There is a lot of mysticism surrounding HEX shares, mostly because few understand what these are, but some intuitively understand their importance. It is now obvious that HEX is not just a boring blockchain certificate of deposit. It has incentives based on game theory to motivate, or to prevent, specific behaviours. Shares are the crucial part of all incentives.
Complexity
The concept of shares is actually simple once you understand it, but it takes quite some time and effort to get there. Knowledge of what shares are is important, as it gives a big advantage. Those that will get intimidated by their perceived complexity risk adopting less efficient staking strategies, or may even get repulsed from staking, or may mislead themselves into believing that shares are either something scammy or irrelevant.
Sharing returns to stakers
The main function of shares is to proportionally reward stakes with interest. Everything a stake gets assigned by the HEX contract daily, is based on the proportion of shares a stake has (the share ratio). Interest is composed of:
- supply inflation (3.69% annual inflation of total supply),
- BigPayDay (BPD, all unclaimable HEX that is distributed to stakes at end of launch phase on November 19th 2020)
- redistributed penalties (half of all contract penalties are distributed to stakers).
Interest gets shared among stakers according to this simple equation:
Daily_stake_interest = Total_daily_interest × Stake_shares / Total_shares
or
Daily_stake_interest = Total_daily_interest × Shares_ratio
(where: Shares_ratio = Stake_shares / Total_shares)
Therefore, HEX shares act analogously to shares of a company. They assure dividends in proportion to shares. Except that in case of HEX shares, it is not a company that distributes dividends, but a smart contract that distributes interest trustlessly.
Purpose of shares
HEX shares are an internal unit of account of the HEX smart contract. They are not tokenized even though they are immutably registered on the blockchain. They are acquired by staking HEX. When someone stakes HEX, the staked coins get burned and shares are created instead. Therefore, each stake has a number of shares assigned. When a stake is endstaked and new HEX is minted, these shares are burned.
The shares system in HEX is mainly a measure against anyone gaming the contract by compounding interest. The way it works is that the contract assigns a new price for shares every time someone makes a record return on investment (ROI) at endstaking. This endstake event then sets the new share price at such a level that restaking the full return from this completed stake can only give an equal amount of shares at equal stake length as the previously held amount or principal.
Share price
The share price is thus indirectly raised by stakers themselves through a system similar to bidding on an auction. On an auction, the price of an item keeps rising each time someone outbids all previous bidders. Similarly, the share price keeps rising each time someone outbids every previous staker with a bigger ROI. The most successful staker thus creates a precedent for all new stakers and thus the share price can only go up. This way no staker can take advantage of any other staker by compounding interests from restaking short stakes to get exponentially more interest.
Because the share price, when expressed in HEX per share, is currently so low in units (in the range of 10-8 HEX, or Hearts), the inverse value of the price is generally more practical for use. The inverse value is called share rate and is expressed as shares per HEX.
The share price or share rate have no direct connection to HEX price. Share price is only relevant at staking. For example, initially the share price was 1 share = 1 Heart (100M Hearts = 1 HEX), or expressed as a share rate was 1 HEX = 100M shares. So 1 HEX could buy you 100 millions shares on day 1 of the contract deployment, but at day of writing this (day 199), it would get you about 96 millions shares, thus 4% less.
Share price after BigPayDay
On BigPayDay (BPD) all stakes will receive all unclaimable HEX. This one time reward will be added to stake interest. As a consequence, the first person that will endstake after this event will cause a sharp increase in share price, because BPD will increase his ROI more than anything up to then. Other endstakings that will follow will increase the share price even more. Those that staked for 351 days on day 1 of HEX would have the maximum ROI and would set the highest share price.
The BPD event will not only conclude the coin distribution phase, but also create an irreversible sharp increase in share price. Therefore, everyone who staked before BPD, for a period significantly beyond November 19th 2020, will get rewarded with increasing interests compared to all later stakers who will get much less shares for an equal staking setup.
Bonus shares
Since HEX is reproducing a certificate of deposit with a blockchain alternative, it also reproduces the rewarding system from the legacy products in banks. Banks generally provide better interest on bigger and longer deposits. HEX assures this by awarding bonus shares for bigger and longer stakes (BiggerPaysBetter and LongerPaysBetter bonuses). Shares are acquired using “Effective HEX” which is your principal increased by up to 10% by the size of the principal (capped at 150 million HEX), and up to 200% based on stake length (capped at 10 years). For example, creating a stake of 10 years would give 3-times as much shares as a 1 day stake.
