Hive: Reducing Counterparty Risk

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Few think about counterparty risk until it is too late.

What do Silicon Valley Bank, FTX, Signature Bank, and Celsius all have in common? Each of them presented massive counterparty risk that few gave any consideration to. Instead, people piled in without questioning the solvency of these entities. Unfortunately, there will be billions lost by people who failed to understand this simple concept.

Of course, many of the losses suffered by many who should know better.

Fortunately, for those involved with Hive, we are dealing with a situation where the counterparty risk is low. Steps were taken to ensure things would stand up long term. Certainly, an ecosystem and a company are much different. However, at the end of the day, we are still talking about people's money.

So let us explore what takes place and how we can sidestep the landmines.

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The Safest Game Going

There is a lot of talk about regulation and how the cryptocurrency industry needs it. We see a lot of people who believe this approach actually provides safety in the financial world. As we will see, this is foolishness.

Silicon Valley Bank was regulated. So was Bear Stearns. MF Global. Bernie Madoff. Enron.

All these situations were operating within a financial environment where regulations were in place. Yet, billions were lost in them simply because regulators failed. Perhaps one can make a case there was no way to know what was going on. Regardless of that, the point is regulations were in place and people still got crushed.

This is why counterparty risk is such a big deal.

What is counterparty risk?

Basically it is the risk that one takes on by engaging in a financial transaction with another entity. The risk comes in the ability of the other entity to complete the transaction when desired.

For example, the idea of sending money to someone. We are undertaking the risk that Western Union, or whomever, will do it. What happens if the company went out of business before our transaction was complete?

The same holds true for holding. When one deposits money with a bank or brokerage firm, the agreement is that the entity will be able to return it when needed. Of course, as we see from the first list, that is not always the case.

Hundreds of billions of assets were placed into Silicon Valley Bank. Due to the belief in regulation, few gave any consideration as to the actions the bank was taking. How many questioned the liquidity of the financial institution? In hindsight, this is something that people should have looked at.

Hive does not have this problem.

Its A Blockchain

Why does Hive have the least amount of counterparty risk? Because it is similar to Bitcoin. This is something that Satoshi Nakamoto sought to minimize.

What is the counterparty with Bitcoin? The answer is the blockchain itself. Of course, the next question is who runs that? Here we see a large number of nodes, most unrelated, spread throughout the world.

The same holds true for Hive.

What is the counterparty risk associated with $HIVE? Here it all boils down to the ability of the node operators to keep the blockchain running. With ~120 block producers, there is a good chance someone keeps the software running. Over time, as more is done to compress the base layer, we should find more operators joining especially if we reach the point where it can be run on a PC.

Hive has no foundation or laboratory behind it. As we saw with Steem, a lot depended upon Steemit, Inc, a fact that was a major vulnerability. That counterparty risk caused the creation of Hive.

Hive Backed Dollar (HBD)

We discussed the Hive Backed Dollar (HBD) a great deal over the last 12 months. At the same time, we talked about establishing a financial network based upon this stablecoin. Many scoffed at this notion, underestimating what Hive offers and how powerful HBD is. Do not look at the size or total distribution, look at how it is designed.

Tether and USDC are the two leading stablecoins. Both have been seriously questioned at different points in time. Circle is now under the watchful eye of the industry with many questioning the counterparty risk they overlooked, thus creating more risk for those holding the coin.

Let us not forget BUSD and the issues going along with that.

Yet, in the meantime, HBD just keeps plugging along

Framing this against the backdrop of this article, what is the counterparty risk with HBD? Where are people exposed?

The great thing about HBD is it is on the base layer. Again, there is no company or project to depend upon. One only needs to rely upon the blockchain running, same as $HIVE.

That said, there is another layer that is not in place with the other coin. HBD is backed by $1 worth of $HIVE. This means we have to take into account the risk that the conversion can still take place.

With the haircut rule, we designed a backstop to prevent a UST situation. One can openly see what the ratio is between the two coins. There is even a site that does it for us.

