Many of you have probably noticed recently that, a few days ago, you no longer received HBD as a reward for your posts. Why was that happening?
The answer is fairly simple: "Because of the debt ratio!"
To which you might ask, "OK, but what's the debt ratio and why is it messing up with my HBD rewards?"
In this post, I will try to explain to you in the simplest possible way the mechanisms that come into play, starting from the basics that are necessary for your understanding.
1. One blockchain, two tokens
The Hive ecosystem has two tokens: HIVE and HBD (Hive Backed Dollars)
To avoid confusion, because the Hive platform has the same name as its HIVE token, we used to capitalize it when talking about the last one.
HIVE is the main liquid currency of the Hive ecosystem. It may be traded, staked, bought, and sold.
HBD were designed as an attempt to bring stability to the individuals who use the Hive network. Although HBD can also be traded, bought and sold (but not staked), it is considered a debt by the blockchain.
2. Why a debt?
HBD are created by a mechanism similar to convertible notes, which are often used to fund startups. In the startup world, convertible notes are short-term debt instruments that can be converted to ownership at a rate determined in the future, typically during a future funding round.
HIVE can be viewed as ownership in the community whereas HBD can be viewed as a debt denominated in HIVE.
The terms of the convertible note allow the holder to convert to the backing token (HIVE) with a minimum notice at the fair market price of the token.
Translated to the Hive ecosystem, the above sentence means that:
- the "terms" are embedded into the blockchain code as a smart contract
- it allows its users to convert each HBD they own into the equivalent of $1 USD worth of HIVE
- the conversion process will take 3.5 days
- the conversion price is the "median" HIVE price observed during those 3.5 days using the price feeds from the Hive witnesses. This has been put in place to factors out short-term price fluctuations.
Each HBD is essentially an IOU ("I Owe You [HIVE tokens]") issued by the platform and given out as a reward to its users.
3. What is the debt ratio?
As we have seen above, if HIVE is viewed as ownership in the whole supply of tokens, then HBD can be viewed as debt.
The debt ratio is the ratio between the HIVE virtual supply and the HBD supply.
- The HIVE supply is the number of HIVE tokens, both liquid (HIVE) and staked (Hive Power), that are in existence.
- The HBD supply is the number of HBD tokens that are in existence.
- The HIVE virtual supply is the HIVE supply plus the amount of HIVE we would get if we instantly converted all the HBD supply into HIVE.
Note: since hardfork 24, HBD stored in the treasury (@hive.fund wallet) don't count towards the HBD debt ratio because it doesn't make sense to count them in the debt ratio as they are "locked" by another "smart contract" which prevents them to be liquidated at once (the daily outflows are capped at 1/100th of its holdings).
A pseudo formula to compute the debt ratio would be :
convert_to_HIVE( HBD_supply - hive_fund_HBD_balance )
-------------------------------------------------------------------
convert_to_HIVE( HBD_supply - hive_fund_HBD_balance ) + HIVE_supply
You will find a visual representation of its value over time in my financial stats:
4. Why does the debt ratio matter?
The debt ratio determines how and when the blockchain creates new HBD.
There are 5 mechanisms involved in the creation of HBD:
- payout of author rewards
- conversion from HIVE to HBD
- interest payment on HBD stored in savings
- allocation of part of the inflation to DHF
- conversion from the ninja mined HIVE
I will describe these different ways to create HBD, but just know that only the first two are subject to the influence of the debt ratio.
Author rewards
UPDATE: as of Hive hardfork 26, the debt ratio thresholds used by the blockchain changed from 9% and 10% to respectively 20% and 30%
When the debt ratio is more than 9% 20%, the amount of HBD printed for author rewards is reduced and the authors get more HIVE and less HBD.
When the debt ratio is more than 10% 30%, HBD is stopped being printed and only HIVE is awarded as author's reward.
As soon as the ratio falls back below 10%, HBD is printed again.
The various conditions for HBD print rate are hardcoded in the Hive blockchain and are depending upon the debt ratio. A post payout can be as of following:
| Debt ratio | Payout |
|---|---|
| < | Hive Power + HBD |
| between | Hive Power + HBD + HIVE |
| > | Hive Power + HIVE |
When the debt ratio is between 9% 20% and 10% 30%, the blockchain will print HBD on the basis of this formula:
HBD print rate = 100% * (10 - debt ratio)
This means that the closer the debt ratio is to 10% 30%, the less HBD will be printed and replaced by more HIVE, until will be HIVE only when the debt ratio reaches 10% 30%.
The above rule is often referenced as the "haircut" rule.
If you go back to the graph provided above, you will notice that the debt ratio was over 9% then 10% for a few days, which is why the blockchain shrank and then completely stopped paying rewards to authors with HBD.
