We have some powerful opportunities with [cryptocurrency](https://leofinance.io/@leoglossary/cryptocurrency).  The ability to construct a financial system that benefits large groups of people is upon us.

With Hive, we have the potential to formulate something rather unique.  By combining two [base layer](https://leofinance.io/@leoglossary/leoglossary-base-layer-blockchain) coins, one that captures value while the other is designed for transactions, we can leverage the two in the development of a strong [economy](https://leofinance.io/@leoglossary/leoglossary-economy).

At the same time, we can create resiliency by taking advantage of derivatives.  This is something that is often abused in the existing financial system since the idea of [speculation](https://leofinance.io/@leoglossary/leoglossary-speculation) is the main function.  However, as we will see, there is a beneficial reason to turn to derivatives as a means of enhancing what we are constructing on the base layer.

Through this combination, we are establishing a truly [decentralized financial](https://leofinance.io/@leoglossary/leoglossary-decentralized-finance-defi) system.

![image.png](https://images.hive.blog/DQmeqwtwk7H3QQmAKvm7Lrv38G2oWPhAZ5LBTNEbLY7tx6E/image.png)
<center>[Source](https://images.hive.blog/0x0/https://files.peakd.com/file/peakd-hive/doze/48J8Kb67CJfyVYkHtyHpQLbSJdiq2tHMnfkmGju6ALJU9UdxXjA3JiGVhm99YQPeSM.jpg)</center>

### Cryptocurrency Derivatives

A derivative is basically a financial product that derives its value from something else.  This is a rather simply concept to understand.  An easy example is with stock options.  Here is an asset that has no inherent value on its own.  All value is tied to the underlying [stock](https://leofinance.io/@leoglossary/leoglossary-stocks).

There are many reasons to create derivatives.  It is best to remember the financial system is nothing more than a system of moving [risk](https://leofinance.io/@leoglossary/leoglossary-risk) around.  Essentially, it take risk from a person who is unwilling to hold it and transferring it to one who will.  People have different reasons for being in [markets](https://leofinance.io/@leoglossary/leoglossary-market), thus creating different risk profiles.

Derivatives are a means to do this.  For example, the stock holder might sell options to [hedge](https://leofinance.io/@leoglossary/leoglossary-hedge) (reduce risk) in their [investment](https://leofinance.io/@leoglossary/leoglossary-investment).  This provides an immediate [return](https://leofinance.io/@leoglossary/leoglossary-return-on-investment-roi).  Of course, the one buying the option is taking on more risk by betting on not only the movement of the stock but the velocity which it takes place.

Another way of looking at this is as a transformation.  It is converting as [asset](https://leofinance.io/@leoglossary/leoglossary-asset) from one form to another.  An example is how a [US Treasury](https://leofinance.io/@leoglossary/leoglossary-us-treasuries) bond is really just future [dollars](https://leofinance.io/@leoglossary/leoglossary-u-s-dollar).  Within Hive, we have the ability to create [bonds](https://leofinance.io/@leoglossary/leoglossary-bond) from HBD, thus transforming it.

Not all cases involved creating something different.  In fact, wrapping is a derivative creation process.  When HBD was wrapped onto [BSC](https://leofinance.io/@crypto-guides/what-is-binance-coin-bnb), resulting in bHBD, we see a derivative generated.  Of course, it is similar to HBD in its properties.  Nevertheless, [bHBD](https://leofinance.io/@leoglossary/leoglossary-usdbhbd) is not HBD.  They are two distinct assets although there is a correlation due to the 1:1 backing.

### Using HBD Derivatives To Push Risk Out

By developing [layer 2](https://leofinance.io/@leoglossary/leoglossary-layer-2) forms of HBD, we end up pushing risk further away from the base layer.  This is a concept that few discuss yet it vital to the long term sustainability of the ecosystem.

A wrapped version of HBD instantly becomes a transactions [token](https://leofinance.io/@leoglossary/leoglossary-transaction).  This can be used in a similar manner as HBD.  Yet, because it is a derivative, it does not pose the same threat to the ecosystem.  A wrapped version cannot be converted to [$HIVE](https://leofinance.io/@leoglossary/leoglossary-usdhive).  This is reserved only for HBD.