The advantage to building things on the base layer is that we are offering decentralized finance (DeFi) services while reducing the counterparty risk.

As we are seeing with recent events, this is extremely valuable.

If you found this article informative, please give an upvote and rehive.

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19 comments
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Risk is always there, but you can reduce it using such expertise.

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Thanks for giving counterparty risk another shot at explaining it to the likes of me that don't understand it, you have written about it in the past but it got clearer for my understanding now.

With the recent happenings, it goes to tell us counterparty risk is worth looking at before making a move into any business or substantial financial dealings.

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Knowing these counterparty risk are easy fit you maybe because you've actually studied a lot of finances and have taken your time to understand the concepts
Many however are oblivious of that.... It is a privilege on your part 👍

Ouch... Reading down the post, I discovered it was just a term you used as I understood the meaning from your explanation down the line.

Please post more of this, it was really educative and I learnt a lot.. I enjoyed it

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Hive might be the safest thing out there. I don't see Hive in the crosshairs of regulators yet.

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Can one say that there's counterparty risk on layer 2 even though it is tied to the base layer?

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This is something I have been thinking a lot, when the times to take profits and I dont want to be on cash where do I go? so far for me seems HBD could be the answer, in the past three years I have seen local bank, the most "trusted" local bank Banco General misplace users funds and hundreds of ppl ran to the bank door next day as they login to their online banking and all funds were gone, FTX the most regulated exchanges shuts down after been insolvent, Celsius a project by a guy with a high reputation on the tech industry goes insolvent, I just dont trust any entity in the middle and even question the projects I get in, whats the worst that can happen if I hold crypto, I guess in case of Bitcoin and Hive is to get hacked or somehow a global ban of crypto by governments period, both unlikely but probably not impossible although its best option as at least I hold my crypto until the last minute, the moment you transfer to a third party its gone, just cant trust any third party to keep assets safe but only yourself

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I'd love to set up a server and run a witness node. I don't have the infrastructure for it at home though. I could do it from work but that wouldn't necessarily be very ethical. I might run one of these lite nodes when they get them up and running for specific projects.

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What amazes me in the bull trap movement of the market is that Hive doesn't seem to respond with FOMO but rather moves healthier than other assets. This alleviates changes of direction which makes it more stable than other crypto assets. That's one reason for me that I simply continue to build on HIVE without any other drama that keeps on the markets.

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I have wondered what are the risks to Hive. I am sure the developers think a lot about how it could be attacked either financially, legally or technically. Attackers only have to be lucky once to have an impact. I know people have been phished, but that's hard to protect against. Using Keychain helps.

I have high confidence in the security of Hive, but that's down to trust in the people behind it.

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The counter-party risk is always there and I agree that it's unlikely for Hive to suffer under it. We aren't mingling funds with other entities but I do think there are projects that might have. So I still think it can affect hive but just not as much as other crypto projects.

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Seems good in principle but in practice I always worry about this small number of people running the show. All it takes is some hissy fit drama for the big ones to pull out, discouraging the others, and that's the end of Hive.

It might not seem likely, but there are a number of examples of huge entities collapsing under personal feuds. That doesn't seem safe in the long term, to me.

People could be bought out/bribed, replaced, overtaken by gigantic stakeholders controlling witnesses and any other number of really quite simple things.

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I seriously doubt the majority of PayPal, CashApp, Zelle, and Venmo users know what counterparty risk is. People who regularly remit money back to their home country, from their country of employment, probably have a more nuanced understanding. With that being said,

Just imagine the potential $HBD could have for global remittances: Philippines, Thailand, Vietnam, Cambodia, Laos, Indonesia, Australia, Nigeria, South Africa, Brazil, Venezuela, Ecuador, Argentina, Mexico, and even Cuba, as we've seen. Ripple Labs has been trying to corner the digital remittances market for years now, and has not succeeded. $HBD could slide right in, remove the counterparty risk Ripple's $XRP has and enable instant and free transactions!

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