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](https://leofinance.io/@dalz.shorts/is-the-hbd-stabilizer-frontrunning-everyone-else-for-hive-to-hbd-conversions), 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.

<center>![image.png](https://images.hive.blog/DQmYdHkND75KkZD4DgoSMgNvbqy9H8fkngBzgA7dDC9F9nP/image.png)
[Source](https://images.hive.blog/DQmU2VHvyv9wS8pNBuCLFr9nhUg3p9K4MakGKYY3epSa28s/image.png)</center>

# 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](https://leofinance.io/@taskmaster4450/hbd-arbitrage-and-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](https://www.coingecko.com/en/coins/hive_dollar).

We also have the recently added [pHBD-USDC liquidity pool on Polygon](https://leofinance.io/@leofinance/phbd-is-1-1-backed-with-hbd-on-the-hive-blockchain-or-mechanics-deep-dive).  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](https://wallet.hive.blog/market) 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](https://peakd.com/@hbdstabilizer/wallet) 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](https://peakd.com/@hive.fund/wallet).  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](https://leofinance.io/@edicted/20-interest-rate-on-hbd).  

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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