We have discussed the Hive Financial Network on numerous occasions. This is something that will radically alter the direction of not only Hive but tokenization in general.
So what is required for this the become a reality? To answer that, it is best to understand the process and how the design can look. Each component has a reason behind it, based upon how global trade is funded today.
In this article we will delve into what is required along with how it ties into the larger system.
Time Vaults
The starting point of the short term lending comes from time vaults. This is essential to the asset being produced since it provided a set revenue stream (payments) over a specific period of time.
For example, let us say there is a 1 year vault that pays 20%. This means that each HBD placed into the vault will generate .2 over the course of the year, paid out in 12 intervals.
This is the foundation for the bonding. It is the backing of that which is going to be used as collateral.
Hive Bonds
A Hive Bond is nothing more than a token that is created tied to the HBD that is placed in one of the time vaults. This serves a couple purposes.
To start, it provide liquidity. Obviously, HBD placed in a time vault is locked up. What happens if the individual needs (wants) the money? It cannot be accessed. With a bond, that can be sold into the marketplace and turned into cash. There could be a haircut based upon the market pricing but one can access funds.
The second purpose of Hive Bonds, and more importantly, is for collateral. Here is where we are looking at creating something that can form high quality collateral, especially for short-term lending.
When it comes to this arena, volatility is the enemy. This is why something like bitcoin will have issues. With Hive Bonds, the underlying asset is a stablecoin. That means we are dealing with less inherent volatility. Naturally, the price of the bonds can fluctuate since they are freely traded. However, the likelihood of a 10% drop on an asset of this nature versus the price of something like bitcoin is clear. The latter can drop 10% in a few hours.
Lenders engaging in these types of transactions do not care about credit. When dealing with something short-term, the only question is "can I get my money back if there is a default". Here we see the focus shift to liquidity and stability. This is the main reason why U.S. Treasuries are so popular in this market.
Exchange
This is part of the infrastructure that is presently being developed. Most are aware that smart contracts are essential to what is being created.
Part of the contract design will be an exchange to swap the Hive Bonds. This has to be created to have any chance at liquidity. Anytime a new token is created, if there is no where to trade it, you are dealing with something pretty worthless.
This situation is multiplied when trying to develop a financial system built upon these new assets. Therefore, decentralized exchanges are essential for anything that is created going forward.
Lending Platform
Another piece to the puzzle is a lending platform where people can actually take their bonds and post them against loans. On Hive, the payouts should be in HBD (a derivative of it). Here is where we start creating a circular system that builds upon itself.
We see similar applications that provide this service. There is a major difference from what I can see. Many of these use BTC or ETH as the collateral. Recent activity shows how dangerous that can be. As the price of these assets bounced around, we see the potential for more collateral to be posted. Most of these operate based upon a certain level of collateral against the loan (say 50%). If the value of the collateral drops below that, time to pony up more.
Hive Bonds can reduce this situation. Again, since we are dealing with a token that essentially represents a stablecoin, we basis the entire transaction on something less volatile. If the system starts to get a lot of use, we will see the liquidity amass to the point where market volatility is also reduced.
On longer term loans, a bond is ideal. In this instance, volatility is not even a question. Also, since there a redemption at the end, i.e. the HBD is released at the end of the 12 months (in our above example), the lender knows the money will be there.
In a bear market, it is possible to see something like BTC or ETH below the highs, which could be the point where the loan was made.
Base versus Second Layer
Should this exist at the base or second layer?
We are dealing with a mixture here.
The time vaults are base layer coding. There is where the HBD savings account resides and is best there. Here we are dealing with an extension of something already in place.
Hive Bonds would ideally also exist on the base layer. This would eliminate another level of counterparty. To achieve this would probably require extensive coding, a great deal more than adding the vaults. This would likely need some form of smart contracts at the base layer, something not existent right now.
This would then provide the option of building a base layer lending platform on Hive. The applications would naturally serve as the front end but the process would operate on Hive.
At this point, there is a lot of coding for something that is untested. For this reason, this is going to operate at the second level, using a sidechain (VSC?) for the smart contract. I would hope this is something that can, eventually, be incorporated into Hive itself.
Nevertheless, there are ways to configure the services so that human (or company) counterparty risk is removed. That is the goal of any of these designs.
Trillions of Dollars
The short-term lending market does trillions of dollars each day. This is something that is no known to the average person. To contrast, the global oil market is around $7.5 billion per day. Oil is the largest commodity market and it is dwarfed by this.
Could a system like this capture even a small fraction of that type of activity? I would believe so. Tokenization is becoming so popular that even Larry Fink of Blackrock is starting to promote it. Of course, his goal is to have that firm heading up and offering these services. That is not the best course forward in my opinion.
It is up to Web 3.0 to start building things that provide real world solutions. We can talk about it all we want yet without solutions, we are simply blowing virtual air online.
There are financial markets that have trillions of dollars in activity. The key is going to be developing viable alternatives that can provide some of the services that are presently offered.
If Hive is going to make waves, this is some of the areas to target. We have a very powerful tool in the Hive Backed Dollar (HBD). By building upon it, as a centerpiece, we can develop a financial network that provides a solid alternative to what the present system offer.
This is how we start to usurp the banks. Simply creating tokens is not going to do it. We have to have a robust financial network built on top of the monetary system (blockchain) we have in place.