We Need To Implement The 5% HBD Conversion Fee On HBD-HIVE

in #hive-1679225 months ago

To peg or not to peg, that is the question.

There was a very interesting conversation that took place the other day that, evidently went overlooked. For this reason, we will discuss some of the parameters of it and how we should look at things going forward.

In the post, Dalz was asking if having the 5% conversion fee when going from HIVE --> HBD was effectively front running the market. After all, the HBD Stabilizer is able to convert without the fee, giving it an "unfair" advantage.

There was a lot of good conversation regarding the answer, including a comment by Blocktrades that spells it out. However, it does bring up a few points worthy of consideration.


Conversions Are Not For Arbitrage.

Many feel that the fee placed upon the conversion deters arbitrage. On this end of things, it most likely does. Yet, when we look at things closely, we see this is not the goal of the conversion mechanism. Instead, this is to affect the supply of each coin.

While it could be used for arbitrage, the true design is to affect things at a larger level. By altering supply, we potentially change the market dynamics of each coin. This, if large enough, would affect the pricing. Here the goal is to push the price closer to peg by altering the float.

Arbitrage opportunities still exist. In fact, they are expanding. If one wants to arbitrage, on-chain, there is the Internal Exchange. This is a valid market of late. The last few days the volume reached near $100K. We also see the peg holding better than the external exchanges which are reflected by Coingecko's price.

We also have the recently added pHBD-USDC liquidity pool on Polygon. This is another pool that is experiencing higher trade volume than HBD is accustomed to seeing. For this reason, we have a way to arbitrage HBD with pHBD.

There is also discussion that the Leofinance team will add a bHBD liquidity pool in the future. That will be a third option.

Of course, we still have the external exchanges for those who are able to access those carrying HBD.

The point is that the traditional arbitrage opportunity, pricing differences in between exchanges, exists. In fact, it is also growing giving traders a chance to profit. There is nothing stopping anyone from using the Internal Exchange and, say, pHBD to arbitrage.

The 5% Fee As A Deterrent

Many question why the 5% fee exists to begin with. This is a valid concern. However, if we look at it from the standpoint of manipulation, we can see how it is a deterrent. That is why it exists. By reducing the potential profit of people looking to game the system, it could deter those from manipulating the price for personal gain.

What we are talking about here is an arena of large plays over a short periods of time for a small profit. Play with enough money and a half a percent gain is huge, especially if it is done in a few minutes. Having the fee naturally reduces this incentive. As it stands now, the price of HBD has to move above $1.05 to make it profitable. In a world where a couple points is a huge opportunity, we can see how this is a barrier.

So this brings up the next question: why do we not have it on the downside? Shouldn't the 5% fee also apply to the HBD --> HIVE conversion. According to the comments, Smooth thinks it should.

Before answering that, we need to get back to the original question posted about the HBD Stabilizer gaining an unfair advantage over everyone else.

A Community Initiative

The HBD Stabilizer is a community-owned initiative. This is funded with money from the Decentralized Hive Fund. Each hour there is over 6,500 HIVE paid out. This is used to buy and sell on the Internal Exchange. Any profits received, are returned to the DHF.

As was pointed out in the comment section of the other post, anyone can create a proposal for the community to approve. The point being, we could see a multitude of "HBD Stabilizers" running of different people put it together. If the proceeds are fed back into the DHF, the community receives the benefit.

So far, nobody has stepped forward to do this. Hence, this is all we have for now.

The HBD Stabilizer exists to provide market operations in an effort to hold the peg. Therefore, when viewing it from this backdrop, we see the purpose is to operate on the Internal Market. The conversion mechanism is done to get the coins as needed.

However, by having the 5% fee, aren't we effectively making the HBD Stabilizer the sole conversion mechanism? Isn't this where the majority of conversions will occur?

The answer is most likely. Since there is a 5% fee, one must be willing to donate 5% to the DHF when converting HIVE --> HBD. This is not going to happen often. Of course, this changes if the price crosses the $1.05 level but our goal is to avoid that.

At this point we have to question whether this is a problem? Actually, there could be advantanges.

Since the HBD Stabilizer is community owned, essentially the community is the one who is controlling the supply of HBD and HIVE. While others could step in, they are not incentivized to do so. In fact, on the high side of the peg, they are penalized for it through the conversion mechanism.