Deflationary nature
The obvious consequence of this system is that shares are deflationary over long term, while the total supply of HEX keeps inflating 3.69% annually. The total HEX supply inflation is what drives the shares supply deflation, but the two are not correlated purely mathematically. They are correlated through staker’s behaviour that inflates the share price. More specifically, the success of every record breaking stake increases the share price, but not every stake breaks records. So, most minted HEX will never be able to ever buy an amount of shares equal to the shares destroyed by the minting events.
The ROI success of a stake is a matter of strategy, as it depends very much on LongerPaysBetter and BiggerPaysBetter bonuses, on redistributed penalties paid by the stakers who broke contract obligations, and most importantly, on how early the stake was set and how long it took to mature. All these behavioural parameters are impossible to predict. The future share price can only be estimated based on known constant parameters such as the 3.69% HEX supply inflation rate and the BigPayDay reward, while other parameters need to be modelled. Estimating future total shares is even much more difficult. It will keep increasing over the coin distribution period as people create new stakes from new coins distributed daily. Inevitably though, over longer time, the total shares keep reducing faster than the total supply of HEX keeps increasing. This is the core property of shares.
Share ratio
The amount of shares in any given stake remains constant throughout the length of the stake, but the total amount of all shares keeps changing dynamically and is deflationary over a longer period. Let’s call the proportion of shares in relation to total shares as share ratio. When the total shares change, the share ratio of a certain stake changes correspondingly:
- Share ratio decreases when new HEX gets staked, as such an event creates new shares.
- Share ratio increases when stakes get endstaked, as such an event destroys old shares.
To better understand this, imagine you have a ton of gold when all gold in human possession was only two tons. You would have half of all gold, or 50%. But then imagine a miner unearthed 98 tons of new gold. Suddenly, your gold ratio would become only 1%. But then a ship carrying 90 tons of gold over an ocean sinks. You would suddenly find yourself with 10% of all gold. In all these cases, your amount of gold stayed fixed, but its proportion to overall ranged widely. This is an extremely important concept one needs to understand to optimise ROI of staking. Interest is assigned based on share ratio.
Compounding by stake length
Compounding of interest would require no particular sacrifice and commitment from a staker. For this reason it is rightfully frowned upon, and shares prevent interest compounding from ever giving a better ROI than a stake of equally long compounded time. For example, if one was to restake the return from a 1 year long stake for another year, the ROI would be lower, compared to a stake where the 1 + 1 year length was compounded in a single 2 year stake.
On the other hand, compounding of time in a stake represents a significant sacrifice and is a clear sign of long term commitment. Delayed gratification is generally accepted as a virtue among humans and is therefore worthy of better rewards.
Penalties and share price
One interesting practice in crypto markets is the so-called Fear, Uncertainty and Doubt campaigns (FUD) that try to provoke bagholders to dump their coins, so that traders get a better price entry, or just to harm competing projects. An interesting consequence of FUD in HEX is that the Emergency EndStaking (EES) increases. Each EES pays stakers, because 50% of penalties is redistributed among stakers. Therefore, stakers are actually incentivized to spread FUD. Other events that cause spikes in EES are any pumping or dumping of price, because some impatient stakers may want to take advantage of high prices, or panic sell due to low prices. An additional source of redistributed penalties is the neglect of matured stakes (they bleed 1% per week).
All these spikes of penalties have a less obvious consequence. They increase the ROI of all stakes, including those that are about to endstake. This way penalties indirectly inflate the price of shares and deflate total shares. Penalties therefore benefit long stakes in more than just one way. They increase interest directly by redistribution, and indirectly by increasing the share ratio of the older stakes.
The long term game
The impact of shares on a long term stake is immense. A 10-15 year long stake gets a 3x bonus amount of shares. But the strongest impact is from the share ratio increasing over a long term due to the deflationary nature of shares. This effect only becomes prominent once the stake ages beyond the weighted average length of all stakes that got shares at the same or lower price as your stake. After this point, the interest starts increasing exponentially. Some simulations based on modest parameter values predict higher than 80x returns on a stake longer than 10 years (not including impact from EES). In practice, it is impossible to properly simulate the behaviour of stakers on which interest depends, but one thing is certain, for stakers, the deflationary nature of total shares will inevitably prove more influential than the HEX total supply inflation. Consequently, for long term stakers, HEX may prove the best store of value ever invented.
Additional sources:
HEX Contract in Layman’s Terms
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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