This post comes a little late; it's been sitting in my ideas pile since LUNA crashed to zero. The heat that's been scorching algorithmic stable coins has cooled down a bit and I don't see a lot of people freaking out about HBD like it's going to tank us to zero like UST did with LUNA. However, there still are a lot of questions we need to be asking about algo stable-coins.
The first thing we need to ask is if they are really necessary. If we are trying to piggyback off of the stability of the old debt-based system, do we really need to "decentralize" it? After all, if USD fails all the stable coins pegged to it will fail as well, right?
Depends on yield, actually.
If galloping inflation were to hit USD and it started losing 20% of its value year over year compared to other assets (other fiat would be even worse) then the 20% yield provided by something like HBD would completely negate that loss. Something to think about.
But 'decentralization' is more robust!
Is it though? How many centralized stable-coins pegged to dollars in a back have failed? How many decentralized algo-stable coins have failed? Kinda seems like the centralized versions are winning by a landslide, not only in terms of trustworthiness, but also in terms of market cap and stability and volume and overall presence (exchange listings).
What are algorithmic stable coins even good for?
When looking at something like Hive, HBD is great because it allows us to print debt and outsource that value into another derivative asset that drives growth to the entire network. In a very real sense, it's really just free money floating around. There's always going to be some amount of demand for a stable asset. Driving demand for the network's debt removes Hive from the ecosystem and pushes the price up...
Sort of...
The problem with HBD and just the boom and bust cycles of crypto in general... is that Hive and HBD are positively correlated. We would much more prefer them to be inversely correlated. When the market is doing well and the price of Hive is going up, the demand for HBD is also going up. When the market is crashing into the mountain the demand for HBD is also crashing into the mountain. This is something that seems to happen for all stable coins, even things like Tether (which is constantly getting accused of printing money out of thin air).
Printer go brrr tangent:
Tether can't print money out of thin air. It's literally impossible. I find it extremely comical that everyone in crypto seems to understand that if you dump tokens on the market (taker orders) then the value of that token will drop. How can Bitfinex dump fake Tether on the market without the peg breaking to the downside? Duh? It's not possible.
The only question to be asked regarding Bitfinex is simple:
Once Tether (BTC/USDT) breaks to the upside and they print tokens to bring it back down to $1, do they take the Bitcoin that they bought and turn it into dollars in a bank, or do they hold the Bitcoin reserves and essentially go long on Bitcoin? See? It's not a question of if they are printing tokens, only a question of what reserves they are holding to maintain the peg. This is simple math, but 95% of people in crypto seem to completely misinterpret the situation for whatever reason (printer go brrr crypto culture perhaps).
Back to HBD
When Tether loses demand and they have to buy back their own token, it's no big deal. In fact, Bitfinex makes money on that trade, because a centralized exchange with their own token is basically an arbitrage factory. When Tether breaks to the upside, they make money. When Tether breaks to the downside, they make money again buying back their own token at a discount. It's a win win in both directions.
HBD is not so lucky.
When Hive spikes and price of HBD spikes, Hive gets destroyed to print more HBD to bring it back to the peg. We can think of this as "buying the top". The network itself is destroying tokens and turning them into HBD at peak FOMO. Then when we inevitably crash, those HBD need to be bought back by the network at the bottom. Essentially the HBD stable coin makes Hive more volatile. Higher highs and lower lows. Buying the top and selling the bottom to maintain the peg.
It's not great Dan.
I mean it's great if you're a trader. Anyone who DCA sells the tops and then DCA buys the bottoms is doing amazing. Unfortunately the vast majority of users are terrible traders and end up bleeding value because all the volatility makes us do crazy things.
Should we consider scrapping HBD?
I think not. HBD is great, and even though it makes Hive more volatile, over multiple cycles HBD will drive more value to Hive than if it didn't exist. It's also not HBD's fault that all the plebs are buying the top and selling the bottom. If we simply figure out better ways to provide liquidity to the network during times of need this volatility problem pretty much goes away.
So even though it sounds bad that the network is "buying the top and selling the bottom"... where does that value go? It goes into the pockets of people on Hive who actually provide liquidity to the network when the network needs liquidity. This is why we should stop trying to make trades based off of trying to strike it rich and should change our entire scarcity mindset into an abundance mindset.