The community does see a profit from these operations. Each day, HBD and HIVE is fed back into the DHF. Ultimately, funding the HBD Stabilizer returns more than is paid out.

Because of this, over time, the amount of HIVE dedicated to the HBD Stabilizer, or whatever other variations are designed/funded, can increase. Here is where the community can expand the amount of HBD entering the market, if it is needed. Of course, if there is a massive push, the price could exceed the penalty, incentivizing people to convert HIVE-to-HBD.

Adding The 5% Fee On The Other Side

Against this backdrop, we can see how the idea of the 5% fee to the HBD --> HIVE conversion makes sense. In fact, the fear many have is the printing of HBD will cause a security issue during major price swings, allowing one with a ton of HBD to generate HIVE and present a threat to the system.

Here we go back to the deterrent. By having the 5% fee on both sides, we effectively implements a 10% penalty to anyone looking to game the system in this manner. Will this stop someone? It is hard to cover every situation but we can see how it will make people think twice about it. However, it is safe to say that it is likely they will target projects without this disincentive before turning their attention to Hive.

Again, some might say this will affect arbitrage but why are we looking for that through this mechanism? Those opportunities are forming through the different areas where HBD is available.

As for the centralization issue that some might fear, the solution might be to get more "HBD Stabilizers" going. If there were half a dozen running, how would that change things? Of course, perhaps we are better off having only one running.

Either way, it is a community decision. If others build it, then it could get funded.

In the end, what is created is a range where the community funded initiative(s) will do the lion's share of the converting. Outside that, if the peg gets way out of line, then the door opens for others to join in. Basically, this only will occur if the normal arbitrage mechanisms do not fix the problem.

We also have to mention the 3.5 day conversion time is also a major deterrent since it adds a completely unknown variable for a trader.

We Need A Lot More HBD

Over the course of the last few months, a lot is made of the potential of HBD. We are seeing more being designed to incorporate the stablecoin into different applications. For that reason, it is logical to conclude we are going to require a lot more HBD.

The reality is, at this time, we are not seeing it in the demand. Each day, there is more than 150K HBD put on the market by the HBD Stabilizer yet the amount growing is far less than that. Hence, we can only conclude the demand is not there yet.

This makes sense since a lot is not built. We only saw the latest level of excitement surrounding the project arrive a month ago with the 20% interest on HBD in Savings.

What happens if this changes? The first conclusion we can draw is the market will take care of the problem. With strong demand, the peg could jump to the high side, making conversion profitable.

The second idea is simply to look for more funding to the HBD. There is nothing preventing a short-term proposal, say 30 days, to increase the HBD received by the Stabilizer each day. If it that urgent, the community can decide to get the HBD out there.

All of this shows how the "printing" can be contained. The fear many have is that there will be too much. Leaving this aside for reason discussed in other articles, the fact that the security is enhanced with this process is crucial. Hive is eliminating some of the vulnerabilities other algorithmic stablecoins are sure to encounter.

In the end, the conversion mechanism is not something we want everyone using. The goal is to get the HBD out into circulation and have it used. Money is a tool meant to create wealth. This means putting it to work in different ways, including for commercial and financial transactions. Through this, we can produce goods along with services that fill needs people have.

Of course, if we do get to the point where there is too much HBD for the Hive economy to handle, then the conversion mechanism is there to soak it up. Once again, the stabilizer operation(s) could handle much of this through simply market operations.

For now, it makes sense to discuss the idea of adding the 5% fee to the HBD--> Hive conversion. This will help to deter gaming the system on the downside of the peg also.

What are your thoughts on all this? Let us know in the comments below.

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I think that a %5 fee could be a deterrent because it is high.

If it's good for the ecosystem then I am in :) And I think you are right, having the conversion fee may help curb manipulation by the big players :)

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I don't see how the fee deters gaming the system. The only way I can think of gaming it is by manipulating the feed price and that is an issue only with HIVE->HBD conversion where you get the HBD immediately. However the conversion fee deters conversion and if that adds volume to exchanges and bring more money to market makers and liquidity providers, then the fee may benefit the economy.

The challenge comes in on the other side. If one acquires a lot of HBD through the mechanism you laid out, then a price crash could put that person in position to create a lot of HIVE.

