For those reading this, it is best to refer back to these articles since they are precursors to what is being proposed in this article:
As we develop a framework for the Hive Financial Network, one of the keys is to establish a lending platform. This is an essential component of decentralized finance, one that we can fill utilizing some of the unique aspects to Hive. One of the core pieces is the fact there is a base layer stablecoin in the Hive Backed Dollar. This is a very important component going forward.
The Apiary is also a vital piece. This is the second layer DAO that can be set up to handle all the liquidity for the applications built in this network. The profits from this organization are also fed back to the holders of Hive Power. Again, reference the first article listed for explanation on that.
Bear in mind what we are dealing with here is a developing mental framework. Over time it is evolving and expanding.
The Hive Lending Platform
This is an application that specializes in collateralized lending. The idea is simply to provide loans to users in a way that provides what is needed while offering a return to the Apiary (and eventually HP holders). This is all built on decentralized infrastructure both at the base and second layer.
It all starts with HBD. This is placed in a time vault at the base layer on Hive. When this occurs, we have an asset that has time element along with a stream of payments. This allows us to formulate a return that is fixed. By tokenizing this, we have an asset that is tradeable.
In this instance, the value of the future revenue is used for collateral. Just like US Treasuries, we know what will result in both interest payments and maturity. Since this is on blockchain, it is fully transparent. (Refer to the article on Hive Bonds)
With the Hive Lending Platform, we can set up an application whereby people put up their Hive Bond as collateral against the loan they are taking out. The system can be coded to provide some type of over-collateralization level, perhaps 10%. Thus, if one wants a loan for $10K, he or she puts up $10,100 in collateral.
The lending platform can charge a nominal rate of interest, say half of the Fed Funds rate (or none as explained later). Since this is modeling much of the existing wholesale banking world, we are applying the ability to "create money out of thin air". This return is minimal compared to what is being generated on the other end.
All loans are paid out in the Hive Financial Network stablecoin, sHBD. This is a derivative of HBD, operating on the second layer.
The application sets up a payment schedule similar to any other loan. As long as the payments are made, no action is taken. Failure to make the payments results in default, and the surrender of the collateral.
So far, this is pretty straight forward.
The Dynamics
Where this gets powerful is in the dynamics of how this operates.
One of the key pieces to understand is that sHBD is a 1:1 backed derivative. With each created, 1 HBD is placed in savings. Some percentage would have to be liquid since people might want to swap back to HBD. However, the more the financial network is built out, the less likely that will be as the use cases for sHBD grows.
This means that the Apiary is earning 20% on the HBD placed into savings. If there are time vaults and longer lock up periods available, this could go higher depending upon what the witnesses decide as an APR. For the sake of discussion, we will use 25% on a 1 year time vault.
On the above example, to get 10K in sHBD, that means the same amount of HBD is placed into savings. This is effectively off the market, albeit short term.
The borrower them places 10,100 HBD into the time vault. This is done to create the bond that is used as collateral. Of course, since this is only collateral, the individual still owns the bond. That means the 25% APR is paid to that individual.
From this, we can see the safety in this type of lending. Not only is the Apiary protected with the over-collateralized loan, the asset used is offering a return to the borrower that is in excess of the rate of interest charged.
We also see how another 10,100 in HBD is locked up and no longer on the market. This single transaction effectively locked up 20,100 HBD.
There is also the added fact that loan repayments are to be made in sHBD. Here is one of the key strengths to the USD. When loans are denominated in a certain currency, that creates demand since payments are to be made.
Hence, the desire to convert sHBD back to HBD is reduced. Operations take place in the former.
Once the borrower gets the sHBD, the money can be used however desired. Through the use of a DEX or liquidity pools, the currency can be swapped into whatever wrapped token one wants. This will allow for use in either the digital world or, if moved into fiat, the physical.
In other words, this could provide real world lending.
The key is that, once the loan is made, any further movement is away from the HBD locked up on-chain. A layer of protection is added by operating in the derivative (wrapped version).
Like the 30 day window on the powering up of $HIVE for governance, the delays via the time vault and the moving out of savings help to deter HBD attacks.
The Return To Hive
Referring back to the Hive Financial Network, we discussed the governance token (Larva) for the Apiary. That is designed to be airdropped to HP holders. It not only offers governance but is eligible for 6% of the profits (off the top) from the Apiary.
