My Thoughts on Creating a Bitcoin Fund From DHF to Partially Insure HBD Pegging

in LeoFinance10 months ago

A few days ago a very interesting pre-proposal post was put forward by the @3Speak team, to create a 1m USD bitcoin fund by printing HIVE from DHF, to serve as as partial insurance in case the peg of HBD breaks below a certain settable-by-witnesses level.

The post was met with interesting reactions, most of them positive, but some of them questioning if bitcoin is the right choice of a coin to use to help HBD keep its peg.

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The argument, which makes sense if you consider the balance sheet, is that when you'd need to sell bitcoin to push HBD towards the peg, bitcoin's price would have likely dropped, because that's when it's more likely HBD loses its peg to the downside more seriously. So, the argument says, why not use a stable coin or a basket of stable coins instead of bitcoin for the purpose of helping HBD keep its peg? That makes sense, if we don't take into account other aspects.

We often say HBD is one of the best stable coins in the crypto verse, it just needs liquidity and visibility and we will rock the world of stable coins. Ok, maybe that's a bit exaggerated.

But if we have a stable coin with great potential, using another stable coin to officially (using funds created via DHF) prevent it to go below a certain level means we implicitly accept that the other stable coin is better in some ways. So why would investors take ours? We automatically associate a higher risk to our stable coin than to the stable coin that helps ours keep the peg. We might offer a higher APR, but we also signal that there's higher risk too, even if the reality can be quite the opposite.

Ok, but why bitcoin, if it isn't a great choice to use for pegging HBD when you think at how profitable selling bitcoin to peg HBD will be?

Precisely because bitcoin is not a stable coin and there's no risk of ranking in terms of "HBD is inferior to X stable coin, because it uses X to stay pegged".

Because bitcoin is pristine collateral in the crypto verse, and soon probably in the mainstream area. And many stable coins will have a hard time regulation-wise.

Because regardless of the few pools of miners who get rewards for producing the last few millions of them, bitcoin is decentralized, unregulatable and cannot be shut down, or they would have done it by now.

And Hive praises itself to be more decentralized than most blockchains, without majority stakeholders or foundations backing it. These are some qualities many would wish for but cannot turn back time. And if we choose to create such a fund, it should follow many of these principles.

The bitcoin fund itself would probably need to have a few people entrusted to manage it using a multisig account, because making this a multisig account for top witnesses seems unpractical, as @smooth remarked:

IMO at the current scale of Hive, witnesses doing multisig is likely to be unwieldy. The witness set changes, which means the multisig would need to be updated. And getting ahold of witnesses to sign off on spending the BTC during rapidly changing market conditions (which is probably when you want it) is likely to be challenging. Some of this could be improved with software, but developing and auditing software on a limited budget (and a larger budget is unlikely to make much sense for a $1 million fund) is likely to be more risky than just doing it some other way.

I would just recruit 3-5 trusted community members for the proposal.

I leave you with this reply of 3Speak to a comment on their post, in which they explain why they chose bitcoin and not something else:

In our view, BTC is the only digital asset that should be used in the insurance backing of HBD, since it is the only one that has no VC, no seed round, no ICO, no company and no CEO behind it. Making it actually decentralised, and therefore outside of the reach of regulators. HBD has the opportunity to hold this status too and so we think only digital assets outside of the purview of regulators should be used in its insurance backing. this is one of the things that sets it completely apart from existing stable coins.

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Because bitcoin is pristine collateral in the crypto verse, and soon probably in the mainstream area.

Not with volatility. When looking at how the lending world works, especially short term, when something is volatile, it is crap collateral.

Would you want to make a loan against collateral that could drop 10% in a day or two?

As for the backing, it truly isnt. This is more putting it in the general Treasury. I know it was slated as a backing, but I am not sure the idea of paying out in BTC if the peg drops to low is even possible. As Smooth pointed out, there are technical issues at every level.

However, the focus needs to be upon the idea of making HBD the stable asset and then collateralizing off that. Instead of using something else for our purposes, we do it ourselves.

The "golden nugget" of stablecoins, my latest articles describes how we go about that.

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On bitcoin becoming or not pristine collateral in the future, on the short term it's not possible, because of the volatility. But on the medium-long term, I believe that's a good collateral.

As a backing, bitcoin is obviously not pegged. Whether or not the idea to have a bitcoin fund to sell from practically in a dropping market to bring HBD back above the peg makes sense or not, I'm not entirely sure. It seems smarter to have it as a treasury fund, if there is no risk of losing the peg of HBD for a medium-long term.

However, the focus needs to be upon the idea of making HBD the stable asset and then collateralizing off that. Instead of using something else for our purposes, we do it ourselves.

I totally agree with that. One problem is that we have too few of them.

One problem is that we have too few of them.

Which also hurts the peg since volatility is introduced in a larger way than we prefer.

But on the medium-long term, I believe that's a good collateral.

We will have to see. Gold is a $10 trillion market cap and it still has a degree of volatility to it that cannot be overlooked. Of course, I believe Bitcoin, if it does move into the collateral realm, could end up with a $30T-$40T market cap. At that point, volatility, I would think, would be much less. That could open it up in being attractive.

