Splinterlands Economics: Bonds
Hello everyone! We are back again today with another edition of Splinterland Economics - a series in which we introduce a basic economic concept and then apply it to Splinterlands. If this is your first time reading, just to tell you a little bit about myself: my day job is in an unrelated area but I consider myself a little bit of economics nerd - I read a little (or maybe way, way) more news than I should, double majored in econ, and am obsessed with optimization. I love the way Splinterlands is equal parts card game and resource allocation game. My goal with these articles is to share a little bit of what I know with you all.
Our subject today is a common financial instrument. It has a place in many portfolios, and also may be of particular interest to you due to current and upcoming events in Splinterlands. Today, we'll be talking about Bonds!
What are Bonds?
Bonds are a financial item issued by companies or governments which offer a promise to pay a fixed amount of money in the future to whoever holds the bond. Generally that amount of money will be paid all at once at a specific future date, called the maturity date, and the amount paid back will include some amount of interest, according to some rate called the coupon rate. Do note that alternative payment schedules are also common for bonds, such as bonds which offer interest payments throughout the life of the bond. Regardless of the payment schedule, bonds offer value to both the party issuing the bond (the borrower) and the party purchasing the bond (the lender). The borrower is able to borrow money at the present in order to use it for projects or other investment opportunities, and the lender is able to earn a fixed return on their money.
While bonds tend to be "safer" than other investments such as stocks, there is still a risk involved. Whenever there is borrowing, there is a chance that the borrower will go bankrupt and be unable to pay back the loan. For individual consumers this risk is reflected in a credit score - a number which reflects a calculated probability that the consumer will be able to repay a loan. For entities issuing bonds such as governments or corporations, the equivalent is their credit rating. The exact ratings depend on the agency making them, but the general idea is that a bond issuer with a better credit rating will be considered more trustworthy and less risky, and therefore be able to borrow money at a lower interest rate because of it. For bonds, this translates to a lower coupon rate.
On top of the potential of the lender defaulting, bonds have an additional dimension of risk, which may not be apparent at first glance. While one may purchase a bond (i.e., lend money to the bond issuer) and hold it for the lifetime of the bond, in most cases it is also possible to sell that bond partway through the interest time period. One interesting thing about bonds is that the value of a bond is dependent on the present and expected future interest rate. For example, if a bond is issued paying a certain interest rate and then interest rates across the entire economy increase, than that bond effectively loses value because the previous amount of money in the bond, spent later, would be able to earn a higher rate of return. Of course, the reverse is also true - if interest rates decrease in the future, then the value of that bond can go up!
How do we apply it to Splinterlands?
Splinterlands has one huge example of bonds, and its introduction was the main reason why I decided to make bonds the subject of this week's post. The example I am referring to is the upcoming implementation and sale of DEC-B. Players will soon be able to pay a discounted amount of DEC or Vouchers in order to receive an amount of DEC Batteries (or DEC-B) with a higher face value which may be spent on a limited range of purchases which would otherwise burn DEC. While DEC-B is different from most bonds in the real world because it does not pay an interest rate over time and the Splinterlands company will not be using the proceeds to fund their operations, DEC-B is similar in that it offers purchasers a fixed return in the future in exchange for locking in their money in the present. Players who are planning on spending their DEC in the future on burning activities may be able to earn a return on their current funds by participating in the DEC-B sale.
The DEC-B sale has an additional wrinkle in that an alternative currency (Vouchers) may be used to participate. This effectively will be turning some of the vouchers which have been issued to SPS stakers. While this seems likely to have negative impacts on the price of DEC in the medium term, the developers seem to think that it is worth the tradeoff in order to remove DEC and Vouchers from the marketplace in the short term.
Why should we care?
In the real world, understanding how bonds work will allow you to make more informed decisions with your investments. In the Splinterlands ecosystem, we can use that understanding in order to gain additional insight into DEC-B, which is NOT identical, but has several similar properties.
For many investors, having excessive amounts of cash sitting around, unused, is one of the worst things you can do. But putting that money to work often carries a risk of loss, which is problematic if you are expecting to need that cash at some point in the short to medium term. Bonds offer one of the safer ways to earn a return on your money. While there ARE still risks and you may not make a ton of money, it is far better than nothing. At the very least, it is important to be aware of all of your investment options, and bonds are certainly one worth consideration!
Thank you so much for reading all the way to the end. Interested in seeing some more of my writing in the future? Be sure to give me a follow! In the meantime, if you'd like to see some of my recent posts:
Splinterlands Economics: Confirmation Bias - An introduction to the concept of confirmation bias, and how we can apply it to Splinterlands!
All Armored Up - Using Nerissa Tridawn in Battle! - Last week's battle challenge, featuring Nerissa Tridawn!
Splinterlands Economics: Diversification - An overview of the concept of diversification, and how we can apply it to Splinterlands!
Thinking about giving Splinterlands a try but haven't signed up yet? Feel free to use my referral link: https://splinterlands.com?ref=bteim, and be sure to reach out to me if you have any questions!
All images used in this article are open source and obtained from Pixabay or Unsplash. Thumbnails borrowed with permission from the Splinterlands team or made in Canva.
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Thanks for sharing! - @rehan12
Seems like a lot is about to happen when DEC-B gets introduced. Looking forward to it.