Thus, a 5% fee, which goes into the DHF, would help to offset that some. It might not stop it but it is just another obstacle to overcome.

In this situation we are describing, the 3.5 wait might be less of a hindrance if the moves are big enough.

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How is this different from buying the bottom except the price they pay is probably worse? Haircut rules should prevent producing too much HIVE for taking over the network, right?

Yes the haircut rule is another factor that helps to slow one gaming the system. However, that is increasing as the need for more HBD is going to be required.

So there is the crux, how do you set up a system where there is the ability to expand yet prevent (or at least minimize) the ability to game the system.

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It deters gaming because currently if you can affect the price of HIVE during the 3.5 day period, even by only 1% or less, you can potentially make a profit on the conversion (beyond what you are "supposed" to make from HBD being mispriced). Adding a fee increases the hurdle to where you have to move the price by more than the fee. The fee also represents a direct benefit to the blockchain. When trader convert under- or over-priced HBD they make a profit. The fee means that the profit is shared between the trader and the blockchain

I would have thought that the three day conversion process or whatever it is would hinder people from arbitraging. It seems like most of those trades are something that are time sensitive to really take advantage of them. That unlock period would work against the benefit. Maybe I am wrong though.

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Certainly that is a deterrent also. We have a situation where, from an arbitrage perspective, few are going to be willing to risk half the position on a move over 3.5 days that could wipe out all gains.

But then again, nothing says that people wont do it. So the more layers of protection, the better things are in my opinion.

We want to make HBD as strong as we can. This means that we have to try and prevent gaming, at least on the base layer. Level 2 is its own animal, something that is outside the control of the community.

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That makes sense. Thanks for the great response.

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5% does look a bit extra but if they manage to have at least 2%, they might also do it..

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That is true. Nothing says this is stopping people from doing it. However, it does act as a deterrent.

And if the price is 7% off the peg, then people jumping in to take advantage is probably desired.

However, that option would most likely also be there on the exchanges.

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I don't see this as a problem, for the simple reason that I don't change Hive to HBD until I do). But. this commission is quite justified, since it is one-time for each amount, and the interest from the rates from month to month will more than cover it.

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And it is only on conversion, not on trades on the internal exchange. This is only when altering the amount of HBD and HIVE.

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I will not stand with a banner at the rally and focus my attention on 5%, I will lose more if I look for some kind of negative in the business that I am doing. Not once, I was not interested in the correctness of the exchange rate recalculation, I compensated for this with the productivity of my blog.

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This is a bit on the technical side requiring in-depth understanding . Where I stand with the chain is whatever is of benefit to the chain and its security receives my support.
5% conversion fee on HBD-HIVE, why not if it is of benefit to the HBD Stabilizer?

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If the 5% prevents gaming the system then I am all for it.

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A conversion fee both ways would do since it will stop bots from doing the price damage. Pump and dump schemes won't work and we can safely avoid abuse.

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I wouldnt say they wont work but they are less profitable. This is the key. Put up barriers to make it harder to game the system.

If Hive is a pain in the ass to do this, we would likely see many move onto other coins to do it. After all, Sunny Boi is just copying/pasting code, flaws and all. So there might be an opportunity for people to game that coin.

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I don't like this idea.

Same. I'm really surprised that they don't recognize how bad of an idea it actually is.

Why is it a bad idea?

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For now, it makes sense to discuss the idea of adding the 5% fee to the HBD--> Hive conversion. This will help to deter gaming the system on the downside of the peg also.

Sorry, but this is a horrificly bad idea. I'm really surprised that it's even being discussed to be honest. It would have a similar effect to as if the peg of HBD were set to 95 cents per dollar which makes absolutely zero sense for a stable coin.

HBD would effectively be pegged to 95 cents worth of HIve...

Completely untrue.

This applies only to conversions, it has nothing to do with the peg. The peg is freely floating and set by the market.

Arbitrage, as stated repeatedly, still occurs throughout the different LPs and exchanges that have HBD (or wrapped versions).

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The peg is freely floating and set by the market.

At 20% interest rate, the problem doesn't seem obvious. But lets say the interest rate is 5% and the fee to convert from HBD to Hive is 5%. You buy HBD for $1 USD but you would have to keep that one HBD in savings for one year just to break even if you wanted to convert that HBD back to $1 worth of Hive.