Rather than asking when we should be buying and selling to make the most money for ourselves, we should be putting ourselves in the Hive network's shoes directly and asking if Hive wants us to sell or buy. By completely changing our mindset to an abundance mindset, we no longer care about making money on the trade. It's more about building value for Hive, which means providing elasticity to the network. As the price goes up we might sell off 5% chunks of our stack, and as the price goes down we might use that outside value to buy back in with small chunks. Ironically, this change in behavior (not caring about maximizing gains) will inevitably lead to huge gains. The network intrinsically pays users who provide value to it. That means selling on the way up and buying on the way down.
Not to sound like a broken record, but selling on the way up and buying on the way down is EXACTLY what an LP position does within an AMM market... automatically without any user intervention.
What else?
In terms of HBD, what we really need to be thinking about is if it's possible to turn the positive correlation into an inverse correlation. Let's explore this more...
When Hive number go up... HBD demand also goes up. Why? Because users will inevitably be selling Hive into HBD. That's actually what we wanted all along, for users to sell Hive when number goes up to provide the supply for this increased demand.
Okay, so now we have an HBD price of say $1.02, and we'd like to return to the peg WITHOUT CONVERSIONS, because again, the HIVE >> HBD conversion is basically like buying the top and creating more volatility at the exact time we don't want more volatility. We also can't just sell the HBD back into Hive because that does the exact same thing... creates more volatility during a time where we are trying to have less.
It stands to reason that the easiest way to bring HBD back to $1 without conversions is to sell it... into another asset that hasn't gone up. This makes sense. If we want HBD to be pegged to $1, we should probably consider selling the HBD for dollars, an asset pegged to dollars, or an asset that hasn't been overbought during this particular FOMO cycle.
The problem with all this is that HBD has lost all of it's exchange listings, and let's be real, HBD never had a good exchange listing to begin with. Luckily Polycub has the pHBD/USDC LP, which is making it a lot easier to turn the HBD into USDC. It's also not a big deal if the HBD gets sold for Hive as long as there's liquidity at the current price, and then the Hive can be immediately dumped on exchanges for stable coins or BTC or whatever. This helps both Hive and HBD remain stable during periods of extreme volatility.
Dapps and the dev fund
Businesses on Hive could also help to stabilize HBD and Hive by employing proper business strategies. For example if a business on Hive hosts a sale that requires HBD, they can get that HBD out of the noob's hands and into their own so they can dump it accordingly if HBD is overpriced or hold it if it's underpriced. The 20% yields on HBD are an amazing opportunity for businesses on Hive looking to hodl.
The dev fund is also a huge source of elasticity. If there's a lot of demand for HBD we can simply print out a bunch of HBD and dump it on the market. Sure, the stabilizer proposal already does that, but it's dumping the HBD for Hive, which is absolutely not helpful during a spike as it makes that spike even worse.
It seems to all come down to holding value outside of Hive during the good times so that when the bad times hit we have a big bag to pump back into the network. It all comes back to buy-low-sell-high mechanics.
Well how the hell does fiat stay so stable?
That's the question isn't it? If crypto networks can begin to copy the strategies that central banks employ to create this kind of stability, we'll no longer even need the stable-coins to begin with. I think the ultimate goal is for the main governance token to be semi-stable and for the stable-coin to be very stable. What we have now is an extremely volatile governance coin and a semi-stable stable coin. Definitely needs improvement.
The FED's main tool is manipulating interest rates.
Already, this is super interesting... because crypto can manipulate rates that runs circles around legacy central banks. We can manipulate inflation into any area we choose, should it be the dev fund, the reward pool, AMM pools, or whatever else. The programmable nature of crypto means that it will inevitably surpass legacy banks be exponential margins. We just aren't there yet because crypto is so tiny and new and needs more infrastructure and adoption.
At the same time, the interest rates that the debt-based fiat system employs are the exact opposite of crypto (which isn't debt). The interest rates at the FED are designed to extract value away from entities that take out loans... with crypto it's completely backwards, where our interest rates are a reward (asset) rather than a liability. This is why many things in crypto are exactly the opposite as the legacy system, and also why professional economists can't wrap their head around the new system (because it's completely opposite from what they know).
conclusion
Algo stable coins need a lot of work, but they are worth it. Derivative assets have value, especially when those derivative assets provide stability within a wholly unstable market. The trick is setting them up so that the governance token they are connected to doesn't make the main token even more unstable.
Ideally we need to provide supply when demand is high and reduce supply when demand is low. Manipulating demand itself is a fool's errand, and swings in huge waves of FOMO/FUD boom/bust cycles. Crypto has the tools to evolve into something exponentially better than the legacy system, but we simply don't have the infrastructure to compete yet. Until then, we are dependent on the system that we hope to one day overthrow.