Unlike in a traditional bank certificate of deposit, the interest rate in HEX is dynamic and truly impossible to predict on long term, because it depends on the behaviour of stakers.
The official HEX contract frontend go.hex.com recently got included a chart showing daily interest per trillion shares (HEX per T-Share) over time. This historic data is useful in understanding the trends of the interest rate changing over time and can be used to estimate your return on investment (ROI) when assuming static conditions. But first let’s read how the interest in HEX works.
Source of interest
The total allocated supply of HEX inflates by a maximum of 3.69% per year (based on amount of all HEX ever minted). This inflation is not released into circulation directly. Instead it is credited daily to stakes proportionally to their shares. This way stakers are rewarded with supply inflation. Staking creates scarcity that may positively affect HEX price. Meanwhile, holders of HEX suffer the supply inflation from stakers minting new coins, but enjoy the liquidity of their HEX tokens. This mechanism is basically equivalent to stakers lending value to hodlers in return for interest.
Sources of interest for stakers are:
- Total supply inflation (3.69% yearly inflation divided among the staker class).
- Emergency endstaking penalties (50% of daily penalties are distributed among the staker class and 50% is minted into Origin Address).
- Neglected stakes penalties (50% are distributed among the staker class and 50% is minted into Origin Address).
- BigPayDay bonus (one time event on November 19th 2020 marking the end of the coin distribution phase).
Consequently, interest is not fixed and is variable on daily basis. The interest for the staker class is higher when:
- The staking ratio of HEX is lower (e.g., when 20% of total HEX is staked, the staking class shares an annualized interest of 18.5%).
- More stakers break their contract obligations and pay penalties which get redistributed to all stakes still active on the given day.
- Stakes are active on November 19th 2020 (the BigPayDay event).
This way, a low staking ratio encourages staking by increased interest.
Sharing the interest
All interest credited to a stake is based on the proportion of shares in the stake vs. total amount of all shares on a given day (share ratio). Shares are assigned to a stake based on share price, stake length and stake size at the creation of the stake. Longer stakes are given bonus shares up to a maximum of 200% more for 10 year length or longer (the LongerPaysBetter bonus). Bigger stakes are given bonus shares up to a maximum of 10% more for 150 million HEX or bigger (the BiggerPaysBetter bonus). This connects the properties of HEX with legacy certificate of deposit products where longer and bigger deposits are awarded higher interest.
For more information on the share system in HEX, read the article Shares are forever.
Interpreting the daily payout per T-Share
Once the interest and the share system is understood, understanding the chart of “Daily Payout per T-Share” is easy.
The first thing we notice is that the daily payout kept increasing most of the time. This is comprehensible, if we know that the staking ratio has been slowly dropping since January. In the first months the die-hard Hexicans were accumulating and staking HEX. Later, when HEX got listed on dozens of exchanges, traders and other speculators joined the accumulation of the coins, but these are generally not interested in staking. Staking burns coins and HEX shares cannot be traded. Since new coins are minted daily during the distribution phase lasting until November 19th, the percentage of staked HEX was reducing on the account of the increased circulating supply.
The second interesting information from the chart are the unusual outlayers. On certain days the daily payout was much higher than the trendline would suggest. For example, on day 76, the daily payout was 4 times higher than the trend would suggest. These were the days when big penalties were redistributed to stakers. In particular, when a lot of stakes were emergency end staked (EES). For example, during the days 70 and 90, a certain YouTube influencer unleashed a lot of Fear, Uncertainty and Doubt (FUD), as he was preparing his viewers to come over to his HEX copycat project. He himself made a showcase by performing EES on a huge stake to demonstrate that penalties were not prohibitively high. Apparently, a number of his followers did follow him into the abyss of EES.
Interestingly, interest from EES increased also during price pumping and price dumping, demonstrating that stakers actually benefit from high volatility.
The current daily payout on day 267 is 3.76 HEX per T-Share. This means that a stake of 100 T-Shares would get 376 HEX credited in interest each day when assuming static conditions for the near future (that is about 1 EUR at the current HEX price).
How much HEX is needed to acquire 100 T-Shares? The current price for a T-Share is 10682 HEX. Therefore, 1068200 HEX would buy 100 T-Shares. However, there are LongerPaysBetter (LPB) and BiggerPaysBetter (BPB) bonuses involved in staking. Particularly, LPB is the most relevant.
For example, it turns out that it takes 890k HEX to create a 1 year stake holding 100 T-Shares. If the current interest rate would continue unchanged, a principle of 890k HEX staked today and ending in 1 year would get credited 365 × 375 HEX = 137 kHEX, thus representing an Annual Percentage Yield (APY) of 15.4%. This is does not include the BigPayDay bonus on November 19th 2020 which may more than double the principle, but since this is a one time inaugural event, we will not include it into the interest estimations below.
Table: Examples of 100 T-Share sized stakes starting today. Interest calculations are based on static conditions and thus exponentially less valid the longer the stake length is.
|Stake length||HEX to acquire 100 T-Shares||Total interest assuming today’s daily payout rate|
(not including BPD!)
|APY assuming today’s daily payout rate|
(not including BPD!)
|1 day||1.061M HEX||376 HEX||12.9%|
|1 year||890k HEX||137k HEX||15.4%|
|2 years||763k HEX||274k HEX||18%|
|5 years||534k HEX||686k HEX||26%|
|10 years||356k HEX||1.4M HEX||39%|
In reality, the static model is not valid at all on long terms, as staking conditions change dynamically. The changing staking ratio affects the daily payout strongly, while EES affects it occasionally (e.g., in periods of FUD and price volatility). On multiyear terms, the deflationary nature of total shares becomes the single most important factor influencing the HEX per T-Share daily payout. With total supply increasing from the max. 3.69% yearly inflation, the total daily payout also increases. Meanwhile, the total shares keep decreasing on average, because the share price increases faster than the supply of HEX available for creating new shares. Old shares are burnt on stake ending.
The consequence of all this is an exponential increase in HEX per T-Share daily payout over time. This means that the last years of a multiyear stake accrue the most of the interest. For example, contract simulations indicate an 80× on the principle, or more, over a 10 year stake created before BPD is possible and likely. This would represent an APY of 800% rather than the 39% estimate based on stationary conditions (and not including BPD).
This huge difference shows the power of the deflationary nature of shares and how long-staking APY may always be higher than what is estimated based on today’s static conditions. Models based on static conditions should therefore be used only for short terms, or as the lowest estimate for the long terms.
Obligatory further reading for true Hexicans:
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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