Conversion from HIVE to HBD
When you convert HIVE to HBD, the HIVE are locked for 3 days as collateral (they are removed from the account's balance) and 50% of the value (based on the current median price) is instantly converted into new HBD (added to the user's balance). Three days later, the value will be recomputed based on the median price from those 3 days and part of the collateralized HIVE will be returned to the account accordingly.
Regarding the role of the debt ratio, things are more simple in this case:
If the debt ratio is greater than 10%, the conversion request will simply be rejected by the blockchain to avoid printing new HBD!
Interest payment
Each top 20 witnesses propose an APR rate for HBD. The median value of those propositions is used by the blockchain to pay interest to users for holding HBD. Of course, the interest is paid by printing new HBD.
As of writing, the APR is 10%.
Note: Since the last hardfork 25, interest is only paid for HBD stored in savings.
The debt ratio has no influence on interest payment.
Allocation of part of inflation to DHF
Every hour, 10% of the HIVE inflation is converted from HIVE to HBD and sent to the DHF (Decentralized Hive Fund - @hive.fund HBD balance).
This HBD creation process is not influenced by the debt ratio.
Conversion from the ninja-mined HIVE
Long story made short, the so-called "ninja mined" HIVE are tokens that have been minted during the creation process of the Steem blockchain and put into an account controlled by Steemit inc, with the promise to use it for the development of the community.
When Justin Sun made his hostile takeover and the community decided to fork Steem and create Hive, those funds were moved to the DHF blockchain-controlled account @hive.fund
Later, it has been decided to peacefully convert those HIVE into HBD over ~5 years. Therefore, every day since 2020-10-31, the blockchain converts 0.05% of the HIVE stored in the @hive.fund balance to HBD.
This HBD creation process is not influenced by the debt ratio.
5. Why the debt ratio logic?
If the debt-to-ownership ratio gets too high then the entire currency can become unstable.
Debt conversions can dramatically increase the token supply, which in turn can be sold on the market and put down pressure on the price.
Subsequent conversions require the issuance of even more tokens. Left unchecked the system can collapse leaving worthless ownership backing a mountain of debt. A rapid change in the value of HIVE can dramatically change the debt-to-ownership ratio.
The blockchain prevents the debt-to-ownership ratio from getting too high and the debt ratio logic has been put in place to ensure that the blockchain will never have higher than a 10% debt-to-ownership ratio.
Conclusion
I hope you now have a better understanding of what the debt ratio is, why it was created, what its effects are and when do they come into play.
There is still a lot to say on the subject, but I will not overload this post which is already quite substantial.
However, be aware that there is also a lot of discussion about changing the 10% cap, both among developers and witnesses, and in the community. I invite you to read the very interesting post from @taskmaster4450 on this subject.
Thanks for reading.
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Thanks for the post, I've linked it from https://hive.ausbit.dev/hbd so it'll look like this whenever print rate is reduced next
How cool, I feel honored 😊
Thank you!
I think it meant "reduced by" instead of "reduced to" right?
Nah this was correct, the prompt normally wouldn't appear at all at 100% print rate but I hacked it so I could make a screenshot. The grammar will make sense
So if it was reduced to 100% it means it could print above 100%? It made me more confused
Usually this prompt would say something like "Print rate has been reduced to 50%". This prompt would never usually appear if print rate is 100%
Nope, I've always been a fan of HBD and don't think it's redundant at all.
An excellent breakdown of the details how the HBD/HIVE ration works and what influences it.
This is something all should read.
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Thanks @taskmaster4450le. It means a lot to me from someone like you who also spends time educating people.
I'm starting to understand this after 2 years here! This was the best explanation I've seen so far.
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Better late than never. Thanks for the compliment, I appreciate it.
One doesn't need to understand how it works to make use of it. Having a relatively stable coin in Hive is really useful.
A Short Story about Economics and Economists
(1) A very good friend of mine who once started and ran an international retail chain operating all over the world with 400+ stores got talking to a prominent Bank of England economist at a banquet in the City in the 80's.
(2) After talking a while he asked the economist the following question: what is the relationship between the interest rate which the Bank of England can put up or down and the UK£ Sterling exchange rate with other currencies?
(3) As he finished asking the question, the MC banged his gavel and announced "Please be upstanding for His Royal Highness....". My friend had to quickly move to his seat and never got his answer.
(4) He never did get that answer and he carried on running his large company and making huge bets on future currency swings based on his gut feel the way all of us have to.
(5) Years later he was walking to his (1st class) seat on a train and he recognised the same economist sitting with papers and charts and two colleagues.
(6) He went up to the now Governor of the Bank of England and said, you may remember, a few years ago I asked you what the relationship is between the country's interest rate and the value of the currency.
