Deeper Dive Into Hive’s Stable Coin HBD

Hive Backed Dollars, or HBD, is our stable coin here on the Hive blockchain. HBD is designed to be pegged to US$1 in order to give more stability to those that use the Hive network. HIVE is not stable, whereas HBD is.

HBD can be traded, bought and sold, but not staked. It is considered a debt issued by the blockchain. By why a debt?

Anyone can convert HIVE to HBD, and the other way around. This not-very-good arbitrage opportunity - cos it takes 3.5 days to withdraw- that many exploit for a profit is also important to keep a stable price. When HBD is, for example, at $0.80, many will see an arbitrage opportunity. Since it’s safe to say that HBD will get back at $1, we better buy now. When it’ll be there, we’ll make a profit.

And the same is valid for the opposite, when HBD is, for example, at $1.10. In this case, we’d better start selling HBD, reducing supply.

Thus, we understand now that HIVE is ownership and HBD is debt. HBD is a Hive blockchain debt instrument.

The rule was put in place to make sure that the ratio of debt-to-equity does not exceed a certain level, which is 10% at the moment. That means that if the market cap of HBD reaches 10% of the total market cap of Hive, the production of HBD shuts down.

In a case like that, all payouts automatically convert to HP and liquid HIVE (on the 50/50 reward option). This continues until the ratio is restored.

This is a mechanism that is hard coded into the chain; it’s not due to the witnesses. The only way to change it is with a hard fork. And I say this because there has been a lot of discussion about increasing the cap by many community members given that the 10% is an arbitrary number decided years ago.

Finally, it’s worth pointing out that debt ratio matters a lot because it determines how and when the blockchain creates new HBD.

HBD also has a savings account, currently paying 20% APR (Annual Percentage Rate). This is paid daily into your account. Of course, the interest is paid by printing new HBD.

This 20% not only serves to expand the supply of HBD, but also as an attractive feature of HBD for people out there looking to put some money into a stale coin. However, some argue it might be too high. The thing is that we want people to actually use stable coin for commercial purposes and not just put it into savings.

It’s a good time to point out that unlike the haircut rule, which is hard coded in the blockchain, this 20% is decided by the witnesses through voting.

If HBD can really achieve a consistent and tightened peg, and the fact that it’s not subject to the same variance of HIVE, this will make HBD a perfect candidate for commercial purposes. The idea is to allow people to start using HBD to buy goods and services.

And this is not enough for commercial purposes. And that’s why many people are recommending increasing the HBD debt-to-ratio ceiling from the current 10% to a 30% or even higher.

‍