Reasons to Farm pHBD/USDC instead of native HBD.

over 2 years ago

In a previous post I made a grave math error that I never corrected so I figure I better come clean now. I said that the lowest a Polycub pHBD/USDC farm could go in yield was 20%, but in reality it is really 10% because only half of the LP is holding pHBD. In fact there will need to be a buffer account that contains liquid HBD for cashouts so the lowest it could go is more like 9% (assuming 10% was liquid and 90% was locked farming the 20%.

So the Polycub network will have to allocate yield to this pool to make it more desirable, this was always the plan, so no big deal. However the $5M target for total liquidity in this pool seems... very ambitious given this information. If Polycub itself only has a $1.5M market cap (most of that locked away in xPolycub and not even liquid) then how they they support such a pool?

I'm writing this post to say that it might not even matter.

You'd think if the pHBD/USDC LP had lower than 20% yield then no one would put more money into it (lowering yield even more). But this is incorrect. There are actually quite a few reasons why we would want to put money into a pHBD/USDC LP instead of native HBD on Hive even with lower yields.

1. pHBD/USDC is liquid.

Users that carry an HBD balance within the savings accounts get a guaranteed 20% (as long as witnesses signal 20%), but that money is locked for 3 days. Most of us have been around the block enough times to know that 3 days can become an eternity during a flash-crash. Sometimes we need that money within the next hour, and getting it 3 days later is totally pointless so might as well not even bother. In pHBD/USDC, both sides are fully liquid, and even if the buffer account (unwrapping bot) becomes illiquid we can still dump the pHBD for USDC immediately and exit within minutes.

2. USDC is more stable than HBD.

This is the main reason to create the LP in the first place. The goal is to stabilize HBD by allocating massively liquidity to an AMM. What better pairing than a pair to another stable coin that has billions of dollars of liquidity floating around a dozen other networks and exchange?

Again, enough of us have been around the block enough times to realize that when Hive flash crashes and we want to buy more, HBD also flash crashes at the same time and we get hosed. Not only it is a good idea to support this LP simple because it adds a ton of value to Hive (altruism) but also it's just simple a good idea because USDC isn't going to crash to 80 or 90 cents like HBD does all the time (not so much anymore, but still).

3. It becomes very easy to arbitrage the market.

If HBD spikes to $1.10, you don't have to wait 3.5 days for a Hive conversion and risk slippage cost from the price of Hive moving during that time. This is a huge issue during bull markets.

In a bull market Hive is going up. Sometimes the reason Hive is going up is because Hive is being converted into HBD because HBD has high demand. The problem with this is that it's not worth converting Hive into HBD until the price of HBD has spiked into the $1.10-$1.25 range. The more Hive is spiking up, the riskier it becomes to wait 3.5 days to make the conversion. There are many mechanics in play that cause HBD and Hive price to be positively correlated, which is exactly what we don't want. We want them to be negatively correlated (when Hive goes up HBD goes down and vice versa). This is much easier said than done in practice.

However, a pHBD/USDC pool makes the process of arbitrage much much much easier. Again, this all comes down to the money being liquid immediately and not locked for 3 days. If HBD spikes to $1.05, anyone will be able to dump HBD onto the market immediately. Assuming a lot of liquidity in the LP itself, this implies that users will remove LP tokens and sell the HBD side for USDC when it is overpriced, making HBD much much more stable in the long term.

The same is true if HBD breaks to the downside. In this case there are two options: dumping USDC for HBD and bring the price back up to $1, or if the price keeps dipping transfer the value to the main chain and convert it for Hive. Again, having multiple ways to stabilize HBD is going to make it a much better asset. This is why I think we need to implement CDP smart contracts and allow it to be minted out of thin air using Hive collateral.

On that note it would be possible for something like Polycub to do just that. Because Polycub controls pHBD they could create a system that allowed for xpolycub to be staked in a contract and pHBD to be minted from it. Considering Polycub is already making an adjacent technology that will allow loans from the vault it may be very easy to adapt the tech that's already being made to suit this purpose (the biggest problem is liquidating collateral and avoiding bad debt, which will already be solved from Vault POL loans).

Counterparty risk

The main reason to not swap HBD to pHBD is that we have to trust the Leofinance team and the Polycub code. Largely this is a centralized solution and the HBD used to mint pHBD will be sitting in an account on Hive under the control of the LEOfinance team. Luckily because savings accounts are timelocked for 3 days it would actually be very difficult to steal money from the cold-wallet, and all we have to worry about is the hot-wallet that allows users to unwrap pHBD into HBD.

Conclusion

When we actually theory-craft it out, there are a surprising amount of reasons to support an off-chain pegged token on the Polygon network. Stability, instant gratification, fluidity, and liquidity are all super important. This LP will still get support even if it has lower yields than native HBD, and for good reason. All of these things are synergizing together. Good times are coming. Tada moon.