HBD: A Safe Form Of Money With Little Counterparty Risk

in #hive-1679222 years ago

Few take the time to consider the liability tied to money. When most engage in a financial transaction, they rarely think about the vulnerability related to the counterparty. Instead, they simply go ahead with the transaction presuming everything is golden.

Cryptocurrency is teaching some a lesson. Sadly, most seem to be missing it, that is why it is not everyone being taught. This is something that is imperative going forward. It is also why we can be sure that the Hive Backed Dollar (HBD) stands out.

Double entry accounting tells us that for every asset there must be a liability. Hence, regardless of the transaction, if we have an asset on our balance sheet, there has to be a liability somewhere else. This is the case with money.

Here is where we define the risk associated with everything we do. Those who fail to do this are realizing how vulnerable they truly are. Counterparty risk is a term that most should familiarize themselves with.

In this article we will go through the different levels of risk associated with money. We will also indulge in the world of cryptocurrency to see where so many are going wrong.

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The Baseline

US Treasuries are considered the safest form of investment there is. This is often used as the baseline for all financial risk models. Bonds such as the 10 year Treasury are the "gold standard" when it comes to this type of analysis.

Why are US Treasuries set as risk-free? This boils down to the ability to repay. There never was a default on any Treasury securities. When looking at the banking and financial arena, confidence is the entire story.

As we discussed, US Treasuries are the only form of high quality and pristine collateral in the wholesale banking system. For this reason, the debt always gets sold. Here is another reason why these models use these assets as the baseline. The demand means that no matter how much spending the US Government does, the securities are purchased.

Thus, anyone who buys a US Treasury is in the safest asset there is.

How does this compare to just putting money in the bank?

To answer this question, we have to look at how solvent the bank truly is. By delving into the balance sheet, we can determine if our bank will fail or not. If the numbers are bad, obviously our money is at risk.

In this developed world, this is not the case. Before the Great Depression, in the United States, it certainly was true. However, the Bank Act of 1933 introduced the FDIC to the world. This provides insurance on deposits in American banks up to the amount of $250K.

Hence, is someone puts money in a saving account, the counterparty risk is near zero up to that limit. After that, the deposit is at risk if the bank should fail.

This is obviously not as strong as a Treasury but is almost risk free.

One thing to keep in mind, when you make a deposit to a bank, that is an asset on your balance sheet. It shows up as cash (or cash equivalent) to you. The flip side is the liability the bank now has. Since it is expected that you will want your money back, the bank can presume it owes you whatever is on deposit.

Again, all in line with double entry accounting.

Investment Protection

When investing, how much counterparty risk are we assuming? This is something that is imperative.

Few look at the balance sheet of their brokerage company before deciding to put their money there to trade or invest. The reason for this is because similar protections exist as with the banks. A brokerage account is covered up to a few million before that money is at risk. Hence, when we put $100K with a JP Morgan, we know our money is safe from counterparty exposure. If the investment fails, the account is preserved.

Obviously, many thought this was the case with cryptocurrency. Unfortunately, they are finding out that exchanges in this realm are not the same. Whereas one can go to JP Morgan, even in times of financial stress, and withdraw his or her money, this is not the case with cryptocurrency. People are learning throughout 2022, these liabilities are considered the same as any other. There is no special protection.

What this means is these individuals have to enter the bankruptcy case like any other creditor. It requires getting in line to access the money based upon the rulings of the court. At best, this is going to be a time consuming process; at worst, there will be major losses.

The risk of the investment itself, say buying Bitcoin, is not the only consideration. Instead we also have to consider the risk associated with the solvency (or liquidity) of the entity we are dealing with. Celsius, Mt Gox, and FTX are all lessons in this.

Sadly, it seems like few consider the counterparty risk before making a move.

Hive Backed Dollar

The stablecoin world is also questioning this. We witnessed the implosion of UST as LUNA failed. While many are turned off by algorithmic stablecoins, believing they are inherently risky, the reality is the counterparty risk was there all along.