Certainly, one could unwrap the token back into HBD and then convert it.  At that point, one is encountering the built in security measures of the [blockchain](https://leofinance.io/@leoglossary/blockchain).  For example, there might be a 3 day unlock period if the HBD is in [savings](https://leofinance.io/@leoglossary/leoglossary-savings-account-hive).  This time factor allows for mobilization of a defense if there is an attack.

That said, the idea here is to make the wrapped token the focus.  It is at the second layer where the [applications](https://leofinance.io/@leoglossary/leoglossary-application) are constructed.  It could have wrapped HBD as the centerpiece of the [payment](https://leofinance.io/@leoglossary/leoglossary-payment) system.  All [transactions](https://leofinance.io/@leoglossary/leoglossary-transaction) could be tied to this.  Hence, the [network effect](https://leofinance.io/@leoglossary/leoglossary-network-effect) is actually taking place on the derivative, not HBD itself.

Of course, as the utility grows, value is pushed to the base layer.  The value of HBD explodes without the threat being posed to the ecosystem.  It is as if all battles are taking place outside the walls of the city.  If that is the case, the castle is safe.

### HBD Transformation

When HBD is transformed, it also provides another defense.

We discussed the idea of [Hive Bonds](https://leofinance.io/@taskmaster4450/hive-bonds-the-next-step-in-hbd-evolution).  Here we see HBD locked up and morphing into another token.  Under the present financial system the creation of a bond is [debt](https://leofinance.io/@leoglossary/leoglossary-debt).  However, one Hive, the debt instrument is HBD.  Thus, we are not creating more debt through bonding, simply changing its form.

In this way, a Hive Bond can be thought of as future [HBD](https://leofinance.io/@leoglossary/leoglossary-hive-backed-dollar-hbd).  Since the HBD is locked in some type of time vault (or savings), it results in a payout of HBD.  In addition, at [maturity](https://leofinance.io/@leoglossary/leoglossary-maturity), the HBD is released.

Here is where game theory enters the picture.  [Investors](https://leofinance.io/@leoglossary/leoglossary-investor) who are involved in the bonding process are likely to continue.  There is a reason one creates a bond.  Obviously, the return is there yet that is achieved simply though the [staking](https://leofinance.io/@leoglossary/leoglossary-staking) of HBD.  Under this scenario, a bond might be used as [collateral](https://leofinance.io/@leoglossary/leoglossary-collateral).  Hence, if one is engage in the process of taking out [loans](https://leofinance.io/@leoglossary/leoglossary-loans) for specific financial purposes, this will continue.

We now see how there is incentive to keep HBD in the form of [derivatives](https://leofinance.io/@leoglossary/leoglossary-derivative) and not operate in the base [coin](https://leofinance.io/@leoglossary/leoglossary-coins) itself.

This same holds true for the wrapped HBD as a [medium of exchange](https://leofinance.io/@leoglossary/leoglossary-medium-of-exchange).  Through this, we could have gambling, shopping, and other commercial activities all tied to this.  Obviously, in this situation, people who are engaging with these sites have incentive to hold the wrapped token.  They have no interest (or even knowledge) of the conversion mechanism on Hive.  It is not relevant to them.

Now consider this same concept built on a number of chains.  It can be integrated in many forms, all providing defense of Hive.  If there is an attack, it cannot be directly levied against HBD.  First, it must go through the wrapped version and then turned towards the base layer.

To really take this to another level, picture a robust system of [finance](https://leofinance.io/@leoglossary/leoglossary-finance) and commerce using the derivatives.  At this point, extreme protection measures could be put in like a 5 day hold on any unwrapping.  We also could do something similar on the conversion.  This would still allow for monetary elasticity as driven by the market (community) yet make this as an attack vector rather unappealing.

All the activity on the second layer acts as a defense.  By building different levels through additional HBD products, we are able to move the focus away from the core.  The further out this gets pushed, the safer the core ecosystem becomes.

In the end, we are not reducing risk.  That is not possible.  What we are doing is transferring it from the base of Hive outwards to other assets that carry it.  There might be an implosion of one of the assets on a particular chain but, with many derivatives on multiple chains, the entire Hive based [network](https://leofinance.io/@leoglossary/leoglossary-network) can tolerate it.

And the foundation is protected since very little of that will move back towards HBD.

___
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