The remainder is distributed as follows:
- 90% to Hive Power Holders
- 10% to Decentralized Hive Fund
What makes this so powerful is that unlike traditional banking, which makes money on the interest charged, with the Hive Lending Platform, that is a secondary revenue stream. The true return comes from the utilization of sHBD. Since each is backed by on-chain HBD, most of which is generating a return for the Apiary, we can see how the profits can be outstanding.
In other words, we want more people utilizing the service. This means a greater amount of sHBD is required and in use, each registering more money in the DAO. From there, it is distributed as follows to the different parties, creating a circular financial economy.
One of the vital factors is that all of this is based upon Hive Power. It incentivizes people acquiring the coin and staking it by offering another return on top of the inflation adjustment.
We are applying a similar model to what Circle is doing. For each USDC that is created, a dollar is backing it. However, 80% of their holdings are cash equivalents, i.e. US Treasuries. The interest paid on those instruments is given to the company.
This is a similar mechanism except the Apiary (DAO) is the one receiving the return on the backing asset of sHBD.
The Power of Banking
Make no mistake about this: even though it is a rather simple model, it is very powerful. This is why the banks have run the world for centuries. Essentially, they controlled the ledger, hence they were in charge of money.
Many focus upon the ability to create money out of thin air which is powerful on its own. However, it move to another level when money is transformed from one form to another. By operating at a number of different levels simultaneously, we see how not only is resiliency built in but also the ability to generate a return. Each layer is of benefit. The main difference is that, instead of the bankers being the ones to the good, it is the holders of Hive Power who ultimately come out ahead.
This is the true essence of DeFi. As we can see, there is no entity in control. The Apiary is run by the Larva holders, which is dropped based upon HP. Ultimately, they can be bought and sold, providing the opportunity for those who want more say to be able to acquire it.
Negative Interest Rates
One final idea which can open up an interesting thought experiment:
The lending platform does not actually have to charge interest on the loan. It effectively could be zero since the main return does not come from there. In fact, we could start utilizing negative interest rates.
Why would the Apiary pay people to take out a loan?
The answer lies in the simple idea of locking up more HBD and earning a return. Which is more profitable:
- 1 million at 20%
- 10 million at 15%
Can you see the power in money transformation? Take this thought process out into the billions of dollars. By incentivizing the use of the platform, the demand for sHBD keeps growing. This means more HBD has to come from somewhere. While the interest will generate a lot, it will not be enough. We ultimately will have to be converting $HIVE.
Simple supply and demand tells us what the impact that is on the price of that coin as it is converted.
Of course, as more sHBD is generated, the profits of the Apiary goes up, most of which is fed back to HP holders providing even further demand for HP.
Take Over Real Estate
One thing that is often discussed is the real estate industry and DeFi getting involved in that market.
While not exactly what most are referring to, we can see how, over time, this will take over this realm also.
At present, one applies for a real estate loan. If approved, the person gets a mortgage using the house as collateral. Of course, all that is required is a down payment so it is not a mirror copy.
Using the Hive Lending Platform, one can use the Hive Bonds to buy a house. The loan would be secured by the bonds, meaning the house is effective "bought with cash". If default does occur, the house is not lost.
Obviously, the person requires enough to acquire the loan in the first place. This is where Web 3.0 and people's activity is enhancing their wealth. This can be further leveraged into a real world asset such as a piece of real estate.
Now consider this in light of a flat or even negative interest rate. Take out a collateralized loan to acquire a home and end up paying less than was originally borrowed. At the same time, earn 25% on your collateral.
Do you see the potential as the value of $HIVE increases?
It all starts to feed back onto itself.
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Why would you collateralize HBD to get HBD?
Just sell it for USD or other token if it’s 1:1.
Who is going to do the collection if the collateralized assets become impaired? (If paired with different assets)
The borrower would just simply walk away.
The idea for collateralized lending is 2 folds:
The borrower wants to retain the original asset for usefulness or speculation.
The lender wants to get the original value plus interest back.
If the underlying assets go up in value, no problem. The incentives are aligned. But when the underlying asset value go belly up now what?
And then you dont own the asset. Collateralization allows for one to retain the asset while getting a loan out against it. Why do people take out mortgages to do things like fund a business? Why not just sell the house? Because then they dont own the asset anymore.