In such a scenario, in a liquity pool like PHBD/USDC, people who need liquid funds would almost always choose converting PHBD to USDC, which means the PHBD would never be able to hold at peg of around $1 but be around $0.95. This means that eventually the pool would empty of USDC or conversely PHBD would always be around $0.95.

It would be pegged to a range of 95 to 1.05, which is not meaningfully worse than being pegged to a range of $1-$1.05 which is the current situation. There are other mechanisms that tend to push it toward $1 such as people choosing 50/50 HBD/HP or 100% HP for rewards, and speculation pushing it away from the bounds (makes more sense to sell HBD at 1.05 than to buy it, and likewise buy at 0.95 than sell).

There are other mechanisms that tend to push it toward $1 such as people choosing 50/50 HBD/HP or 100% HP for rewards, and speculation pushing it away from the bounds (makes more sense to sell HBD at 1.05 than to buy it, and likewise buy at 0.95 than sell).

I really hope you're right. I think it would tend to stay in the lower range of $0.95 more often than not as buying HBD at $1 would mean taking a certain time commitment to make up for the 5% fee. Around 3 months before ROI if the savings rate was 20% like currently.

Only converting would incur the fee. If you buy from the market you're not paying a fee. Likewise selling. If you buy from the market at $1 you have essentially symmetric risk, since you can lose 5% if it drops to 0.95 but you can also gain 5% if it rises to 1.05. Neither of these would inherently dominate.

This is bad ,I don't like this idea ,so if someone convert from hbd to hive 5% fees and when he was want to convert back another fees ,to sum it up ,how much is the gain,quench this idea

This is useful and educational information to share. Indeed, I completely agree with you, however I am also considering a value lower than 5%.

It does seem a little weird to only see the 5% fee on only 1 side. How often do people use the HIVE->HBD conversion? It's not like the internal market will be affected so I think it will be fine and it adds more security to the system.

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The only time HIVE->HBD conversion was used was when there was a huge pump of HBD up to 1.25 or so. Obviously it doesn't make sense to use when HBD is "only" a few cents over $1. However, when that did happen, it was used a LOT.

I'm not sure we need 10% spread, though the exact size of the spread is very debatable. But I would like to see fee on each side instead of the status quo of putting the spread at $1-$1.05 which is pretty much pointless.

Instead of burning the fee, we could send some, or all, of it to accounts holding more than 1mv?

There is no feasible way to do this. Theoretically it could be sent to all staked vests, but it isn't clear whether this is better or not, opinions differ.

Could it be sent to one account and then doled out individually on an account's birthday, presuming they have 1mv?

There isn't any mechanism for that but I guess it's possible.

Perhaps the dao could be coded to save it in an account and dole it out to the birthday people each day?
1/365th split equally across all accounts over 1mv?
Presuming it won't slow down the nodes too much, is there enough volume to justify it?

Can't do this with the DAO directly. The fees from conversions are taken right by the blockchain itself and burned. The code would need to changed via hard fork to store those fees somewhere.

Yes, I understand that.
It seems to me that having the dao do things keeps the decentralized theme active.
No one person in charge.
The chain itself does it as a feature.
I think changing from a burn to a distribution is a nice to have, and may incentivize holding hp.
No real hurry for this change.
Getting to 1mv is a hill that only gets steeper as the price rises and time goes on.

Although, I do like the bonds idea to lessen the crab bucket as a central focus of what we are doing here, it seems bonds won't be happening this year, and we will be lucky to get them by the end of next year due to the scheduling nature of hardforks.
I see that as an additional kneecapping, but I guess until HAF is ready, it may be premature to re-invite the general public to our party.

All in all, we are doing pretty well, iyam.
Not many of us thought we would still be here 6 years later in 2016.
We lost sooo many people in 2017 to the kneecappening and walkabout by stinc, and bidbots, I was losing hope.
That faint hope is now breathless anticipation for the developments to begin our climb back into the top 10 coins existing by market cap.

I'm not sure a 5% fee on the downside would help much. Although I understand the distinction and that conversions are not meant for arbitrage.
What we have is a reporting problem on the price more than a pegging one, based on what aggregators take into consideration for price discovery. I'll expand more on this in my post from today.

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