HBD Defense: The Nuclear Option
The cryptocurrency world was filled with discussion this week about the situation with UST and LUNA. It made the stablecoin market jittery along with getting the usual political folks up in arms.
Before going any further, let us make this clear: this is a mental exercise designed to stimulate discussion. So please partake in it and let your views be heard.
When an event failure like UST occurs, it is best to analyze and try to learn from what happened. This is how we can build better systems.
While it is true that HBD is vastly different from UST, it is worthwhile to investigate all options.
With that out of the way, let us look at the nuclear option to protect HBD and HIVE.
25% Conversion Rate On HBD --> HIVE
As they say in Texas, go big or go home.
The point here is to make the conversion mechanism rather unappealing. Certainly, we want it to exist yet it will be costly to utilize it. This is removing one of the major points of vulnerability that affected UST.
Many feel that algorithmic stablecoins are worthless. This is only true for those poorly designed. If we take the proper approach, we can build something much better.
Is what we have in place enough? This is something we need to keep asking.
Nevertheless, for this exercise, we will put a 25% fee on converting of HBD --> HIVE.
This move makes it very expensive to try and game the HBD system like UST. To stage an attack is going to cost someone in the ways spelled out in the linked article above. However, with this fee, it is really going to turn people away.
After all, the main point of these features is to deter people from engaging in nefarious activities. It is impossible to stop everything. However, we can make it as unattractive as possible.
The 25% conversion rate seems absurd until you think the process through.
Growth Versus Security
This is essentially committing Hive to security over growth. It is putting us on a path of steady expansion of HBD while severely restricting a point of vulnerability. For many converting to HBD is not as attractive with a steep price to move back.
A challenge with these types of stablecoins is when the attacker (or even market forces) moves to generate a great deal of the backing coin. In this instance, a printing of a lot of HIVE would expand the float, driving the price down. While it should not matter in theory since value is simply being transferred, we know markets do not operate like that.
As witnessed, one the backing coin starts to slide, it enters a freefall. This has a similar impact upon the stablecoin as investors run for the exits. Ultimately, both tank.
Having a stiff conversion fee would severely deter someone taking an attack like this. After all, it would be an instant 25% hit along with the 3.5 conversion time on 50% of the trade.
It is rather obvious TerraLabs favored growth over security. While a blend is necessary, we see how important security is.
Community Controlling The Coin Makeup
The idea of the conversion mechanism is to give the community the ability to control how much of each coin exists. Putting a high fee does not totally eliminate this since it is still in place. If one is willing to accept the fee, conversion can happen.
As noted in the past, this application has roughly 150K of HBD to distribute each day. It enters the Internal Exchange to swap HBD and HIVE. This activity generates a profit over time that is fed back into the DHF. This helps the balance of that to grow.
We also have to note as the value of the DHF increases, primarily due to the price of HIVE, the more that HBD Stabilizer could have to play with.
Whatever the numbers, we can see how this could be the primary mechanism for conversions onto the market. Certainly, it is not the only way to create HBD, as we will discuss in a moment.
Of course, other projects could build applications similar to the HBD Stabilizer and submit a proposal. We could then have a number of these bots operating on the Internal Exchange, feeding the DHF.
This makes the Internal Exchange a vital component to the Hive ecosystem.
As use cases for HBD are built, there is going to be a lot more HBD required. However, it is important to take a somewhat measured approach to avoid the situation similar to UST.
This can be accomplished by looking at the HBD creation features that exist.
- 50/50 option in reward payouts
- Conversion mechanism
- Interest in Savings Program
The first obviously is not going to change much. We also mentioned the conversion mechanism. However, the third does post interesting possibilities.
What does the interest in HBD in Savings really do? Sure it is a great return for individuals utilizing it and, hopefully, will attract more capital over time. That said, there is a basic function this serves:
It generates more HBD and gets it out into the open market.
Here is where we can see the ability to expand the amount of HBD. Since the Witnesses (Block Producers) set the rate, they can determine how fast expansion will take place. This can be done by looking at what is in the Savings and how much is going to be generated.
We discussed time vaults in the past with Hive Bonds. Ultimately, this allows Hive to really expand its offering in the Fixed Income Market, moving towards being one of the most decentralized options in this area.
If the fear of large amounts of HBD being converted to HIVE is reduced due to the high fee, we can look at expanding the float through this path. It also feeds into a more robust Hive Savings Bond program.
One of the concerns has to be the ability to contract the HBD supply when needed. Money equilibrium is vital. It is great to expand the money supply yet the reverse also is required at times.
Money ultimately comes down to supply/demand factors. Unfortunately, with the present system we see times when there are shortages since our currency comes from the commercial banking system. When the money creator is for profit while also serving as the distributor, we see money flow to where it is most profitable, not where it is needed. Or actually, a better way of phrasing it is when as opposed to where.
If the HBD --> HIVE conversion mechanism carries a steep price, how do we get HBD out of circulation in times when is low? Hopefully time vaults would negate that to a great degree and an increasing in the interest rate could help to soak up free floating money.
However, in the event that is not enough, we could turn to the HBD Stabilizer again. If people are "dumping" HBD, then that is what it is acquiring. The HIVE from the DHF will be swapped for HBD, which is fed back into the DHF. While that is not technically removed from circulation, it is locked up and distributed slowly. In the end, the effect is the same.
Thus, we have a number of tools available to us whereby money equilibrium can be achieved. This should be a goal of any monetary system.
One of the primary benefits of this is that it makes the Internal Exchange an important part of the entire ecosystem. How this can be leveraged to enhance the entire ecosystem will be discussed in an upcoming article.
While the rate of 25% on the conversion might not be accurate, the point is clear. If we can shore up one of the points of vulnerability while still having the ability to generate HBD, we could be taking security one step further.
What are your thoughts? Does this make sense to you? Let us know your views in the comment section below.
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