The Hive Haircut Rule is a measure that was put in place to safeguard the ecosystem. This was recently changed in Hard Fork 26, moving up to 30%.
What is the haircut rule?
Basically, it is a mechanism that continually looks at the relationship between $HIVE and HBD. Since the former is backing the latter, the blockchain needs to be sure it can fulfill the request. What this means is there needs to be at least $1 worth of $HIVE available for each HBD that is outstanding.
Here is where HBD is actually a debt instrument.
The haircut rule helps to ensure this and remove the counterparty risk. At the present moment, if the market capitalization of HBD reaches 30% that of $HIVE, the blockchain stops producing HBD until the ratio gets below the threshold.
As stated, this is a defense mechanism to maintain the peg. Remember, the peg is on the conversion, not necessarily the open market. There the price of HBD for $HIVE can fluctuate. However, when converting, the rate is hard coded into the blockchain.
Each HBD can be converted into $1 worth of $HIVE.
Of course, the coin has a free floating exchange rate. That means the conversion is always the same in USD terms yet can changes based upon market price. If $HIVE is $1, then it is a 1:1 swap; if 50 cents, then each HBD is worth 2 $HIVE.
The question is whether this will ever need to be changed?
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Producing More HBD
It is the haircut rule that makes HBD different from UST. With Luna, there was no limit to the amount of UST that could be created. The potential for a ratio of 125% existed. How could a backing coin hold if the market cap of what it was supporting was worth more? The answer is obvious as we found out.
One of the reasons the haircut limit was raised is so that more HBD could be produced. Certainly I am in the camp that we need a lot more of it on the market. We know, with the existing HBD supply, there is not a lot out there for commercial and financial applications.
That said, we are far below the limit. At the present market cap of roughly $151 million, we could have 45 million HBD in circulation (HBD in the DHF is not counted as it is effectively locked away, posing no threat to the ecosystem).
According to Hiveblocks, there are 31 million HBD total in existence. The DHF is sitting on 20 million, meaning there are 11 million in circulation. That is a long way from 45 million.
Of course, that is at the present market cap. The key to remember is the relationship between HBD and $HIVE is in USD. That is the unit of account both use.
Here is where things get interesting.
If we need to produce more HBD, the only requirement is for the market cap of $HIVE to increase. In fact, this is an fantastic way for the ecosystem to expand.
As more HBD is needed, the community (market) can produce it. By converting $HIVE, that decreases the supply. This, in theory, should drive the price up if demand is the same. Naturally, demand for the access token can come from the need for resource credits, creating the circular economy we discuss so often.
Therefore, if we the market required 300 million HBD, that is possible of the market cap of $HIVE is $1 billion.
It is a process that just keeps moving up the ladder.
Is 30% The Right Ratio?
This is something that is in place only for the last few months. In theory, it was a sensible move but we have to see it operating in practice. So far, there isn't even a hint of a problem.
The ratio is there primarily to prevent a money attack. UST was vulnerable because the expansion of both coins was without limit. That is not the case on Hive.
So what is the proper ratio and will we have to increase this in the future?
A better question might be why we would need to? Under what circumstance could a higher ratio be required?
The only thing I can think of is because we needed more HBD. However, if we were bumping into the ceiling, is that wise? As we can see, since there is no limit to the market cap of $HIVE, more HBD can always be produced.
If we need 30 billion HBD, still a rather small amount, the market capitalization of $HIVE would have to be $100 billion.
Seems fairly reasonable.
Could the ecosystem weather a 50% ratio? That could be possible. However, is it something that is wise to do? At this point, we are just speculating. If we find the haircut rule is regularly being hit, perhaps we can take a look at that. However, if the expansion of the ecosystem keeps driving the demand for $HIVE, we should not encounter any problems.
$HIVE is a value capture token. Whatever is created in value on Hive, in theory, should be captured in the price of the coin. Of course, we know markets do their own thing so it is not exact. Nevertheless, in the long run, as Hive's value grows, so should the market cap.
This allows for even more HBD to potentially be created.
In Conclusion
It is impossible to know exactly what level is proper for the ratio. We do know that 30% appears to be very manageable. There might be times where the rule is implemented and HBD production ceases until things get back in alignment. This is what the mechanism is designed to do.