Many posed the same question about Tether, which is not an algo coin but rather asset backed. Yet, we are dependent upon the word of the company that each token is backed by what they say. There are serious questions with transparency. Circle is in the same situation.

Of course, regulators claim this is why oversight is needed. Circle is taking steps to become compliant. However, as we saw with Enron, accounting scandals do happen. The banks have "cooked the books" for decades, paying fines each time they get caught.

HBD offers a different solution. When we look at the liability that is tied to the asset sitting in your wallet, we see how the measures take reduce the risk associated with holding that coin.

To start, this is a base layer coin. By staking it through the saving account, the counterparty in this instance is the blockchain itself. Hence, the only way it can implode is if the blockchain stops running. As long as someone a node going, the software will be in operation, allowing access to the money.

There is also the Internal Exchange. Here we can trade HBD for $HIVE. Again, this limits the risk to the blockchain only. There is no company or entity that has control over all the accounts. Nobody can come in and shut down the entire exchange or stop trading. As long as people are putting up in orders, the exchange keeps trading.

HBD also have full transparency.

This coin is backed by $1.00 worth of HIVE. Unlike USDC or Tether, there is no USD (or equivalents) backing the coin. Instead, it is fully backed by $HIVE. As long as the haircut rule is avoided, the blockchain can guarantee this conversion.

It is something that anyone can look up. In fact, this site provides a real time reading of where the asset backing stands.

If the value, in USD, of $HIVE drops below the haircut limit, then the production of HBD ceases until the ratio is retaken. Conversions are also stopped preventing the supply from further being affected while the ratio is not maintained.

These are protective measures that UST did not have. Once the run started, it was game over. At no point was the production of the coins interrupted. Hence, the rush to the bottom was on.

With HBD, there is a point where the base layer basically freezes the production, allowing the system (and markets) time to adjust.

HBD Reduces The Counterparty Risk

As we can see, there are a number of ways that counterparty risk is reduced with HBD. When operating on-chain, we see the other side (the liability) is the blockchain itself. This eliminates the risk associated with the fragility of another entity.

At the same time, we see how the price of the backing asset is directly tied to the ability to create HBD. If that manages to cross the threshold, the system adjusts to compensate for this.

We need to consider the associated liability of any asset we are holding. Accounting tells us there is always another side to the transaction. Who is responsible for the liability is the question.

When it comes to money, HBD has a powerful liability in that we are looking at a decentralized blockchain as the counterparty.

This is a rarity in the cryptocurrency world.

One final thought: a smart contract is also counterparty risk.


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I have been trying to build up a little stash of HBD and it is going well so far. 20% interest is a huge draw.

Which is better for the platform when converting to Hive, to use the 3 day conversion, or the exchange?

This post has been manually curated by the VYB curation project

So the most obvious “danger” where HBD would run to trouble is when HIVE is no longer in demand and price melts down.

Which goes back to the value and security of the HIVE blockchain that needs continuous focus and updates.

That is true. Of course, if the price does drop below the haircut ratio, the production of HBD stops until the ratio adjusts.

But you are right, we need to focus upon the utility and value of Hive.

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This information gives hope that no matter how bad crypto market will be, hive has back up. Hive blockchain will never collapse because it is built to back itself up..

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Do you think HBD would get the attention of big exchanges? And is that a good thing or bad thing?

No. I wouldnt be surprised if it gets banned on exchanges in many countries.

We on Hive need to focus upon decentralization and true DeFi.

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In my opinion, no. But, LeoFinance has already addressed this with PolyCUB and CubFinance. We can convert HBD and HIVE into forms that exchanges will accept.

We could use a COSMOS bridge to make cHIVE and cHBD, which could transfer to many different chains. It would free us up from looking to exchanges altogether.

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We also have SpkNetwork looking at using Honeycomb to wrap other tokens.

That is going to be a major boom.

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Very illustrative explanation. In some point I think we need to understand more about the technology, but it gives a great picture.
Thanks for sharing!



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Threats or chances of nodes stopping operation?

