in a price, then pay off the principle over time.

While others would lock their digital assets into an over collateralised account, and borrow stablecoins at an interest rate.

So there are multiple use cases for the stablecoins, earning fees and creating a revenue stream that can pay the interest payments.

Where does HBD interest come from?

Now for someone to receive an interest rate payment, another person has to be paying an interest payment. I see many people talking about getting a return, but no one is talking about borrowing and paying the return so half of the system is missing.

The way I understand it is HBD remains a 10% rate of the HIVE supply, so as the HIVE market cap grows, it allows for the HBD market cap to grow in relation, this could be through created coins from posting or this interest rate.

If more people lock up their HBD that also means less HIVE, meaning there needs to be a rebalancing. The more people locking up HBD the less HIVE, the less HIVE, the lower the available supply.

The lower the available supply the higher the market cap, giving you more breathing room to mint HBD interest payments.

Possible offsetting forces are too small

The only income stream I see is the 5% fee to convert HIVE into HBD, but will that be enough to offset the interest payments? I am not so sure, it doesn't seem like a popular method to acquire HBD when there is fee-free HBD you can purchase on internal or smaller fees on external markets.

Sustainable in small doses

This operation is not sustainable, EVERY market reaches a maturation point and the moment it does, and people want to start realizing their return, it puts pressure on the market cap to sustain the selling and can easily unravel.

This can manifest in a breaking of the peg or a massive price suppression of the backing asset in this case HIVE, as people are price intensive and want to sell to realize that value.

While this system may be an option to a point, it is not a risk-free rate, the risk is just pushed out further into the future and the longer it does, the bigger the risk becomes.

Unless it's moved to a traditional model where someone is on the other side of the trade paying the interest rate by doing something with that working capital that generates a return that allows them to cover the interest payments.

Opinions welcome

I am open to explanations, and I think more people should be asking questions when they put their money on the line. When I see a certain amount of bandwagoning and group think usually leaves me feeling uncomfortable, especially when there isn't a solid explanation backing up the story.

So let's hash this one out! Brave commentators are welcome, feel free to attack my arguments.

Have your say

What do you good people of HIVE think?

So have at it my Jessies! If you don't have something to comment, "I am a Jessie."

Let's connect

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(Edited)

I have nothing but doubts about everything right now... I don't think any of it really exists, especially in terms of relative value (to what?). Bitcoin, for example, seems to be irreconcilably tied to the markets it claims to counter-- if everything goes to zero, BTC follows.

I guess I'm not adding any value to this discussion, but maybe it was worth thinking out loud. Thanks for trying to spark something... I'd like to hear more. 🤔

!LUV
!PIZZA
!HBIT

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Me too, I found this post here explaining it, and from what I gather it's like an accounting trick, getting people to move the same value between two assets in a circle jerk.

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Whoa! That's a heavy read... and it gets a bit convoluted when slipping in things like the subtracted treasury funds. I'm not quite sure how to make heads or tails of it.

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I really think the hbd is really getting a lot of attention regarding the 20% interest but I believe if hive should be in the same scenario the impact will be worth something more.

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Attention yes, cheerleading yes, critical debate very little if any, I haven't seen many posts really looking into it

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I didn't really look into it too much but this post by dalz kind of went into the details. I think at least the math checks out and it makes sense in my own head. From a view, I think it's trying to look at the view of turning HBD into Hive and how it will affect Hive.

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Thanks I read that one and the technical one, I linked in the comments, what I don't get is where the value is coming from. As I understand it, you have a market cap with 2 assets and a ratio that needs to be maintained within the given market cap

So people are switching the same value between 2 "assets" but no value is being created, it just seems like an accounting trick rather than creating an actual bridge between someone wanting to borrow or lend an asset

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I guess it ultimately boils down to a question of what the real "time value of money" is.

All these great yields are expressed in unit terms, so if you have 20% more units at the end of the year, but the base asset declined 20% in value per unit you actually have a negative return.

A 20% ROI is rarely a thing, except with extremely high risk to your principal. The whole "Yeah but this is DIFFERENT, because it's CRYPTO!" argument only goes so far... it's not that different.

=^..^=

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I understand that argument, if im offering you 20% APR but my inflation is growing 100% a year, in the end, its just numbers, you're getting 20% of the units not accounting for the expansion.