The bond is posted at the time of the loan. If defaulted on, the bond is in the possession of the application (DAO).
The asset value is based upon a stablecoin and a consistent return. The volatility in this scenario isnt important because the bond, if collected, can be held to maturity, garnering the interest plus the original HBD.
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I feel like everybody reading this is getting it all wrong and only looking at the leverage that comes with using volatile assets as collaterals. At first, I thought, why would anybody want to put in HBD to get back HBD because sHBD is in fact HBD, well, this is where it is tricky and if you're heavily into Hive, you'd understand the merits and how it effectively promotes holding Hive Debt - HBD.
To narrow it down, first, we have to look at the demand pressure it forces on Hive, because getting HBD means buying Hive!
This causes Hive's market cap to grow, benefiting Hive holders and also serving as a catalysts for security because it leads up the coins marketcap, causing the heavy printing of HBD to fall to nothing as it doesn't up the supply way too much to cause concerns(like exceeding the haircut).
Additionally, the borrowers stands to earn an interest for taking instant loans that nearly matches the sum pooled. Long term, this becomes a medium of loan repayment and really doesn't disadvantage the borrower and also doesn't put the lending protocol at risk.
Then again, as a Hive holder, you're effectively earning not only on the loans you take out but also on the HP you hold, this is where we're really look at abundance.
The Network prints this value, users sustain it by being eager to grab high instant loans that earns them interest, the real problem here would be building up liquidity for sHBD that doesn't go to sink the Hive price.
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HBD is put in to get back sHBD via a bond that is collateralized. The borrower still owns the bond, only turned it into a loan. Hence, any payouts are distributed to the bond holder.
This is only one piece of the entire puzzle. The goal is to drive value to both HBD and HIVE. By doing that the price of the latter should increase, which makes the entire financial system more efficient and capable.
You are missing the Apiary. That is the receiver of the profits from the activity on the entire platform, especially the HBD in savings/time vault. This ends up going back into the hands of HP holders, further increasing the return for holding HP. This likely adds to buying pressure.
Liquidity is certainly an issue, even at the levels we are at. So it is an ongoing process to do that. Of course, this is not operating in a vacuum. We know there are other things taking place on Hive that will help to enhance the value of $HIVE. Will the market react, that is always an unknown.
The ability to provide a robust economy, wheter focusing upon commerce or finance, is dependent upon having enough HBD to power it. This means we are going to have to see higher $HIVE prices to allow for the conversion of what is needed.
This is why nothing is operating in isolation. It is all connected and has an impact upon other aspects of the system.
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I think building out the financial system with out pushing the use of the financial system would be an error. Hive should work on giving its members a way to transact before a way to borrow. In this case we would need to begin work on building a community that wants to sell goods and services. An easy start to this is in services and not products. The Hive already has many talented artist, musicians, arts and craft people that could sell but then it is the marketing as well.
For me this may be an easier challenge as I have plans to grow food and commodities and sell them in cryptos, my whole point here is that you can build out these systems but if your community adoption is 5% 10% its a lot of wasted time VS driving the awareness of a financial community that buys sells and trades nominated in HIVE - HBD.
Building a community that actively trades goods and services via the native cryptos or blockchain structure is a better benefit that turning the system into a bank with lending and other legacy financial toolsets.
So in what way could we benefit the people who are already selling goods physical and digital goods?
Getting them to do the same action just denominated in HBD vs ETH, USD, EUR, BTC?
The social media aspect is a plus having a thriving economy of real goods and services 1 million percent better.
Thinking that the only way to add value to a currency is through commerce is a mistake. The numbers when you account for investing, funding, lending, and collateralization dwarfs commerical transactions.
Not that they arent important, they certainly are. However, when driving value to HBD, it is vital to access all the different areas where the most HBD will get sucked up. A platform that offers financial services, all tied sHBD, will likely offer a faster growth rate as compared to finance.
Plus, then commercial development can also be funded, further expanding the ecosystem.
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Is the assumption that most people would be taking out a loan and putting up collateral so they can invest that money into something else. Something they are hoping will give them a larger return than the terms of the loan? I mean clearly there are countless use cases for the loans. I am just curious if the majority of them would be for additional investments.
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People can use it for whatever they want. If there is a robust DEX with wrapped tokens, the possibilities are endless. People could take their sHBD and swap it for something that gets them to fiat. Then they can do whatever they intend from there.
