Understanding the Hive Debt Ratio and the Haircut Rule
Many of you have probably already heard about the Hive Debt Ratio and the Haircut Rule that comes with it. But few understand these two notions which are important for the good financial health of the Hive ecosystem.
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 was 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, although some see moving HBD to savings as a form of staking), 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 factor 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 can find a visual representation of its value over time in my financial stats:
4. What is the Haircut rule?
Some might wonder why does the debt ratio matter?
The answer is: 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
The Haircut Rule is the fact that when the debt ratio is higher than predefined thresholds, the blockchain will slow down or even stop printing new HBDs for some of its HBD creation mechanisms.
The haircut rule comes with three thresholds: soft-lower-limit, soft-upper-limit and hard-limit. As of writing, the thresholds have the following values:
| Threshold | Value | pre-HF26 |
|---|---|---|
| soft-lower-limit | 20% | 9% |
| soft-upper-limit | 20% | 10% |
| hard-limit | 30% | 10% |
Note: Pre-HF26 values are shown in the above table so you can see that soft-lower-limit may be different from soft-upper-limit
Each of these thresholds may be used (or not) depending on each HBD creation mode.
5. What are the effects of the Debt Ratio and the Haircut Rule?
I will now describe each different ways to create HBD and how they are subject to the influence of the debt ratio and the haircut rule thresholds.
Author rewards
When publishing posts on Hive, authors can choose the 50/50 payment method which means their author reward will be split into 50% HBD and 50% Hive Power
When the debt ratio is higher than the soft-lower-limit, the amount of HBD printed for author rewards is reduced and authors receive less HBD. The missing part is replaced by liquid HIVE.
When the debt ratio is higher than the soft-upper-limit, HBD stops to be printed and the author no longer receives HBD. These are completely replaced by liquid HIVE.
As soon as the debt ratio falls back, HBD may start to be printed again.
Paying for posts can be summarized as follows:
| Debt ratio | Payout |
|---|---|
| < soft-lower-limit | Hive Power + HBD |
| between soft-lower-limit and soft-upper-limit | Hive Power + HBD + HIVE |
| > soft-upper-limit | Hive Power + HIVE |
When the debt ratio is between soft-lower-limit and soft-upper-limit, 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 the soft-upper-limit, the less HBD will be printed and replaced by more HIVE until it will be HIVE only when the debt ratio reaches the soft-upper-limit
Note: If you go back to the graph provided in section 3, you will notice that around the end of September 2021, the debt ratio was over 9% and then 10% for a few days, which is why the blockchain shrank and then completely stopped paying rewards to authors with HBD.
But, as you can see in the thresholds table in section 4, since hardfork 26 the soft-lower-limit is the same as the soft-upper-limit. This has the effect that there is no longer a transition period during which authors receive both HBD and liquid HIVE as was the case before hardfork 26. As soon as the debt ratio exceeds the soft-lower-limit, the HBD parts of the author rewards are paid in liquid HIVE only.
Conversion from HIVE to HBD
When converting HIVE to HBD, the HIVE are locked for 3.5 days as collateral (they are removed from the account's balance) and 50% of the value (based on the minimum median price - computed hourly from the witnesses' price feed - over the previous 3.5 day window) 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.
During these conversion operations, the price is adjusted to take into account the 5% fee that is applied. As a result, the instant conversion is usually less than 50% of the current value of HIVE, but this is all adjusted at the end.
Regarding the role of the debt ratio, things are more simple in this case:
When the debt ratio is higher than the soft-upper-limit, the conversion requests are 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.
Note: Since Hive 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 to HBD 0.05% of the HIVEs that were stored in the @hive.fund balance on that date.
This HBD creation process is not influenced by the debt ratio.
Conversion from HBD to HIVE
Although we are not in the case of the creation of new HDBs, quite the opposite, the debt ratio also has an effect on this process.
To perform this conversion, the blockchain uses the median price feed provided by the witnesses. When the debt ratio exceeds the hard-limit, the HIVE price used for the conversion will no longer be the median price feed but a corrected price feed.
The aim is to limit the effective price to force HBD to remain at or below the hard-limit threshold of the combined market cap of HIVE and HBD. This way, we can protect the blockchain by preventing individuals with a lot of HBD to take advantage of a sharp decline in the HIVE price to make in-chain-but-out-of-market conversions to HIVE and take over the blockchain.
