We all noticed the fall of UST and LUNA. This sent shockwaves through the entire cryptocurrency market. Billions were lost which is now put a target on algorithmic stablecoins.
This, naturally, has some people wondering if the Hive Backed Dollar (HBD) is going to be affected. Could the same thing happen to Hive that occurred with Terra?
Over the last few weeks, we covered a number of topics relating to HBD while contrasting the downfall of UST. The value in that situation is for us to learn what occurred and how we can prevent something from happening again.
In this article we will cover the ultimate defense for HBD.
Currency Demand
A few weeks ago, we covered a variety of ways to give HBD value. They were:
All of these are designed to provide value to HBD. By doing so, it drives one of the major aspects of currency: demand.
Many do not look at things through that lens but it is what makes the USD so powerful. In fact, these are areas where the US Dollar completely dominates. The percentage of transactions along with total in each area surpasses all the other currencies combined.
The challenge many have with stablescoins is that, to hold their peg, they require a certain level of demand. The reality is true for any currency pegged to anything else, such as the USD. For that currency, the different categories mentioned are what actually provides its baseline.
HBD Backed By Hive
We now see a great deal of discussion of having stablecoins backed by an equal value in collateral. This is what regulators are focusing upon.
With HBD, the token is backed by $HIVE. This is an important concept that is overlooked. Many want to discuss USD, Bitcoin, or cash equivalents to back the token. The fact that UST was backed by LUNA, until it wasn't, is the source of discussion.
Before digging into HBD, we have to look at UST.
Many mention the network effect and how it is important to get the stablecoin adopted. This is a sensible approach. It does, however, leave out a major piece of the puzzle.
UST was able to achieve this. It went through the roof in terms of network effects. This simultaneously sent the price of $LUNA flying. The challenges was the lack of resiliency.
The network effect was in the wrong place. While the focus was upon the adoption of UST, nobody was discussing the lack of adoption of $LUNA. Here is where the downfall happened.
HBD is backed by $HIVE. It is where the network effect has to take place.
Building Hive's Utility
Why do regulators keep pushing for stablecoins to be backed by USD? The answer lies in the fact the USD, due mostly to what was mentioned before, retains its value. This currency, on a global scale, has an enormous network effect. Hundreds of millions of people use it, accounting for trillions of dollars daily in transactions.
The same could be said for Bitcoin. This coin has a great deal of volatility but the belief is that it will not go to zero (or near zero). Most feel there is a certain level of value inherent in the coin and, for this reason, buyers will step in if it gets low enough.
With HBD, the backing asset is $HIVE. Simply put, here is where the networks effects can be lasting. The key is to build the value of $HIVE. In doing so, there will be uncorrelated demand not related to HBD.
In other words, there has to be reasons for people to want the backing asset. It is easy to see how pushing more value through utility to $HIVE will only benefit HBD. As a backing asset, the price ratio should then far exceed the haircut level.
Network effects operate on an exponential scale. This means the growth in value of the backing assets will far exceed that of HBD.
All of this involves moving away from the speculation game. That was the fatal flaw in the UST situation. As long as speculation was strong, everything held together. However, the second there was a large push the other way, the lack of network effects on the $LUNA meant sell buttons were being hit all over the world.
The end result became obvious.
Building Network Value
Most focus upon the financial aspects of this industry. Since tokenization along with 24/7 trading allow for essentially instant mark-to-market activity, the fact we are dealing with technology is overlooked. Here we are dealing with computer networks.
For this reason, we have to take a look building the value of the Hive network. This is not sexy nor is it going to get a write up by the mainstream crypto media. However, it is the vital aspect to the value of HBD.
A prime example of this is what is happening in the Podcasting world. Hive is being inserted as a provider of infrastructure with Podping. This is now serving as a source for many hosts that index podcasts. We see the shift from an application to an actual protocol.
The key differentiator here is the fact that, these companies, if the technology works, will keep it for years. It becomes a vital part of their business.
This means continued development which will help to roll out more utility. One such advancement is the first notification in the world of podcasting that alerts users when their podcasts go live. The initial broadcast was done the other day and was available on a couple of podcasting applications. If this spreads, what is the value to Hive?
Going back to UST, was there anything with Terra that resembled this? Where was the value in the network?
With Hive, we are starting to see more feeding of value to the network itself.
Value Takes Time
Value is not price. The latter can increase dramatically in a short period of time. $LUNA exhibited this. Value takes a lot longer since it has to come through building.
For this reason, the tendency to rush forward has to be resisted. When looking at the HBD situation, we now see how important the value is of the backing agent.
Many feel that algorithmic stablecoins cannot withstand attack. The common analogy is Soros crashing the British Pound. Many cite that when discussing UST.
The reality is that the Pound only lost about 35% of its value against other currencies. This was, naturally, a huge move. However, in the end, it did not go to zero. The reason for this is utility. At that time, the Pound was the second most held currency in the world.
If the asset backing the stablecoin has similar properties, in that the network effect and utility is there, the former is going to be able to withstand any attack. Under those circumstances, the correlation between HBD and $Hive come into play.
In Conclusion
Ultimately, the value of HBD Is going to reside with $HIVE. The stablecoin is really a utility token, allowing for mediums of exchange. Of course, there can be a store of value as evidenced by the USD. These should be pursued.
That said, with all the discussion of backing, the reserve asset is where value building should reside. Hopefully we showed throughout this article how that can be accomplished.
It is not sexy nor is it a rush like people get from the swings in markets. It is, nevertheless, the sound approach to ensure not only long-term stability, but resiliency.
This was something completely lacking with UST.
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