(7) Yes he replied, I do remember you and I remember I never gave you an answer! And I've thought long and hard about it in the intervening years!
(8/8) The answer to the question "what is the relationship between interest rates and currency" is I didn't know then and I still don't know now.
And that, my friends, is economics 101 and economic forecasting.
[There are plenty of theories on this, but no single answer]
Do you understand all the intricacies of the FIAT system you use for years and the different services provided by banks?
Does it prevent you from using your money?
Should banks reduce all their services to one?
I'm not upset. Just asking questions to make you consider the positive aspects of HBD.
I personally consider HBD brings positive value to the Hive ecosystem.
I'm not comparing Hive to a bank. I'm just saying that you do not need to know everything about a complex thing to use it. And it does not lower its value because it's complex.
Bad characterization. Steemit neglected HBD almost entirely, and since the Hive fork a lot more development has been done to make it work better.
If you don't like what you have now or what it might become, that's on Hive, not Steemit.
Smelly SBD.
Thanks for the very enlightening post. For myself I find it is always good and useful to have a greater understanding of how things work at a fundamental level (it's good to be da analyst!).
Blessed be.
Thank you @cowboyphylosophy
I have no clear idea on this topic of debt ratio and payment with hive above 10% debt ratio. Well informative and explanation is so simple to understand for non native English speaker like me. Thanks.
I have saved this post in my computer. Its really cool to me to learn the basic.
@arcange Thank you so much for this great explanation. Now I feel like I do understand the basic concepts. I've been slowly building my HBD savings account every time I receive it as and I'm planning on converting some extra USD into HDB and putting it in the savings account. 10% interest is a great return.
Thank you for the detailed explanation. I understand better now why my payouts were reduced in HBD. I liken the debt aspect part of it to my offline corporate stock holdings and the company's issuance of warrants to be converted into stock at a later date.
Is there a way to check when the debt ratio exceeds 10% so that I don't attempt a conversion in the first place?
Thanks for sharing your explanation of what's happening.
You can check the debt ratio either in my financial stats or here
Thanks. I've booked the site and will visit your financial stats. Appreciate the reply. Have a good rest of your week.
Thanks for the information! Very well written.
Thank you @l337m45732. Glad you found it informative.
Thank you for the explanation or re-explanation. It is one of those things some of us knew and had somewhat of an understanding of, but over time number things get forgotten, so this was pretty timely reminder.
A regular small refresh never hurts 😉
True and it did not last that long. The one thing you did not mention and the one thing I keep forgetting is when is it best to use convert verse direct market for turning HBD to Hive??
I did not mention it in my post because I do not provide financial advice.
A quick answer would be "it depends on your profile and investment strategy" 😀
I get that, some times I do the convert, sometimes the direct market, but mostly right now popping some into savings.
Wow, thank you for this indebt article! I was wondering that I got Hive Power + HBD + HIVE rewarded once. Now I understand it much better. This is super helpful and I start to understand more and more how much thought went into the entire Tokonomics of the Hive ecosystem. Respect and full-on appreciation!
Cheers 🙏
Thank you @gunnarheilmann
Wow this is amazing do you have any other posts like this on other hive subjects because I would read all of them!! So good!! I learned a ton about a subject I still had some questions about even after 3.5yrs.
Thank you @jarvie.
I published another "educational" post which also seems to have been greatly appreciated. It's about trust in the account recovery process
Maybe I should refresh the one I made a long time ago about reputation.
Do you have one about Hive Reward Pool and Voting system?
That's something plenty of people have questions about... lots of people try to explain it all the time of course but something written in this style would be really interesting.
I will add your suggestion to my todo-list.
Please be patient for it to come out, I'm busy preparing SF6 right now 😅
Best explanation ever, you have gifted talent of teachings this stuff. I will take note of this post that I can use whoever may want to see this.
Thank you @hiro-hive 😊
It means that hive that is converted into HBD will be burned? so the system will reduce the supply of hive ?
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Yes, HIVE are burned and new HBD are printed. Therefore, the HIVE supply is reduced.
Shared, excellent explanation! Clarity at last, always have enjoyed balance between the two, this better deeps into inner workings.
Thank you @joanstewart
Wow! I had no idea but the system makes sense the way you laid it out. Thank you for the informative post, I reblogged it in hopes of spreading the info and help grow the knowledge of the community.
Thank you @asynckronism
A really interesting and helpful post.
I had asked myself this question and thanks to you I received the answer I was looking for explained in a simple and comprehensive way!
!BEER
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Check the LUV in your H-E wallet. (6/10)
Thank you @libertycrypto27
Wow great post thanks for sharing this info have the best day
Thank you @benthomaswwd. Have a good day too!