6. 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 hard-limit 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 they come into play.
Thanks for reading.
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Oh wow!!!
I guess this is why it takes HBD three days before it converts to liquid Hive
No, the conversion delay is unrelated to the debt ratio.
Great information, gives me greater insight into how Hive works! Thanks!
You're welcome @javeson
I agree! Great article, Where fundamental concepts are written. !PGM
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Everything is fine, everything is clear - you could also explain to us in what situations it is profitable to convert and in what situations to buy and sell on the market!
Thank you @russia-btc. A more in-depth post about conversions and market opportunities would require another post.
We'll be looking forward to it!
I too would be interested in known this information
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I always change(d) HBD into Hive on the market directly and vice versa. I bet this is just moving around Hive and HBD (from A to B) and does not impact the debt %.
You are correct, you only exchange your assets with other party. To impact the debt, you would need to use the conversion mechanism.
That's correct, if you buy and sell on the internal market, none of the HIVE or HBD supplies are modified.
Finally I understand it!
Finally! 😅
Thank you very much for explaining these termnalogies in a very simple, step by step method. I listened these words but not understand what are the means of these. Now I fully understand Hive Debt Ratio and the Haircut Rule. Again Thanks.
You're welcome, @ziabutt3836! I'm glad that my explanation helped you understand those concepts.
Awesome. I might have to go through it a few more times but now I have a far better understanding of how it works.
I mean who thought of all this and then went ahead to implement 😂
This much math hurt my brain xD
Very informative post. Thanks
Thank you @silverd510
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Thank you! Very detailed explanation. ✨✨✨
Thank you @yibbiy
Excellent summary.
So with around 20M HBD in the Hive.fund and the HBD Stabiliser proposal requesting 240k HBD a day, does that mean we're already at that 1/100 limit per day?
Yes, all the daily budget is consumed every day but the stabilizer acts as a "return proposal" so the funds it gets are sent back to the DHF
Very insightful, you make one of the complex things about hive so simple
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Thank you @dwayne16
These are the best ways to accumulate HBD but how we can get direct HIVE token without any conversion of HBD to Hive??
Currently, you can't get liquid HIVE without buying them (or being given from another account). Alternatively, you can post and/or curate, then power down the HP earned.
Okay thank you
Thank you for this informative read.
You're welcome @guruvaj
Hive is 💪🏼
incredibly valuable information ser. thank you for the explanation on this.
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You're welcome! I'm glad you found the information valuable and helpful.
Thanks for the info. I have a question about the conversion of Hive to HBD.
The following paragraph mentions a 'corrected price feed'. I wasn't aware that this existed and am interested to know what this phrase means - do you have the calculations/process for the 'correction'?
The next paragraph seems to describe a situation where the Hive price has become so low that converting lots of HBD to hive would result in them owning a huge amount of Hive, but wouldn't that effectively result in the devaluation of HBD on the markets? Wouldn't that then result in HBD crashing to as relatively low a level as Hive has hypothetically done? Or is the assumption that if the Hive price chrashes then HBD will also crash and therefore nudging HBD to crash in order to somewhat protect the Hive price is the best option?
It would be best for HBD in some senses if it were not reliant on the price of Hive, though I guess that's hard to avoid. It should be made clear to investors in HBD that the stability of it's value is directly tied in to the value of Hive, since that is not obvious.
It could but as we've seen the price of HBD is market-determined and doesn't necessarily align with exactly how much HIVE it could be converted into. As I write this HBD is worth about 6% more than its conversion value.
The haircut affects the amount to which it can be converted, but the market price is still a market price, could be higher or lower.
true, yes. however, I was thinking that it might be possible for the market value of HBD to be pushed down if Hive crashed to a very very low level, since if HBD can't be exchanged for an accurate price of Hive from within the blockchain and there aren't any external markets with good HBD trade volume, then holders of HBD would effectively be stuck holding a devaluing currency and would have to undersell it in the internal market in order to cash out.
i think it's safe to say that in this sense, HBD is 'Hive with a different hat on' and so it's ultimate stability is dependent on Hive's stability to some extent. as someone who holds a fair amount of HBD in savings (by my standards), this is important for me to understand (and for others too).
