A Critical Review Of 20% APR On Stable Coins

I've said it before stablecoins are shitcoins, the point of bitcoin for example was to get away from fiat, yet it seems most people prefer to remain in fiat and are looking to earn and remain in fiat.

A lot has been made about 20% APR on stable coins be it on HBD and UST. I've always been the type to not buy narratives and I want to know how something works, especially when it sounds too good to be true. Having reviewed UST its APR has Ponzi-like economics to it.

As for HBD, I see a lot of rhetoric but no one has really explained where the yield is coming from.

You're not getting 20%

Let's get one thing straight before we crack on, you're NOT getting 20%, if the amount of your holds increases by a certain unit amount, but the total amount increases by a higher percentage you're still getting devalued, just less than those that don't risk their capital.

• Long Bond yield rate - 2.79%

If we look at the highest return in the bond market, then you're only getting a 17.21% return, still a crazy return. To put it into perspective, if pension funds could bag half that return, we would solve the pension crisis.

Note: If the 30 year/Long bond climbs to 4% that means the US current debt interest payments would be 1 trillion a year, which would make it impossible to service. So this has to be manipulated down, they have to peg down the long end of the curve.

• CPI Inflation rate - 8.5%

If we have a look at "reported inflation rates" it sits at 8.5% but this is a manipulated figure to maintain certain tax rates, bond rates, and obligation payments by the US government. So subtracting that from your 20% means you get an 11.5% return, which is still a crazy return that most people cannot pocket regularly without taking a crazy risk.

• CPI Inflation rate based on 1980 calculuations via shadow stats - 17%

If we calculate inflation based on the 1980 basket calculation you're sitting on 17% which means you're getting a paltry 3% return, which seems pretty realistic to me.

• M2 Money supply rate - 20%

If we calculate inflation based on M2 money supply it's hovering around 20% so your return is zero.

So is 20% APR really a valid point to make or is it a marketing gimmick?

Illustrating in real terms

Ask any person who held stocks in the Venezuelan market or Zimbabwean market, their stocks were going to the moon, but this was driven by the devaluation of the currency.

When the Venezuelan and Zimbabwean stock markets were relatively the best performing stock markets in the world, did you see people running to invest? No, because the yield has nothing to do with productivity, but a unit of currency increase.

Now that I've established my arguments on why 20% isn't 20%, let's tackle why I don't consider the yield a yield.

Where does the yield come from?

In a traditional market, to gain an interest rate you make your capital available to a third party like a bank. They assume the liability for the deposit and go out and borrow it to someone else willing to pay them a higher interest rate to use that money.

As the old bank saying goes 3-6-3, borrow at 3%, lend at 6% and be on the golf course at 3 pm.

Now in this simple example, you have someone willing to pay 6% interest on the capital, the bank takes 3% and the depositor gets 3%. If the borrower doesn't find a way to pay it back that is this risk you're getting compensated for by the bank.

If the borrower does pay back the loan, everyone is happy and they've created something with that capital, be it a business or a home.

How stablecoins are gaining interest

In the shitcoin market, most of the borrowing is done by exchanges, they gobble up the depositor's liquidity to either market make on their platforms or to borrow to traders to use as leverage.

The fees earned, the spreads earned, or the liquidations earned are then gathered and a portion of the fees are paid back to those depositors.

This makes up the majority of the fees, while another use case is people locking up their stablecoins to borrow against it to use that value to take a position now and lock in a price, then pay off the principle over time.

While others would lock their digital assets into an over collateralised account, and borrow stablecoins at an interest rate.

So there are multiple use cases for the stablecoins, earning fees and creating a revenue stream that can pay the interest payments.

Where does HBD interest come from?

Now for someone to receive an interest rate payment, another person has to be paying an interest payment. I see many people talking about getting a return, but no one is talking about borrowing and paying the return so half of the system is missing.

The way I understand it is HBD remains a 10% rate of the HIVE supply, so as the HIVE market cap grows, it allows for the HBD market cap to grow in relation, this could be through created coins from posting or this interest rate.

If more people lock up their HBD that also means less HIVE, meaning there needs to be a rebalancing. The more people locking up HBD the less HIVE, the less HIVE, the lower the available supply.

The lower the available supply the higher the market cap, giving you more breathing room to mint HBD interest payments.

Possible offsetting forces are too small

The only income stream I see is the 5% fee to convert HIVE into HBD, but will that be enough to offset the interest payments? I am not so sure, it doesn't seem like a popular method to acquire HBD when there is fee-free HBD you can purchase on internal or smaller fees on external markets.

Sustainable in small doses

This operation is not sustainable, EVERY market reaches a maturation point and the moment it does, and people want to start realizing their return, it puts pressure on the market cap to sustain the selling and can easily unravel.

This can manifest in a breaking of the peg or a massive price suppression of the backing asset in this case HIVE, as people are price intensive and want to sell to realize that value.

While this system may be an option to a point, it is not a risk-free rate, the risk is just pushed out further into the future and the longer it does, the bigger the risk becomes.

Unless it's moved to a traditional model where someone is on the other side of the trade paying the interest rate by doing something with that working capital that generates a return that allows them to cover the interest payments.

Opinions welcome

I am open to explanations, and I think more people should be asking questions when they put their money on the line. When I see a certain amount of bandwagoning and group think usually leaves me feeling uncomfortable, especially when there isn't a solid explanation backing up the story.

So let's hash this one out! Brave commentators are welcome, feel free to attack my arguments.

Have your say

What do you good people of HIVE think?

So have at it my Jessies! If you don't have something to comment, "I am a Jessie."

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