Will there come a point where we want to raise it again? It is possible. However, the Hive ecosystem provides monetary elasticity as the market (community) sees fit. The haircut rule is in place to prevent the manipulation of this by nefarious actors who seek to duplicate what happened with UST.
In the end, if we are building value on HBD, through utility, we likely will never have to alter the haircut rule. $HIVE should capture the value of the entire ecosystem, of which HBD is a part of.
Of course, it is worthy to mention that even though Hive is feeless, to make payments in HBD does require some Hive Power. Once again, we see the circular. As HBD transactions increase, more HP is required to be able to transact.
This action would push the demand for $HIVE higher.
That said, we could see a time when volatility skyrockets. With a fair bit of $HIVE on Upbit and more being fed into Hive Power, the amount free floating could diminish. This tends to create volatile conditions that could see large moves in price.
Having the haircut rule in place helps the ecosystem weather these moves. While temporary, they could be points o vulnerability without it.
If you found this article informative, please give an upvote and rehive.
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Once HBD starts having more applications, people will be less inclined to buy HIVE with it, will this have a negative effect on the value of HIVE?
You are right, now the primary use case of HBD is to buy the other coin. However, do not forget, to utilize HBD, one needs resource credits which means powering it up. Someone has to provide the RCs to operate on chain.
Hence activity on chain could well be the primary driver of demand for Hive. After all, it is an access token.
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Good reminder, HP is the true sink for HIVE and every new user needs Resource Credits. Growth on the hive blockchain will increase demand for HIVE, let's keep growing the chain! Thank you for your support!
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Actually, the cap on the HBD in circulation would be 64 not 45 million. To estimate this number you have to divide the market cap by 0.7 (100% minus the debt ratio). Then the difference would represent 30% of the potential virtual supply and the actual hive supply would represent the other 70%.
You just have to remember that the debt ratio is in relation to the virtual supply and not to the current hive supply.
Thanks for the clarification.
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Thank you for the above line, since I have been reading about the haircut rule this is the simplest form that finally hits home. Am slow to grasp some of these fancy terms.
The Hive, HBD relationship is like none out there, from all I have been reading about Hive and HBD, it shows the mechanics in place were carefully thought of and not just some tokenonmics built with only token price appreciation in mind, there has to be security and we have that.
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There are some safeguards in place based upon what happened elsewhere. The key in all of this seems to be to try and slow things down. That is the difference in an attack. Speed is how things get out of control.
Slowing things down and making the process a pain in the ass can deter some behaviors.
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And chance for that still exist on Hive. You can't really compare both or write about HBD haircut ignoring value drop on "collateral". You just described one side of the deal, pretending it's all safer than UST, and ignoring main risk.
This 30% can be 125% very fast. Someone could say there is no limit for that. Even if you stop printing hbd, hive value still can go down.
Which factor have higher impact on mentioned ratio, hive price or people?
I think however you approach this matter price change is more important.
This might be even measurable, you can compare activity based changes on ratio to price based changes to ratio in time. Like: take ratio some time ago, could be date of mentioned change, compare it to actual ratio after time, and compare influence on change by activity -> printing hbd, burning hbd to change caused by hive price.
If we reach 30% ratio at 3$ Hive and hive price will drop overnight to 1$ it's not 30% anymore, right? You can imagine all the events following this scenario, printing hive to drop price even more to print more hive, etc...
So, Hive price amplitude is probably most important factor on the topic you describe, but you missed it. Possible any number above 10% creates risk, not necessary we will see it now at low hive price, but eventually with next bull period if people start cashing out to HBD and we will get closer to 30%, eventually price will drop and some funny events may occur.
Take a look at Hive chart, think about something like max possible value drop on Hive. Maybe 3 - 0.3?, 10x ? Then simulate how this will affect ratio at 30% :)
Worth to mention is that I know nothing about hbd itself. Wrote it based on your post and basic math knowledge.
If the debt ratio is at the maximum of 30% and the value of Hive drops the blockchain will stop paying one dollar's worth of Hive. In the scenario that you described, HBD would be worth 30 cents. So the debt ratio cannot go above 30% by design.
In fact, the blockchain starts printing less and less HBD when the debt ratio hits 20%.
That's good to know.
