HBD: Creating A Currency (Part 3)

This is a multi-part series about how to create value for a currency, specifically the Hive Backed Dollar (HBD).

The first parts can be read:

• Part 1
• Part 2

In the first two sections we established some of the basics of currency. We detailed how it is the intermediary in trade and how the ability to fund more transactions is an advantage. After that, we covered how important distribution is when it comes to ensuring enough people are able to utilize the currency, kicking off the network effect.

Ultimately, enough money has to be available to fund the business transactions that an economy requires. This is always the goal of monetary policy (or at least should be).

Our next step is the commercial applications. However, before we get to that, it is important to delve into the financial aspects of a currency. This is often overlooked yet is vital for a variety of reasons.

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Money Transformation

Most of us are familiar with the transformation of water. When we freeze it, the state is change from liquid to solid. The reverse happens when we heat it up. If we apply enough heat, not only does it go from solid to liquid, it will also transform into steam.

In a similar fashion, currency can undergo money transformation. We can move it between different states yet never change the base nature. After all, no matter what the state, it is still water.

We mentioned that anything that is liquid and tradeable, in the digital or electronic realm, can be used as money. This is what allows our currencies to trade states.

For example, the US dollar exists in many different forms.

Let us take the example of going to the bank and withdrawing $1,000 cash. We now have banknotes in our hand that were issued by the central bank. The money went from digital to physical as evidenced by the fact our account was debited $1,000.

The reverse is also true. When we deposit the $1,000 cash into the bank, we are credited that amount and our balance goes up. We then can pay our mortgage. Of course, the money supply does not change since the banknotes are now vault cash and not in the economy. The digital dollars, however, are.

Now let us suppose the digital currency was used to buy a U.S. Treasury bond. This is the equivalent to ice. This financial instrument is really future dollars. One purchases it using USD, gets paid in that currency for the interest, and, ultimately, at maturity, gets USD back.

This is not the end of the story.

We then can take that Treasury security and use it as collateral. Now we are engaging in another form of money transformation. Financial institutions use assets as currency for cross-border payments, remittance, collateralization, and settlement.

Sophistication

As we can see, things can get very sophisticated. A currency can change forms. The ability to do so is crucial for its value.

To start, this creates a great deal of resiliency. It is very difficult to attack a currency when it is in so many different forms. This would be akin to trying to collect all the water with a suction pump. Sure you could drain the pond but what about the steam and ice? These have to be accounted for also.

Fractional reserve banking has turned the major fiat currencies into digital ones. Loans are not paid out in banknotes and few people utilize them. At the same time, settlement is not done using physical currency meaning the entire banking and financial network is digital.

The difference between the USD and the EUR, as an example, is not relegated to the distributed. Certainly, the fact that the former is truly global with the latter essentially being regional is a factor. Nevertheless, when we look at the layers of sophistication tied to the USD, it is unrivaled.

Derivatives are often misunderstood by the general public. They were given a bad name because of the antics of Wall Street at different times. That said, they are a vital part of the financial system. Without them, many of our most basic financial and commercial services would disappear.

While most focus upon the ability to leverage using derivatives, they are also used to hedge. This is what gets overlooked. In an era of Value-at-Risk (VaR) balance sheet management, this is vital.

Here we see currency risk offset, perhaps by using interest rate swaps. Options use ranges from farmers to utility companies providing the electricity coming out of the walls.

In short, adding layers of sophistication to the currency is vital for its value. As that grows, the tentacles extend further out. This means that attack is less likely. While one area can come under fire, the others are immune to it.

This is a concept we do not presently see in cryptocurrency.

Building Upon HBD

HBD is a base layer coin. This is an advantage that we have to stress. It was not generated by a smart contract. Here we see a vital component to the foundation of sophistication layers.

When creating value for this currency, derivatives are vital. Fortunately, the process already started. We see wrapped version on BSC and Polygon. This is the first layer of defense, spreading the tentacles wider.

bHBD and pHBD have the characteristics of HBD yet they are separate. Each is backed by one resident on the blockchain, providing the value. If one of those liquidity pools got hacked, the assets could be drained yet still would not affect the HBD that is locked safely in savings.

Now consider the idea of commercial transactions occurring in bHBD. This currency could be used for payments on that network. It would look like HBD transactions, be priced similar, yet they would not be HBD.

What it does do is extend the reach of HBD further out. This is exactly what the USD accomplishes.

In the past we discussed the concept of Hive Bonds. This would be a layer 2 token that mirrors sovereign debt bonds, yet is backed by HBD placed in a time vault at coded into the Hive blockchain. This is a prime example of adding sophistication to HBD by layering on top of it.

How would this work?

A lending application could be created whereby Hive bonds are used as collateral. These are created by placing HBD in a time vault, say for a year. In this example, we will use 1,000 HBD. Thus, 1,000 HBD are locked up on-chain. The liquidity comes from the bond market and the ability to trade the asset there.

The holder opts to utilize this for a loan. With a bond, the rate, amount, and stream of payments are all known. For this reason, a valuation can be placed upon it. Also, since it is tied to a stablecoin, the volatility of the cryptocurrency itself is less as compared to value capture tokens like Bitcoin or $HIVE.

A loan is structured using the Hive bond as collateral. This asset is then locked into the application, removing the ability to trade that on the open market. Since this is layer 2, the application can pay out in a wrapped version of HBD, call it sHBD.

The borrower than can use the 1,000 sHBD for whatever is desired. This can either be commercial or financial.

Resiliency And Depth

Let us take a quick look at what really happened with this 1,000 HBD transaction.

• 1,000 HBD was locked into a time vault on the Hive blockchain (for 1 year)
• A Hive bond token backed by the 1,000 HBD was created which was locked in a lending application
• 1,000 sHBD was paid out which can be used for economic activities (expanding the Hive economy)
• 1,000 HBD is locked up as backing for the 1,000 sHBD, meaning 2,000 HBD is locked in time vaults

You probably did not consider the last one. Notice how this 1,000 HBD transaction locks up 2,000 HBD on-chain. We also have 3 forms of HBD in operation (HBD, Hive Bond, sHBD) all at the same time.

In spite of this, there is still the equivalent of 1,000 HBD available for commercial use.

This is another piece in the puzzle for creating value on a currency.

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