Today, I want to expand on the subject matter of using HODLCommodity as a collective savings mechanism. I’ll explain the dynamics behind this use case and compare it to a traditional saving banking.
HODLCommodity vs. Traditional Banking
Let’s start by comparing the HODLCommodity to banking. In traditional banking, there is the concept of a transactional account, usually a chequing account, and a savings account, either in the form of a fiat account or in the form of placements. In this case, I would limit the comparison to the first type, but it could probably be extended to the placement market as well.
The transactional account is fungible, meaning that any fiat unit (e.g., Euro, US Dollar, Brazilian Real) is as good as the next. Additionally, it is liquid, can be used instantly, and works with currencies, meaning that it can be transferred from one individual or organization to another.
The savings account shares most of these traits, but it must be taken out of savings before becoming transactional again. As long as it remains in the savings account, it will generate a small amount of interest, depending on the saving plan with the institution and the capital.
In this context, the HODLCommodity fits in the savings account category, whereas Ether or other cryptocurrencies are transactional. HODL is not a currency and cannot be transferred. It cannot be used to pay for a good or service, nor can it be given as a gift or used as a reward. It is a financial vehicle much more suited for savings.
HODLCommodity as Decentralized Savings
In this case, if the HODLCommodity is a savings vehicle, where does the savings go? What are the dynamics enabling the user to withdraw their savings? To explain this, I must start with the concept of how a financial institution generally achieves fiat currency liquidity.
There is a trove of excellent online literature on the fiat currency dynamics and banking mechanisms in general. We’ll start with the common understanding that liquidity is assured by a reserve (10% of current deposit in good governance) with the rest being guaranteed using collateral assets from which the institution will capitalize upon and dole out a small portion to the depositors corresponding to their respective amount in capital. In the context of stablecoins, there is also a principle of collateral. It means that each asset, the token in this instance, is guaranteed and occasionally made liquid (e.g., DAI) using an underlying asset, such as cryptocurrencies or precious metals.
The collateralization using crypto is inherently risky, whereas underlying asset value will fluctuate often and sometimes dramatically. Backing using precious metals has not yet been wholly achieved, but this scenario currently being undertaken by projects such as Tether. This will, of course, grant a more potent factor of confidence and stability to these tokens.
In the case of the HODLCommodity, there is no collateralization; tokens are free trading, and the seller-buyer market brings liquidity. The reserve ensures a certain amount of token availability for the market; however, once depleted, only the seller’s market will be available.
This means, for instance, that any time someone deposits into a savings account, it enables another to withdraw from theirs. This ensures that there is no central point of deposit and failure.
HODLCommodity Liquidity Overflow
Typically, in the banking infrastructure, liquidity overflow can be affected by an extensive network of lender markets and banks that will make liquidity available now and require reconciliation later. In the case of collapse, the lenders market will dry up, and the bank will need to lower withdrawal limits to not default on payments.
In the case of the HODLCommodity, there is no lenders market of financial institutions bringing liquidity. Critical overflows will result in a slow down of the liquidation process and possibly a drop in the trading volume, but it will not impact the capital value. This is the reason why a savings use case is so important and powerful for enabling a market of the largest number of small, daily transactions and bringing the volume necessary for short- and mid-term savings plans to liquidate fast. This type of behaviour is healthy for such a network, compared to a speculative market where large dumps are made as part of an exit strategy. The HODLCommodity is not invulnerable to this dynamic. Still, it is strongly mitigated by the 100,000 transaction threshold, which limits the number of Ether circulating to incentivize a more extensive network of participants and favorize an asynchronous buying and selling dynamic.
In conclusion, this is only one of the use cases for this asset. It has a very stable and grounded approach to savings that cannot be controlled, censored or seized, and behaves like a stablecoin with interest. It also creates a barrier between the transactional and savings environment, which can play a psychological role in incentivizing and rewarding financial discipline.