You are correct on the math that a huge drop in price will cause the ratio to drop. When that happens, the creation of HBD stops along with conversions. The point was that more creation doesnt continue unabated like with UST/Luna.
Conversion of HBD would help to eat it up, lowering the market cap and ratio.
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That is true. Applications have an incentive to hold it simply because of the need for resource credits. People need them to engage onchain.
Also, the key is to build value on HBD itself, through utility. That means that in spite of the trading and other financial aspects, users have incentive to keep it in their wallet, ie to make payments and purchases.
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right game starts from 0. At least we play it against ourselves. Possible it's more psychological matter than numbers and stretching playground probably doesn't matter until we maybe reach very high HIVE price somewhere in 10 years
I wonder if this haircut rule is managed through the witnesses and if they can adapt it based on the market conditions. If that can be updated on the go, it would surely be a great safety measure to act right away if something bad happens.
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I believe the haircut is hard coded into the blockchain. This is why it was changed in the hard fork. The witnesses do control the interest on HBD in savings. So they could alter/stop that based upon market conditions.
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The uses of HBD are limited. Increasing this should be among our priorities. For example, if a shopping card called HiveCard, which is used for shopping, is released, it can solve some problems.
There's hivepay a service built by the @clicktrackprofit team that you can integrate into your webshop right now to accept not just hbd and hive, but also other hive-engine tokens as payments.
The game Ragnarok will become a massive HBD sink.
The same will be true for the Speak network that is built by @3speak
Hashkings is another game that uses a lot of payments with HBD. They integrated Hivepay for that.
The @leofinance team has created derivatives on the Binance smart chain and Polygon and is earning thousands of dollars arbitraging the price of HBD. Soon they will do that on the internal exchange as well.
Many, many more projects are looking into it. Because it works.
Good summary of what is already taking place.
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As mentioned, Hivepay is already in operation and can be integrated.
Utility for HBD is vital. But there is more to a currency than just payments. That is important but it is also a small sliver of the pie.
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Me gusta saber cada vez más sobre hive, gracias por la información 👍, siento que me falta muuucho por conocer aún
So are there only two ways that HBD is created? When you get rewards for a post and when you convert Hive to HBD? I have heard the term haircut before, but I never really understood what the percentages were all about until now.
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I believe HBD is also created to pay the Witnesses.
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Witnesses are paid in HP. DHF proposals are paid in HBD.
Check, but DHF HBD is already created but locked up if I understood correctly?
Correct. The payout itself doesn't create HBD, but it does put it into circulation. HBD within DHF doesn't count toward the haircut calculation, but once paid out it does.
The DHF receives newly-created HBD from the blockchain every hour (inflation), and some of the HIVE in DHF is converted into HBD every day.
thanks for the clarification, interesting how this all works together, lots of pieces.
Yeah that sounds logical I guess, there's a lot involved with this but starting to understand it more step by step
Ah, okay. I wasn't even thinking of that one.
I'm glad there are better minds than mine working on it. Well done to all involved. HBD seems to be working well and even with the depegs hasn't been much of an out of control issue. No death spiral. That's all that matters really.
UST never had any safeguards in place. That is one thing Hive is doing well, putting obstacles in place that slows things down if something similar is attempted.
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it is very interested how the HDB generation works, at the moment of reading I was going to ask if we could see a LUNA situation but seems very unlikely, going to bookmark this one to keep it handy, thx for sharing ✌️
There are some obstacles in place to deter something similar like that. The haircut rule is one. The HBD stabilizer can be looked at as another. The conversion mechanism also is not immediate.
All of this is meant to push people away from pulling something similar.
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I asked about the term "haircut" you used in one of your videos last week. Nice of you to explain it in depth now. 👍
It's actually really easy to tell where the haircut should be.
The increase to 30% was nice, but we need to leave it here for years to test it.
At the end of the day if legitimate demand for HBD goes higher than 30% we will be forced to increase it. There's really no question about it. Otherwise it will just spike to the upside and be impossible to maintain the peg.
The real problem is estimating the range of elastic demand that will fluctuate wildly between bear markets and bull markets. We need to think of ways to increase demand for our debt during the bear market so that HBD is less likely to be converted to Hive and doubly cripple us during the bad times. It would also be just as helpful if we could lower demand for our debt during the bull. Both of these strategies create more elasticity and buffer for the main chain.