It is dependent on Hive yes. You can't guarantee value unconditionally and out of thin air. The stables that have claimed to do this are fraudulent. HBD isn't because it makes clear you are subject to a potential haircut (even a severe one) if Hive can't continue to support the value.
yes, understood - even gold back currency is not guaranteed.
aside from understanding the mechanics for my own use, my main interest is that potential investors have easy access to transparent and clear info on this topic. i tend to find that hive's details are available somewhere but not easily and definitely not in the very concise form that is beneficial in web UIs. people tend to assume that stable coins are likely to be scams at this point - since there have been several - which we saw in the recent twitter threads on this topic for HBD.
being able to convey in clear language/images/video how the relationship between hive and HBD works would probably make it easier to advertise/promote HBD.
Good points.
Your witness price feed is stale.
Thanks, yes, I will get to it soon.
For the conversion, we want the existing amount of HBD (X) to be hard-limit (L) of combined market cap (CMC), meaning the existing amount of HIVE (Y) has to be (100-L)% of CMC.
Therefore, a minimal price feed can be computed as ((100-L) * X) / (L * Y)
When the debt ratio is above that hard-limit, the blockchain median price is replaced by this minimal price and is therefore used by the conversion process.
Thankyou! These are not obvious concepts to calculate since running a currency is not something I do on a daily basis! Bookmarked for future reference.
Thanks you very much for your information... 🙋♂️
You're welcome @williams25
The instant conversion uses the minimum price over the previous 3.5 day window, not the current median price.
The HIVE converted conversion calculation at the end of the 3.5 day delay, which determines how much of the collateral is returned, uses the median price (adjusted for 5% fee).
As a result, usually the instant conversion is a less than 50% of the current value of the HIVE, but this is all adjusted at the end.
Good catch. I updated the post with your remarks
This was insightful. Thanks for the post. Now I can have an informed debate about HBD with non-hivians.
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Happy debates 😆
KaBOOM #7
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So disinterested in finance. I shouldn't be. It's a mental block because money makes people do bad things. I prefer to avoid
itthem.All I do understand is that there's a mechanism in place to avoid the fiat debacle that happened some years ago in Greece.
The non existent funds covering the promisory notes that people still believe are real "money" thing.
Diabolical 😆 Astounding the world is still running around trusting mainstream banks and terrified they're going to be ripped off in an unregulated market. Hilarious in fact. If it weren't so sad.
Hive has covered that possibility with this "hair cut" then. speaking of which, I could do with one
It would also be good for total Bots with this stuff to have suggestions on what not to do and what to do to ensure the stability and growth of HIVE.
Of course one can't offer such financial advice or tell anybody what to do with their accounts because it goes against the very ethos of W3.
Why I'm here. Personal freedom and we should focus on that first and foremost in my opinionated opinion.
With the greater good of the whole being mandatory since this is actually a community at the end of the day. And users should (ideally) participate with a community mindset.
But some never will.
We like to blame "the system" for our woes, but it's corrupt people in the system that cause the trouble. Often not the system itself.
Blaming "the system" is just more people-y lack of accountability so they can profit from personal gain. Always.
There's often a difference between something being illegal and something (only - yet more importantly) being unethical. And there lies the confusion and mess, at times.
And people often seem unable to regulate themselves because of it. So we will always have predatory people taking, skimming and using things to suit themselves.
And fucking things up for everybody else.
Whether this is simply human nature or whether we are able to evolve as a species is the question. After centuries of the same old, despite everything we maybe should have learned... I think this is just us as a species perhaps?
No dark or light religious rubbish. Just givers and takers. And that's the balance and flux, possibly.
Who knows for sure.
But we maybe need to accept this and figure out a way around it. Human nature, I mean. Not financial logistics and numbers.
How does one begin to shift a mindset?
Education of course. So thanks for sharing this.
So.. super smart a bottom out has been covered, but I'm sure most users would want their accounts to value over time and will work together to grow the value of both the community and the token?
Instead of just randomly cashing out so we all stay same same in a world where costs of living are rising every minute.
Or am I still a dreamer? I know "I'm not the only one" - Lennnon
Sorry. This comment is developing into a whole post again.
We've passed on knowledge for centuries via stories. Stories reach us. And resonate with us.
