Over the past year, we discussed some pieces of a foundation for establishing more opportunities on Hive. This started with Hive Bonds yet is being expanded with a framework being developed to generate a complete financial platform.
For now, we will call it the Hive Financial Network.
In this article, we will not go into the full details as the model is still being developed. However, there was a post about the Hive Bond Market by @edicted which brings up some good points which can be clarified.
Here we will cover the specifics of that article along with how it fits in the backdrop of a larger plan.
JPMorgan On Hive
The essential premise started with the idea of "creating JPMorgan on Hive". Of course, there are some limitations to this since Hive has limited smart contract capabilities. For that reason, much of this would have to be built on as layer 2 solutions.
There is also the structure of the Federal Reserve. For anyone who read the Federal Reserve Act of 1913, there is a structure of ownership to that institution. A mistake many make is to believe the Fed is part of the government. It is not. The Federal Reserve banks (there are 12) are owned by the member banks in each region. They receive a dividend of 6% each year as mandated by statute. All excess profit above that is sent to the US Government.
We discussed the concept of the Hive Central Fund which spells out some of the details. Give that a look if you are unsure what we are referring to.
From there, we can build a host of financial applications. This can serve as a full decentralized finance (DeFi) platform. Here is where the offerings can get quite expansive. It also could be a major source of revenue for Hive.
Essentially, we are looking to provide the services Wall Street offers. This is designed to be constructed on top of a DAO that is tied to Hive. It also incorporates the Hive Backed Dollar (HBD) throughout the system.
To go further into the concept that @edcited mentioned, we have a few things to clarify.
When a company or government needs money, they issue out bonds. These financial products are sold for existing money, providing the entity with the capital it need. In the case of a government, it goes into the Treasury fund which is then pays the bills the government has.
Bonds are both an asset and a liability, depending upon which balance sheet is being looked at. To the government, as an example, it is debt. It is responsible for paying it back. On the other hand, the one who purchases it is receiving regular payment, thus it is an asset.
The logical choice is that Hive Bonds are the same way. Here is where the twist enters.
Hive Bonds are NOT debt. Instead, they are just a derivative for existing debt. This becomes clear when we explain how a Hive Bond is created.
Let us suppose someone takes 100 HBD and locks it up in a time vault on Hive. Under the Hive Bond scenario, a token would be created at the second layer and deposited in the individual's wallet. As was stated in the other article, we can think of this as a NFT since it is unique to that transaction. The rate of return, time, amount, and maturity date are all programmed into the token.
Now there is an asset that one can trade. Even though the HBD is locked up, the Bond (NFT) is eligible to be traded on a market with, hopefully, a great deal of liquidity. Part of the financial network is an exchange to offer a market for these assets.
Here is where the twist comes in:
With a US Treasury, the bonds (notes or bills) are sold for existing USD. That comes in from the accounts of financial institutions that are purchasing the debt. The USD is dropped in the Government's bank account at the Fed. It is then distributed.
There is another piece of this puzzle. US Treasuries could be thought as "future dollars". Obviously, upon maturity, the holder will receive the initial USD used to buy the bond (par value) plus the interest.
Hive Bonds are not debt to the Hive ecosystem since it was already in place. While we can think of these bonds as "future HBD" we also realize that they were created with HBD. It is really the HBD that was the debt to the Hive system when it was created.
By adding the bond element, we are simply changing the state of the HBD. It is akin to taking water (HBD) and freezing it to get ice (bond/NFT).
Why Create This?
There are a couple reasons to head down this path.
The first is obviously to add liquidity to the HBD that is locked up. For example, let us use a 1 year time vault on Hive. Under this scenario, the individual agrees to lock up HBD for a period of one year. The rate would be set by the block producers (witnesses) just like savings. In this illustration, we will say it is 25%.
Without a bond, this is no problem for someone who is willing to go the full year. What happens, however, if the person needs the money? There is no recourse. The blockchain has it coded when that HBD will be available.
Hive Bonds solve this problem by providing a market whereby people can trade this asset. Obviously, there might be a discount the seller has to provide but that will be based upon market action. It is one of the reasons to have a Hive Bond Market built.
The other is the idea of collateral. With Hive Bonds, we now have an asset that is fully transparent since all can see all details tied to the particular bond. This is where other aspects of the financial network enter. By building out an assortment of applications, we can suddenly integrate this into lending, borrowing, and other forms of financial activity that are not being serviced.
Here is where we mirror what JPMorgan does. There is even the potential, with enough activity, to create an application that offers futures contracts on the interest rates along with swaps. Another idea is to enable individuals to take the Hive Bond and post it as collateral to trade on margin and buy Microsoft of Amazon stock, or at least a synthetic version of that.
There is another element. Hive bonds are future HBD that is created using HBD. However, they will also be purchased with HBD (actually a derivative since it will be a layer 2 operation). Notice how this is creates a circular sink for HBD.
All of this ties into what will hopefully become the Hive Financial Network.
If you found this article informative, please give an upvote and rehive.
gif by @doze
logo by @st8z
Posted Using LeoFinance Beta