Wouldn't it be the same as swapping Hive for BTC if you're replacing HIVE for HBD? Trading/Transacting with just Hive would just increase sell-pressure for Hive. Having HBD as a mandatory option should give more stability and should lower volatility to the downside (as it is pegged). But I guess it's all theory until it's not. So I think it's good to test things out for longer periods of time before making adjustments.
It also makes for a valid reason to hold and transact with HBD if you want to chip in and do your part btw. At least, this would be the case for me to hold some/more HBD, and to put more in savings to mint new HBD (which also increases the supply).
No worries, English isn't my first language. Mandatory wasn't the right word, 'secondary' would've been correct.
You missed the point. But sure, indirectly it's probably how one may see that, as in: "I sold my BTC to buy X". Whatever form of (wrapped) BTC, in your case; SWAP.BTC is then sold (note the selling pressure if thousands will do this)/traded by buyer/merchant for a currency to cover costs and expenses. The same would go for HIVE, and obviously HBD as well. Since HIVE is a governance token, and HBD has more properties that resemble a similar stablecoin (like a dollar), it's a no-brainer which one to prioritize to use to transact, but that's indeed not my business. Fair, anyone could use HIVE to transact, I wouldn't mind. I price HIVE much higher than it is right now, so I'd be more than happy to accept HIVE -right now- as a receiver. Understand that uncertainty will grow when prices of Hive will be higher, are volatile, spike, etc., and the risks (insert your Utopian Coin here) and volatility probably grow with it as well. But another important factor is that buying pressure -needs- to be equal to the introduced selling pressure to cover costs/expenses of products that are being bought/sold with HIVE (and not with HBD).
If you have purchased Hive for 10 cents, and you can buy something for 10 dollars for 1 Hive in the future, let's say 30% is costs/expenses. Guess how much money is actually flowing out of the ecosystem at the price of 10 cents? Sure, this is great for the early investor, but the newcomers are paying for that. Do the same basic math with HBD. This could be easily countered with transacting in HBD, as prices have shown to be quite stable over time. At this point, I'm not even considering the Utopian version. It would be the same as "Hey, I bought this with HBD", even if this meant using HBD to swap for BTC, which then swaps for USD or whatever currency is accepted. The point is, that such a thing will decrease selling pressure -to the downside- of Hive (and increases that of HBD).
No one is saying that HBD is the same as a dollar. It is aimed to be pegged to a dollar equivalent worth, do note the difference. With your logic: Hive isn't a dollar either.
Let fly over a scenario inside of the Haircut:
Here are numbers, Hive = 27c$
100.000.000,00$ Hive MC
30.000.000,00$ HBD aka 30m HBD
--
Now the HBD APY and general Inflation will be paid in HP and Hive from that point on, and the HBD APY in liquid Hive.
Here is a starting point and fixed parameters to keep the complexity in check:
How I see it play out:
The HIVE Marketcap will increase due to;
HBD Savings by 30.000.000$*0,017= 510.000,00$ in Hive <=> 1.888.888 Hive
Hive Infaltion 100.000.000 * 0,058 = 580.000 Hive <=> 156.600$
So people can reinvest 30% of that into HBD, due to the Haircut and 70% will have to stay liquid. Now I believe that the HBD price will start to rise by a small % in waves, people will arbitrage and the Hive price started to rise to expand the MC and create additional space for more HBD - in good market conditions. If there's the bottom of a bear market outside and all coins start to swing downwards, we might see the Haircut getting very deep and additional sell pressure is generated.
What do you think?
good analysis
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Great post
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This is great, you explained it in a layman's terms and I now fully understand it. Hive is doing well and I'm proud to be part of this community
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Nice explanation of an important concept. It is worth rereading and developing. I had never heard of it prior to this time. I also wonder if steemit had anything like this going on. Its stable currency has not been very stable at all.
I think the haircut rule is reasonable right now but we haven't really had too much of a stress on the system yet. I think we still need a ton more HBD liquidity and then we can see how it affects things first.
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This is great information for me. It helps me understand some of how tokens work. I never heard of the 'Haircut Rule' and it sounds like a good thing to be in place.
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