I suggest users who understand the financial aspects here, write fiction stories to illustrate how and why they managed their accounts (or summink), to the point where they can earn passive income and withdraw reasonable amounts while still maintaining (or preferably growing!) the value of the tokens.
Make it creative, engaging and simply illustrated would be my suggestion.
Hell. Make it a competition and release the 10 top stories, verified by the 20 top witnesses as good to go or something.
I'd be super keen to read a story that clearly illustrates the process, methods and outcome (or failure!) and why it did or didn't pan out :D
Failing that... I'll carry on creating because it's a drive and not a means to an end. And save as much as I can now.
Me? I'd like to have numbers on what numbers I'd need to withdraw around 500 HBD a month without powering down and how to build towards that.
I've left my account to be run by my daughter when I pass on BTW. Delegations to remain in place and a specific amount of HP to remain in place. The rest to be used as needed. And future curating off the set amount of HP to be split between the kids.
What plans have people made with their accounts, I wonder? Maybe a topic for #silverbloggers
We must have all thought this one out?
ps. Is this also why Power Downs pay out over 13 weeks? To stabilize the tokens?
@nickydee, thank you for sharing your thoughts and concerns. It's true that finance can be complex and sometimes intimidating and understanding the basics can help.
As for shifting mindsets, education is key. Sharing knowledge can help users understand how to manage their accounts effectively while contributing to Hive's growth.
PS: Powering down over 13 weeks indeed helps stabilize the tokens by preventing sudden massive sell-offs that could negatively impact the market.
Thanks. Makes sense. 👍🏻
Well... there is info on Hive social etiquette available for folks. Perhaps there should be info on wallet etiquette as well for us noobs and artists! :D
I do try to learn. But honestly... my eyes glaze over in about a minute!
And it's important stuff to know.
I'll get there. Or not. 😆
I'll have fun either way.
Very informative and broken down into terms that are understandable. Thank you.
This is a really good explanation, and helps investors of hbd to understand the risks.
I find because of these mechanisms and the attractive interest rate buying large amounts of hbd is often difficult to buy without having a market impact on price or taking the risk that hive price will move over 3 days.
I think this is what protects hbd from being a bubble, like Luna and UST, but investors still need to understand the total hbd on issue and market cap of hive supporting that hbd, there is still a risk even with these mechanisms of losing value if hive drops enough. This means that investors rightly should demand a risk adjusted interest rate which is essentially what they are getting at 20%.
Thank you for your feedback! I'm glad you found the explanation helpful.
You're right, the mechanisms in place help maintain stability. However, as you mentioned, investors should always be aware of the risks and consider them when making decisions about HBD holdings and interest rates. Understanding the relationship between HBD and HIVE, as well as monitoring market trends, is crucial for making informed investment choices.
I’m new in the blockchain and after read your post I learned more about debt ratio, long time ago I was asking some people are long here and I don’t get a clear explanation how the hive ecosystem works. Very useful your information.
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I'm glad that you found my post informative and helpful! It's essential for newcomers to understand how the Hive ecosystem works. Best of luck on your blockchain journey!
This article is amazing! thank you for explaining the roles of HBD and HIVE coins in a simple way !LUV
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@arcange, @stefano.massari(1/5) sent you LUV. | tools | discord | community |
HiveWiki | 
NFT | <>< daily
Thank you, @stefano.massari! I'm glad you found the explanation helpful and easy to understand.
Very thorough explanation, great article!
Thank you!
Beautiful... this mechanics is... that HBD minting automatically reduces and stops when debt ceiling ratio is coming... I know this is very important to understand, that's why I took time to read it and want to re-read again for indepth clarity.
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It was so helping as I got a little bit now how about the wallet as I was facing some difficulties while using wallet as a new user.
Hey @arcange, it would be great if you could take some time to read this and reply in case you find any discrepancy in Andrew's initial understand of HBD. He took your article as basis of his research:
https://twitter.com/ACQuinn_/status/1649534502220300288
Thank you for pointing it up 👍
You are welcome. Cheers!
And thank you for a crystal clear explanation on how HBD works.
I need to re-blog this to reread it again. It's too much to comprehend everything in one sitting. It's something new for me to read the distinction between "HIVE supply" and "HIVE virtual supply."
Understanding the intricacies of Hive takes time. I sometimes had to look into some topics several times too.