You have a point there, lol because crypto math doesn't apply, I've seen that argument a lot that code trumps economics and im like that doesn't make any sense. Between all the cheerleading you don't get much solid arguments here, so im yet to be convinced

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"Crypto math." I like that... I may simply be too old fashioned in my thinking, but I hear some of the explanations and reasoning and the term "vaporware" keeps dancing through my head.

Seems like in so many cases, crypto/blockchain projects come across mostly as "a solution in search of a problem."

=^..^=

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I share your sentiments, a lot of it is we made it because we can LOl

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While not what I want to hear, I certainly value a realistic perspective over fluffy bullshit that sounds nice.

My money goal with Hive has been to build a large enough stake that I could someday hope to use it as a sweep account. Hopefully Hive can weather any storms that come - also because I really enjoy building a history here.

Cheers mate, awesome work!

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Lol I never tell people what they want to hear, bad habit of mine I suppose, I mean if we don't review things and just go along with hype, you only end up with risks you don't understand.

I am not here to shit on people's work, I am just saying there is no free lunch and if you still feel its worth it by all means, as long as people understand where the pitfalls are, no one has a perpetual money machine, lol may be the central banks do, but only in units, not in purchasing power

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[…] if we don't review things and just go along with hype, you only end up with risks you don't understand.

Well said, my dude, I couldn’t agree more!

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HBD Interest paid by Hive holders.

I have made a post about "how 200%+ inflation are possible" with 7$ hive to 0,2$ hive.

That was only in theory. But to be honest 50% would damage a lot too.

Printing HBD means shorting hive.

That's something nobody wants to hear. Printing a Billion HBD can be short-term perfect for the price.

Or 10 Billion or whatever stablecoin.

But at the end, its a reliability to the network.

Default ( going to 0) or devalue the coin.

That will be always the song.

The current market is a bullshit ponzi market. Printing $ out of thin air and trading with the same people.

No more real fiat comes into the game.

that is the bottle neck and will crush this bullrun.

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I get that you can recycle between tokens and make any APR for a certain period to get capital to flow from the one to the other and just slosh the capital, basically like a wash trade and then scalping the arbs and maybe that 5% minting fee to a certain point

The way I see it is to get people to lock their HIVE up to decrease supply do some accounting tricks as not enough new fiat is hitting the market to absorb the increasing supply so make your own fiat out of nowhere and encourage people to "purchase that fiat" with locked up hive.

It's a great point you make about shorting HIVE I didn't think of it that way.

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every HBD created is "no extra demand purchase".

And you get an exponential MC curve with falling prices in Hive.

Convert HBD to Hive on falling price = increase MC of Hive = allow more HBD to be in existence.

So if hive hits a lower price, it's like a short option, because you don't need to buy, you simply can create it.

Doesn't matter how deep the market is.

And the best, no extra demand. This transaction creates more hive and doesn't remove hive from the market in terms of a buyer purchase.

IMO a timebomb. I remember the 20% + Inflation times on steem because of SBD.

Same on larger scale we will see in bear too here IMO.

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It's foolish to think that crypto couldn't make a better and even more stable coin than fiat while still allowing users to make massive gains. DEFI has already shown us how this is possible by offering yields. That being said, yes, stable-coins pegged to dollars in a bank are absolute shit and the opposite of what we should be striving for. It's an awkward transition period. Fiat still has something to offer. Not for long though.

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Stablecoins are the hot girl pin up these days, it's basically the eurodollar system but for retail so I get the reason and the demand for it, and that all stablecoins have their own issues be it backed or algo, but I think people are so focused on trying to make an old medium of exchange work for more than what it is, its a point of sale settlement medium. You spend stablecoins you don't invest with it, you secure positions in it, in the end, its subject to the underlying inflation it represents so it's not worth investing in the "stability" comes at a cost, of purchasing power losses.

I've yet to be convinced of DEFI, liquidity pools make sense, but flash loans just so you can trade up or lock into another pool constantly rehypothecation is just CDOs and CDS markets on a blockchain

For me its all just a need to find a unit of measurement that can be trusted, which I think will be the satoshi, its' been my stablecoin and I don't need to worry about 3rd party issues or a peg breaking 1 sat is 1 sat.