The challenge is the elasticity. With it capped in number, it would make it a challenge to expand and meet the needs of the market. This is why fixed is not what the financial system needs, something the Bitcoin maxis miss.

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The challenge is the elasticity. With it capped in number, it would make it a challenge to expand and meet the needs of the market. This is why fixed is not what the financial system needs, something the Bitcoin maxis miss.

Yes, that's indeed a problem that is hard to overcome at high scale.

I have a feeling that HBD is just trying to follow UST's footsteps and I don't really think BTC is needed when there is already Hive. From what I saw in the proposal, I think their idea was to use BTC when they need to stabilize the price of HBD and I see no reason why using Hive isn't enough. It may be slower but I just see far less risk in doing it using Hive.

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Yes, it does seem like this is pushing towards Terra's footsteps. In some cases it might be good, in others in might not be the best decision.

Yes our pegging mechanism works, but it's quite loose, and that's not what stablecoins investors are used to in crypto.

But maybe we can set a different path and convince some type of the stablecoins investors to take it.

pristine collateral

that sounds like bitcoin is a virgin or something :))) nice explanation though even an idiot like myself understood the main gist of it

It sounds the same to me, lol.

I've also found implementing a BTC insurance solution for HBD an interesting idea.

I totally agree with your thinking when it comes to not using the other collateralised stablecoins as backing.

It totally defeats the purpose of using our own superior decentralised algorithmic stablecoin.

Bitcoin's own decentralisation makes it the obvious choice when you're looking for an insurance asset and in my opinion, it can work.

We've just gotta also keep in mind that these BTC insurance reserves would only ever be dipped into during a death spiral.

Not when HBD goes to 96c.

So it's not like we'd be buying and using them all of the time.

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We've just gotta also keep in mind that these BTC insurance reserves would only ever be dipped into during a death spiral.

Not when HBD goes to 96c.

This is a great point! Indeed, the fund would not be for regular use, as in fact the 3Speak post mentioned. It would be likely a threshold of 60-80c before this fund would even be touched, and that threshold would be settable by witnesses to adapt to different circumstances.

USDT is backed by other stable as well, the dollar. I would opt for both BTC and some basket of other stables.

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I thought about this as well, but that exposes HBD and Hive to potential regulations via the stablecoins in the basket.

Debo reconocer que tu análisis es muy interesante. Tiene argumentos muy sólidos y razonables. También me gusta la idea de que muchos usuarios estén interesados en seguir fortaleciendo la presencia del HBD.

!1UP

Gracias! :)

I don't personally see this as a big issue for now but I like it as they are noticed beforehand, since BTC I have no problem with their decisions, after all, we need to remember that this is what we only have right now apart from us.
There are going to come up with better solutions as time passes. Nevertheless, we just need to do our part and see how it fared

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Oh yeah, this is only a discussion for now. Not even a full proposal. They were looking for feedback before making a real proposal to the DHF.

Yeah, imo for me one of the best approaches is precisely to make a LP with another stablecoin, just like the pHBD-USDC pool, maybe thinking of diversifying with more pools, such as: pHBD-UST, pHBD-USDT, pHBD-DAI, pHBD-BUSD, and maybe using the newest Layer-0 capabilities to generate mechanisms that provide OmniChain interoperability for the HBD...

However, I'm no developer (not even a little) so this is just a raw idea.

Best regards bro, enjoying your content very much.

!PIZZA

- EvM

I agree the LP idea on PolyCub is very good, provided it becomes deep enough to be really useful. And it would help to stabilize the price of HBD to some degree also, among other benefits. But that's a side-effect of providing liquidity to HBD via pHBD, which is not what was proposed by creating a fund to back HBD pegging. Remains to be seen if a Bitcoin Fund is deemed necessary, either for backing, or, maybe better for the treasury.

I think it does make a lot of sense for it to be BTC. Looking at what Terra just did to support their stable coin is a great example of why we should. I think we have a good community that keeps an eye on everyone. It should be pretty easy to find the right group of people and hold them accountable.

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There are both advantages and disadvantages for using bitcoin. The advantage is that bitcoin doesn't introduce a vulnerability in the ecosystem compared to stablecoins (and doesn't make HBD look bad either). The disadvantage is that the solution to manage such a fund would still be centralized and, as a backing for HBD, it's not the best choice, since you'd have to sell bitcoin when it dips, instead of when it pumps.

That is true, but they were to make the buy before the next pump then it wouldn't really matter. Hopefully anyway. I don't think anyone will be having this conversation if they were to buy at $40K and then BTC finds new support at $60K or $70K. Any drop from there will likely still be above where they bought at. It will just depend on who quickly they can move if the proposal were to get approved. That is my thinking anyway.

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Thank you for the post. I think I understood most of it.

Thanks, Bob! Feedback is always appreciated.

Peaceful day,
Listnerd led me to your post.
The initiative is an approach of solutions that needs to be considered..
Regards

Yes, of course, this is just something put out by the authors to gather some feedback.

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