Or if remaining in the crypto/financial world, one can take the loan and invest in development, business building, or in another asset.
It opens up reams of possibilities, dependent upon what else is built.
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Okay, that makes sense. I can just see a lot of people chasing profits elsewhere. I am sure there will be a million different use cases though.
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First, people wanted to "destroy" the traditional banking system with the cryptocurrency, now they copy it. Will this be any good for the average people?
People dont understand what they want to destroy so the idea of replacing something they dont know about is pretty foolish.
How is cryptocurrency going to replace the traditional financial system?
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I wish I know. But probably it is possible. If everyone (or at least most) people would use and accept cryptocurrency for general things, for example for buying and selling food, then it is possible. It is much easier in smaller communities/groups.
It was never about destroying the products but to eliminate the control over these products, different things.
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By "destroy", I mean replace. To have a better, more fair wealth distribution. This was the original idea. Or at least this what I remember hearing/reading about it from around a decade ago.
Well, from what I see here, it definitely fits into your narrative, because it's more fair and brings value to the community.
As a HP holder you benefit from this without even interaction with the protocol, so not only the borrowers earn, a HP holder earns without even knowing the system exists in the first place.
This is true. Nowadays Hive Power has an interest rate around 3% APR. People need only to hold it to earn it. I also build Hive Dollar (HBD) savings, which nowadays has a 20% APR interest rate. I currently have 1505.701 Hive Power, and $250.50 HBD in savings.
Is there a timeline on Apiary?
No. This is all a framework with different pieces being built. So it is a process. There isnt even a time vault on Hive.
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I think I need to learn more about these Cryptocurrencies shopping and its operation
Please correct me if I'm wrong so now we can loan hive using HP if we cannot pay then collateral is our HP?
The reason to encourage people using hive to loan hive is to let others pump money into hive and to get the price of hive higher high demand high price of hive.
I'm not really good at this financial stuff but do simplify it for me thank you in advance as always love your article eventhough I don't understand most of the time but I learn something new with each new article you post thank you so much.
!ALIVE
@taskmaster4450! You Are Alive so I just staked 0.1 $ALIVE to your account on behalf of @caelum1infernum. (1/10)
The tip has been paid for by the We Are Alive Tribe through the earnings on @alive.chat, feel free to swing by our daily chat any time you want.
This does seem very exciting. Defi coming alive. Sure is exciting. Things are changing.
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Taking loans against HBD stable and using those in real life while not needing to pay for taxes (as it is a loan) it sounds quite amazing. That would energize the Hive blockchain like never before.
10% of 10k is 1000.
I believe this will help hive even further and we should see more people coming to hive for the interest of hbd and for the opportunity that will comes with it when the emergency arrives.
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Oh man. If you talk about it, it will be built, then they will come.
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STOPCheck out the last post from @hivebuzz:
As we develop a framework for the Hive Financial Network, one of the keys is to establish a lending platform. This is an essential component of decentralized finance, one that we can fill utilizing some of the unique aspects to Hive. One of the core pieces is the fact there is a base layer stablecoin in the Hive Backed Dollar. This is a very important component going forward.
👆
WOW! A landing platform. This is a great plan. The work that is put in place here in a great one.
Weldon boss.
I love the fact that I am here gaining more knowledge everyday.
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I think the loan system is quite hard to really implement and I know the interest would be nice. It can still lose money if people don't pay things back and how would the system cover these bad loans?
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This is a great concept, be great to see it implemented over the next while. I am sure lots of dev work is being done and well bears always bring more benifacial dev work that bulls
Loving everything I read here. Lending is a much-needed feature on Hive but I do hope that the collateralization rate was arbitrary. Most DeFi protocols will allow you to take out a loan for up to 75% of your collateral for multiple reasons.
The most important one is a black swan event where they protocol could actually lose money. If I put in $10K worth of Hive and get $9500 out as a loan I am only risking $500 if the price goes down while the protocol most likely won't have enough time to react and will sell most of the Hive tokens at a loss.
This is how Cream finance became virtually insolvent on BSC in the past. At one point in time, I had $50 worth of collateral and a debt of $200 USDC in the protocol. Liquidity providers were the ones that took the L on that one.
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Maybe many things will change in the future