What is this BigPayDay hype all about?

Introduction to HEX

HEX is a cryptocurrency issued by the HEX smart contract running on the Ethereum network (ERC-20 standard). The contract allows HEX to be the first blockchain certificate of deposit. This main use case is integrated in the immutable code of the contract that was audited twice for security and once for its financial model (by CoinFabrik and Chainsecurity).

In legacy certificates of deposit the funds are left in custody of the bank, while the HEX code is executed by the user in a trustless manner. This effectively makes it the first counterparty risk-free interest bearing financial instrument, leaving only general asset related risks, such as volatility and self-custody related risks.

By abit_Hex

HEX is decentralized and censorship resistant. There is no administrator key, and no switches for the smart contract, so nobody can ever interfere with it. HEX leaves complete control and sovereignty to its users.

Launch phase

HEX was deployed on the Ethereum network on December 3rd 2019. The launch phase lasts until November 19th 2020 and serves for distributing tokens to new users. During this time there are mechanisms that motivate adoption: freeclaiming of tokens for BTC holders, referral bonuses, and the final distribution event called BigPayDay (BPD). All of this is trustlessly executed by the smart contract.

Tokens are distributed daily by a collective auction run by the HEX smart contract (Adoption Amplifier). At the end of the day, bidders can mint their part of daily auctioned amount of HEX.

Addresses that owned Bitcoin on December 1st 2019 can claim HEX for free. A 90% fraction of freeclaimed HEX is autostaked for a minimum of 350 days and only 10% is distributed as liquid tokens.

November 19th 2020 is the BigPayDay (BPD)

On the last day of the launch phase, all unclaimed tokens factored by virality and critical mass coefficients will be credited as a one time bonus interest to stakes (the WaaS or “We are all Satoshi” bonus on BPD). Virality coefficient is related to the number of Bitcoin addresses that freeclaimed HEX, while the critical mass coefficient is related to the amount of freeclaimed tokens. The more Bitcoin addresses and amount freeclaim, the higher the BPD bonus will be (current estimate is at 183B HEX).

Source: Hexgraphs.com

Unlike the tokens distributed in liquid form by the contract on daily auctions, the BPD bonus is credited to interest. This part of distributed tokens can therefore only be minted after end staking. These bonus interest are thus a strong motivation for staking longer, as they are delivered according to the share ratio of each stake on BPD. Share ratio is the amount of shares in a stake divided by the total shares on a given day. Therefore, a multiyear stake will be credited up to 3× the BPD bonus of a short stake.

By abit_Hex

After the launch phase completes, only stakers will have the power to mint new HEX tokens. Stakers will have full control of monetary policy. They will regulate the token issuance which can have either deflationary or inflationary periods. Therefore, the BPD bonus serves also to skew the distribution of token minting power in favor of those stakers that proved most committed, and takes it away from speculative stakers (e.g., those staking short only to collect the BPD bonus). Even though all stakers benefit from BPD bonus, the stakers with longer and bigger stakes benefit much more.

The day after BPD

There is already a lot of wild speculation regarding price volatility after BPD. It is impossible to predict what will happen, because the smart contract design provides motivation for counteracting price pressures and no one can predict which ones will shift the liquidity support in which direction. We may see these forces attaining equilibrium at a certain price range, but more likely a dump or a pump in price may result due to the emotions involved.

The bearish case scenario:

A high number of speculators buy and stake HEX just before the BPD, thus initially driving the price up. They naively set the end stake date to BPD trying to frontrun an expected dump. After BPD they dump the minted HEX driving the price down.

From here the scenario can diverge. Each speculator will try to dump at no less than the price level at which they bought, but since some will front-run others, some will undoubtedly be late to catch up at their profitable level. They will be left with two options, panic selling at a loss, thus further driving the price down, or realizing the mistake in their cognitive process and restake for additional profit while waiting for the price to recover. It is unlikely that a large number of speculators do any research into HEX fundamentals to understand which option is better, so selling at a loss is a real possibility.

At the same time, there will be many opportunistic buyers waiting for the price to dump, so they can multiply their holdings. However, since the BPD is an event that about doubles the holding trough a short staking, and since the share price will at least double after it, the price will have to dump at least by 75% for buying to become advantageous. This is based on opportunists actually catching a sell at pre-BPD top in order to buy back after BPD. But since very few traders successfully catch tops, it is more likely the price would have to dump by 80% or more for such trades to provide a strong counterbalance to panic selling.

Current stakes ending from November 15th to April 15th 2020.
On BPD there is 2.51B staked HEX set to expire. Source: Hex.vision

The bullish case scenario:

Hyperinflationary token distribution by the smart contract ends right before BPD. This means that the current strong down-pressure abruptly ends. Even if a large number of tokens gets minted in the weeks after the BPD, the numbers will still be relatively small compared to the overall pre-BPD inflation. If the buying momentum builds up due to the “free money” opportunity, it may bring in new interest and thus extend weeks after BPD, thus absorbing the dumps. Once the dumpers exhaust, this may result in a bigger pump. Some wannabe dumpers may even restake part their free tokens after not seeing the expected strong dump.

The pre-BPD demand may be driven by speculators, traders and a low share price. The share price front-runners will mostly stop accumulating, but speculators and traders will likely continue reacting at price supports providing a reaction to dumps.

The amount of stakes ending right after BPD may not end up being as significant as some may expect, and they will collect only the minority of the BPD bonus, because they have the least shares. We can see from current trends that many stakers skipped staking to this period of uncertainty, expecting price dumping for a few months before full recovery. Speculators may actually come to the same conclusion and many would thus create months long stakes instead of a single short one. A higher BPD bonus while collecting normal interest is an additional motivation to do so. Some Hexicans also expect a lot of emergency end staking (EES) during this period due to high volatility, meaning that stakes will receive a high interest from EES penalties.

There may also be a large number of skeptical observers who initially got scammed by crypto influencers into believing that HEX is a scam and are now waiting for the launch phase to end in order to verify that it is the right deal for them. After the launch phase, HEX will be a pure blockchain certificate of deposit with the staying power proven by the average weighted staking length (currently at 4.76 years), volume of staked tokens (currently at 54.2B HEX worth 177M USD), widespread peripheral infrastructure (easy on-ramps, APPs and other tools, advertisement, statistics websites, community support, tutorials, etc.) and a large base of satisfied users snowballing adoption. These new stakers will have to buy shares at a much higher price and will thus need much more HEX for an equally yielding staking ladder.

By abit_Hex

Happy end?

It is likely that either a dump or a pump will result in about half a year or more of price correction up or down respectively. In either case, at the end of the correction, HEX will most likely have proven itself as the best DeFi survivor due to its fundamentals. The time-lock nature of its use case will provide impetus for its survival, while the contract surrendering the monetary policy to the staker class provides the means for growth. A long term price appreciation with slow but steady adoption is still the most likely scenario.

By abit_Hex

By @Benzenoid

Disclaimer: None of the above is meant to be a financial advice. Never rely on a single source of information and do your own research before any investment. Don’t trust, verify!

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