Thank you
It's always good to remember how Hive blockchain works. It deserves some !LUV
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Thanks for making this post. Very informative
Thank you @blackman15
Excellent article, I save it in bookmarks. Thanks! 👍
...
I found one text error related to old habits. :)
OMG, bad habits die hard 😞
Fixed!
That's for sure. 😁 😁 😁
Thank you -- this explains it all ... we have been hovering around that 9-10 percent debt ratio ...
You got it right 👍
Thank you very much for the information. The content is excellent.
Thank you @everojas
Thank you ... this clears the matter up entirely
Thanks for this informative post! Now I understand why I am seeing Hive Power + HBD under my payout page for upcoming rewards. 👍
Wow nice post, thanks for information
Thank you @mukna996
wow, thanks now I kind of get it :)
Finally 😅
I think this is over, and payments are back to normal again, and thank you for this very useful info.
Yes, we are now back below 9%
Greta post, I remember it had something to do with this but this sums it all up
Thank you @skylinebuds
Thanks for the information. I was wondering what the conditions were for both HIVE and HBD as part of the post payout.
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Guess you now have an answer 😉
Excellent post and now I got to know the reason behind reward in form of HIve or HBD. Thanks,
Thank you @reeta0119, you will feel smarter from now. 😀
Indeed. Lol.
Thank you so much for this information, very well explained. 👏
Thank you @alvaradofran
How nice it is to have news of what is happening on the platform, I had already noticed it, but I have always known that HIVE is in good hands. Thanks for notifying @arcangel
Thank you for the explanation. !BEER
You're welcome @fiberfrau
View or trade
BEER.Hey @arcange, here is a little bit of
BEERfrom @fiberfrau for you. Enjoy it!Learn how to earn FREE BEER each day by staking your
BEER.Thank You for all of your efforts.!
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Thank you @ugochill
The rewards earned on this comment will go directly to the person sharing the post on Twitter as long as they are registered with @poshtoken. Sign up at https://hiveposh.com.
You post is so informative, I learnt a lot, thank for sharing 👍🏼.
Thank you @onwugbenuvictor
I have been looking for HBD. I just wonder if leo finance are not giving HBD again. Thanks for information.
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@arcange, this comment has been manually curated with LUV.
Check the LUV in your H-E wallet.
Good post.
I don't mind getting no HBD since I don't really use HBD to do anything other than to just hold it, while hive I power up. Maybe I should just get my rewards as full HP but then again I use hive to buy things on hive engine.
Thanks for the info.
Thank you @akumagai
Instead of holding HBD, you could convert them HBD to HIVE. There is a good opportunity to do so now that HBD price is below $1
Or move them to savings to benefit from the current 10% APR
Ahh yes, the savings. Sorry that's what I meant by holding.
Mr. Arcange thanks very much for the information. Is very usefull. Greetings.
Thank you @alejandrop
Top analysis It opened my eyes to a lot of things I didn't know
Is this why at times, Steemit stopped paying SBD and started paying Steem? (or something similar) I mean before Sun took over.
Yes, this mechanism was already implemented in the blockchain code before we forked to Hive
Very clarifying. At first, I was not very fond of this limit of the debt ratio.
It doesn't seem to be hurting, but would be interesting to change a little bit and see how it works out.
It originally had no history to backtrack and choose the amount of debt ratio. By changing it slightly over time we can see the long-term reaction and decide the way to go.
Well, I think I got lucky then (because I converted all my HBD to Hive, I am trying to save HBD).
I am receiving some HBD, but I am sure this will be intermittent as we are near the ceiling.
Thanks for the info man!!
You're welcome @burnoutawesome
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Very interesting article @arcange .
Q: So is it necessarily a good or bad thing, that our debt ratio gets so high?
Q: Besides printing more HIVE, is there a long term negative effect if we stayed at 10% or greater, or is it a positive effect?
Q: What do we think caused this spike in debt ratio, and has happened in the past?
Thank you!
!PIZZA !LUV
This is a difficult question to answer because it depends on a lot of parameters. Debt can be useful, even necessary, for the development of an activity. But also dangerous if it is not controlled and mastered. Finally, the notion of good or bad is quite subjective.
You will find an answer to your question in @editcted post
As mentioned in my post, this mechanism has been put in place to avoid a spiral of death if the price of HIVE drops down too fast.
So, it's a safety net against debt explosion.
Market forces and the new mechanism for converting HIVE to HBD (that led to the burning of ~120 million HIVE). Combined together and probably with other factors, you get the debt ratio to rise.
Unfortunately, I haven't been tracking the supply for long enough to say if we've had a similar situation, but I do know of times in the past where the "haircut" has been activated.
awesome, thank you for the reply!
You're welcome
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