Possible effects of HBD savings at 20% APR.

Before now, the Hive blockchains do pay a 12% APR on investors HBD locked on savings.
Currently, through various votes by Hive blockchain witnesses, the APR has been increased to an insane 20% ROI which is more than what we can easily see across other various blockchains, especially for a stable coin.

Our traditional bank systems do not in any way give up on such an amount of APR on savings. In my country, the ARP goes as low as 1.1% with the highest seen being about 4.2%.

Furthermore, the interest rate on the US dollar holdings is currently kept at zero but coming to stable coins pegged to the US dollar, the APR is usually as high as 11 to 12% and now we are looking at 20% on HBD.

The fact that most of these stable coins are pegged to the US dollar, shouldn't they operate at the same interest rate?

In regards to the above question, I will be pointing out a few reasons why stable coins give high APR when compared to their pegged currency (the US dollar).

In as much as these coins are pegged to the US dollar, there are still chances that they can at some point fall its peg thus making investors lose money. Cutting the above risk is one of the things that has led to the high APR issuance.

Another factor is the fact that these stable coins don't usually have a supply as much as that of their pegged currency making demands for it often higher than the supply.

Being a stable coin, the high demand doesn't usually pull the price off its peg but it does affect its interest rate as holders of these stable coins tend to charge high-interest rates.

At the same crypto and Defi platforms that need these stable coins tend to increase their interest rates in other to attract investors to willing lend their coins.

From the above, we have seen why stable coins usually offer high-interest rates. Now let's look at some benefits of having an HBD interest rate of 20%.

The increased APR on HBD savings will send waves across the cryptocurrency space thus serving as a marketing strategy by creating awareness of Hive blockchain technology.

Also, there's a lot of competition when it comes to stable coins and with HBD at 20% APR, it will give it a good ground to compete for investors. The inflow of investors will surely lead to scarcity of HBD as there is not too much of it in circulation.

This will lead more investors into purchasing HIVE in other to convert to HBD. And an increase in HIVE demand will surely lead to its price appreciation thus making it a win-win for the entire Hive ecosystem.

On the other hand, HBD aims to be a stable coin pegged to the US Dollar in a ratio of 1:1. But with this almost 100 percent increase in the interest rate, we might see a tremendous increase in demand for HBD which will eventually lead to it being overvalued by the market thus unpegging it from the US dollar.

The current price of HBD is $0.978 as at the time of this writing. The price is slightly higher than that of Hive which is currently at $0.94 thus making Hive to HBD conversion to be almost at the same ratio.

With the price of HBD being slightly below $1, we can say that increasing its interest rate is needed in other to increase demand. But when the effect of increased APR is such that was able to tremendously increase the rate of demand which in turn causes scarcity and tremendous price appreciation, it will have an obvious effect on Hive.

See it this way, currently, Hive/HBD is almost at a ratio of 1:1 during the conversation but if we see the price of HBD skyrocket to let's say $10 and Hive still at $1, this means that in other for an investor to get 100 HBD through Hive conversion, he will be needing 10 Hive instead of the current roughly 1 Hive to 1 HBD.

The more Hive to HBD conversion is being done, the more Hive is being needed and this will undoubtedly drag up the value of Hive.

The only side effect I am seeing here is the fact that this proposal will lead to an overvalue of HBD thus defeating its aim as a stable coin but if there's a way to channel the extra demand on Hive, that will be much better.

Nevertheless, I trust the witnesses to be more concerned about the welfare of the blockchain so whatever decision they come up with is fully supported by me.