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One Satoshi is one Satoshi however that 30,000 Satoshi starts to add up especially if you're just trying to buy something with one Satoshi...

I see the next frontier really being anti-fee erosion.

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Let's get one thing straight before we crack on, you're NOT getting 20%,

This is 100% false, because everyone measures their gains in USD. USD is the unit-of-account that everything is measured by. No one calculates their stock going up by trying to estimate how much value it is minus fiat devaluation. That's just not how it works. Warren buffet makes 20% gains every year... in USD... not some other unit.

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(Edited)

Yes, its false in terms of narrative, that's true. However in math it's not, that's why people talk about nominal returns and real returns,

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Mmm, tough one to reason about, I don’t think 20 % is sustainable in the long run, but for the next year or so, I don’t see any issues, as it is a debt to Hive with a cap. And sometimes you have to profit from these kind of opportunities…

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Indeed, I looked at other posts and the math they put forward and it seems like they can pull it off for a while as long as people don't flock in to capture the premium. ill be watching the ratios with interest , just with the knowledge it can turn ugly

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I have no idea what's going on however I do like interest and 17 20%, whatever it doesn't really matter...

I'm doing so awesome as it is.

I'm just actually really happy to be financially in position to put my hbd in to savings and watch it grow.

I'm not exactly sure what's going to happen however while this large interest rate is around I'm going to enjoy it as best I can

I guess my only real thought could be isn't that the reason why we have Hive and hbd so that we have a stable coin as well as stock in our ecosystem?

Anyway thank you very much for your post today I really appreciate it!

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I'm not saying people shouldn't go pocket the premium just that it's a rare situation that can only work for a short period under some unique circumstances everyone's allowed to do with their money as they like but there no magic money maker

Comparing it to other interest options isn’t a straight comparison and people should know what they getting into before they just jump in I saw a lot of people saying oh it’s risk free it’s safe since it’s on chain and I thought that was misleading

From what was explained to me it’s more of a function of the chain trying to keep a certain ratio rather than people borrowing and lending

It’s more rebalancing of value than a real capital market

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I totally signed up here thinking I was going to get rich and we're all going to drive Italian sports cars..

What happened to the Lamborghinis for all movement.

Oh Lord won't you buy me a Mercedes bench my friends all drive Porsche I must make amends work hard all my life.... No way actually that isn't a very good quote I guess because I actually got this investment because of all you being my friend and supporting me...

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This is definitely an interesting perspective. First instinct was being quite sceptical, but seeing the amount of cheerleading, I was almost drown in to the hype. I welcome this post!

!1UP

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Thanks, just wanted to provide a view that others can go and research from and understand that there's risk in every trade and how to consider time value of money

You're always taking risk it's just about finding out where that risk is sitting and how do you account for it before putting your money anywhere

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Well, of course it's not risk free. What is? HBD is paying less interest than many credit cards charge so from that perspective it doesn't seem crazy. I doubt 20% is sustainable forever but I don't know that anyone said it was. It can always be adjusted downward at a later date if this rate starts to cause issues.

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Yes credit card debt repayments is high because someone is taking the risk to offer capital for an unsecured loan! It’s to compensate for all those who don’t pay back their credit cards so while you who borrows pays high

The one holding the contract on that debt returns a much lower rate once you factor in the defaults

Changing the % just means you lose your liquidity to someone else who will offer better rates that’s the entire point of offering a higher rate you want the liquidity

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Dear @chekohler , I like your this article!
I was curious about how cryptocurrencies, including Bitcoin, make money. I understood that your article was explaining how and system of cryptocurrencies earn money through interest.

However, With my current English speaking skills and experience, it is difficult to 100% understand your arguments.
In the world I live in, there are no experts, ideas and systems that can understand Bitcoin and cryptocurrency, so your arguments are difficult for me to understand. So, I felt the need to gain experience while purchasing Bitcoin myself!

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Don't feel like you need to understand everything from day 1, it will come with time, take your time, it took me 5 years to learn all I know now, and I am still learning. Trying to rush in, is what gets people hurt, you're still early

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Great article, although the 20% interest payments don't come from hive conversion fees, but are paid from all Hive holders through inflation/devaluation.

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