How do DEXes work? Are they some kind of self-automated digital machine? I wonder how is it related to blockchain.

“Decentralized blockchain,” many claims such a title, but I am curious about the tentative number of blockchains that are truly decentralized.

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With HBD, your money is in your own hands. You can keep it safe or risk it, it's up to you. Not in the hands of the gov or an exchange.

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Thanks for the information.

I am actually building up my HBD savings.
What will be the fastest and cheapest way to put my USD Paypal to HBD Hive Wallet?

I use Binance for this.

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I haven't tried buying crypto in Binance using Paypal. Is that possible?

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Yes it is.

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Have to swap into another currency like Litecoin first. I usually use Blocktrades to swap LTC to HIVE or HBD.

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I can buy LTC using my Paypal USD balance directly?

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I think the important part here is that HBD scales with the overall value of HIVE. We can't have HBD become a runaway success because the blockchain itself will put on the brakes. However, if we want to push HBD, we also have to push HIVE, which is a healthy growth. We would be increasing the value of the underlying asset, HIVE, in order to grow the amount of HBD.

Plus, HIVE has actual value in that we want, as bloggers, as much Hive Power as we can earn. Not everybody follows this, obviously. But, enough of us do that we are willing to invest fiat into our stakes.

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I agree we need to push value into $HIVE. That is something that is at the foundation of the Hive Financial Network. The RC tie to HP is important.

But HBD does help to enhance the overall value of the entire ecosystem. So we need to keep working on both.

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Also about 20% interest in HBD. Is it monthly or annual?

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Annual but paid out every month.

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Got it! So is it 1.66% per month?

Yes not bad heh?

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Yeah, that's good enough. It reminds me of one broker allowing its users to borrow money with 12% interest per annum.

Oh yeah 12% is pretty standard I would say.

20% is something which makes HBD more attractive . It used to be 10% per annum .

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Question: if everything goes well, HIVE and HBD are both thriving, value goes up, more of both get created, we are then in a bull market. User growth explodes, we achieve Twitter like usage, and assume the blockchain is then bogged down (will it?) then bear market where value go down, HBD theoretically can’t be created anymore because no longer have enough value in HIVE to back it.

  1. What will address the excess HIVE supply during contraction period?

  2. With theoretically more HIVE in circulation, would resource cost be too little and blockchain is completely bogged down? Or is the RC cost dynamic as well?

The ability to create HBD is based upon the ratio. In your scenario, there is no guarantee that when the bear hits, the price will drop far enough to hit the haircut level.

Also, there is a presumption, at that point, that we are looking at the need for more HBD. Perhaps the market is satisfied for the time being with the amount of HBD in existence.

For example, if there are 250 billion HBD out, is that enough? Only the market will know.

As for RC pricing, certainly that can go up. If there is huge demand for the blockchain, there will be the needs for RC. Of course, going back to your first question, we see the need for HIVE in that scenario. So it all ties together.

What you cite is another reason why many feel that we need some decentralized second layer solutions to take some of the non-essential the base layer.

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As for RC pricing, certainly that can go up. If there is huge demand for the blockchain, there will be the needs for RC.

I am guessing that after the launch of the numerous games scheduled to release next year - WOO and GSL , the RC cost will further increase.

So this is the right time to grab more HP .

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Compared to the other stablecoins, I agree that Hive has far less risk as I doubt Hive would disappear anytime soon. I saw the top most comment and I agree that Hive should be the priority to make with use cases. So long as Hive stays strong, HBD should be strong too.

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Interesting topic with lessons, I don't know counterparty risk until now, with Hive ecosystem and HBD being a focus of this article, the home work looks like it's been done for the safety, security of the chain amongst other factors which are not obvious to us users.

We should be taking Hive ecosystem as example when looking at investments outside Hive.

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There is always counterparty risk. Most do not understand since it is reduced via regulation or insurance in many instances. However, when systems blow up, then we see how bad things are exposed.

Crypto has none of the protections so people need to be responsible.

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