HEX is a smart contract with its own ERC-20 token that runs on the Ethereum network. In its immutable code we find integrated the main use case, which is that of a blockchain certificate of deposit (BCD). Yet, that is only its superficial function. There are numerous complex game theory elements hardcoded in the contract, which will allow it to be much more than that. HEX tokens can be staked into a BCD, but this is no ordinary staking. The user burns tokens upon staking and mints tokens upon unstaking. Upon staking HEX, the smart contract allocates shares to each staker in proportion to the current share price, and length and size of the stake. These shares yield interest and other rewards that allow the staker to mint HEX upon stake maturation. Interest generates supply inflation that dilutes the value of liquid HEX, thus effectively redistributing value from HEX holders to HEX stakers.
The founder of HEX is Richard Heart, an entrepreneur and public figure in cryptocurrency industry that started his crypto experience as a Bitcoin miner in 2011. He coordinated the code production by a team of developers, financed the audits, and is the public figure of HEX.
This article is the first in a series of articles about HEX. In this one, I will try to describe what differentiates HEX from other blockchain projects and what’s all the hype about. For full disclosure, I’m not part of the project team, but own some HEX, and various other coins such as ETH and BTC. Views expressed herein are my personal opinions and require verification by your own research. I’m biased toward HEX, because I find its basic concept of integrating complex game theory elements into immutable code the best innovation in crypto since the invention of smart contracts. I believe this innovation may lead to widespread adoption of decentralized finance (DeFi). The motivation to write this article comes from seeing clueless crypto influencers making judgements about HEX without investing any effort into research. Therefore, I decided to invest my own effort into it.
HEX was launched as a complete and functional product
It is quite rare for a cryptocurrency project to launch as a finished, complete, multiply audited and fully functional product. In this industry, most projects launch as unregistered securities with no working product whatsoever and sell promises instead of products (the so-called ICO or IEO). Since launch, the HEX team had no need to make any promise, or provide any expectations of some future development or entrepreneurial effort. For this reason, the HEX community soon become proud of their “No promises, no expectations!” mantra that so strongly differentiates it from other communities.
HEX is free for everyone who owned keys to their Bitcoin addresses at the time of the UTXO snapshot (December 1st 2019). All it takes to freeclaim HEX is to cryptographically sign a message containing your Ethereum address by using your Bitcoin wallet. This procedure does not require any exposure of keys, but it does create a blockchain traceability between your Bitcoin address and your Ethereum address used for freeclaiming HEX. If you are concerned about your BTCÐ addresses cross-traceability, create a fresh Ethereum address for your HEX.
The amount of HEX that can be freeclaimed was initially 10000 HEX per BTC, but this amount bleeds out 2% per week during the HEX distribution phase. Using a referral link gives you a 10% bonus, while your referee gets 20% of the amount you mint. Of the freeclaimed HEX, 10% is liquid while 90% is autostaked for a minimum of 350 days to prevent dumping during the distribution phase and to secure the BigPayDay (BPD) reward to the freeclaimer.
The “HEX is scam” marketing
In 2017, the Initial Coin Offering (ICO) crypto projects got the most investment attention even though it was obvious most of them only sell promises of a product. ICO’s were not registered securities, so any money they got from investors was formally just a form of donation, with no legally binding obligations whatsoever. The teams behind these projects were often not even developing anything beyond their public image. They would publish a bogus white paper, do public presentations, write roadmaps, or would be otherwise promoting their unreasonable business models. People donated money, not so much because of business expectations, but because 2017 was a time of pump and dumps, and only those who entered early and dumped in the right moment profited.
HEX is an already completed product and thus the ICO sell approach was not possible. The ICO hype is already history, but a lot was learned from their efficient marketing methods. How to finance marketing of an asset that does not launch as an unregistered security? Any paid marketing could be interpreted as a substantial effort aimed at securing value and generating promises and expectations. This could potentially violate the securities regulations. HEX found the most ingenious solution to this regulatory dilemma.
In 2017, it became obvious that the more the influencers warned people that ICO’s are scams, the more successful these ICO sales become, presumably because of the free marketing by directing attention and seizing mind share. This aspect of the marketing was well exploited by HEX. A site hexscam.com was set as a bait for haters, so they would click-bait due to the tittle, and spread the link, but those that read it, would see it actually describes how good the project is (the site was now set to redirect to the contract frontend). The official website hex.win employed the design and discourse characteristic of ICO projects. The only difference being, that instead of bogus promises, the content was purely fact based while still maintaining scammy appearances.
The HEX community later also contributed in the same click-baity style, like with the now famous mock article “Is HEX The Most Notorious Scam in The History of Cryptocurrencies?” This one is still occasionally being spread by haters themselves, regardless of its pro-HEX content. Ironically, Richard Heart did everything with full transparency by warning about this marketing strategy on his YouTube channel and his interviews well in advance of the actual launch.
The fundamentals of HEX and more so the fact that it was designed by an ex Bitcoin maximalist soon shook the Bitcoin bagholders, who provided free marketing calling attention to HEX by joining the “It’s a scam!” parade without being able to give any convincing arguments on how is it scamming anyone. HEX founder Richard Heart baited haters into live interviews where they would publicly demonstrate their ignorance of the project and inability to defend their positions. Some of these interviews became legendary.
Even now, 5 months after launch, some haters still direct attention to HEX free of charge, thus allowing widespread awareness. The undesired result was that almost the entire crypto industry now does its best at censoring HEX. Nevertheless, even this draws attention and consolidates the HEX community. For example, even the popular price aggregator Coinmarketcap, famous for promoting scams in 2017, now gate-keeps HEX on its third page (rank 200-300), even though it is now in the top 30 cryptocurrencies by market cap. Similarly, Coinpaprika recently publicly decided to suppress HEX ranking by modifying the circulating supply, while Coingecko pretends incompetency regarding the retrieval of circulating supply information from the blockchain.
However, verifiable data is publicly available on the Ethereum blockchain using block explorers. Moreover, since most of the trading volume occurs on Uniswap DEX, the price discovery process is fully transparent with each trade recorded on the blockchain. Censorship may allow HEX to fly under the radar until entering the top 10 coins by market cap, at which point a shock and awe marketing strategy will occur spontaneously.
The “HEX is a scam” strategy makes HEX one of the most interesting and paradoxical crypto projects ever. This very novel approach forces potential users of the HEX smart contract to do their own research, read its audits, project documentation, and interact with the community, before making rational judgements. This results in HEX users being generally more knowledgeable of the fundamentals and less likely to invest for pump & dump purposes.
Blockchain network economy
HEX runs on the Ethereum blockchain network. The economy of the network maintenance is provided by Proof of Work (PoW) mining, which inflates only the ETH supply and does not affect the HEX supply. Ethereum, Bitcoin or similar networks are maintained by inflating supply. Miners are allowed to mint tokens as rewards for validating transactions. At the time of writing, running the entire Bitcoin network costs users approximately 900 BTC/day or about 8M USD/day (before the latest halvening it was twice that expensive). The miners dump these coins on the market, exerting a strong selling pressure that suppresses price appreciation. All PoW based blockchain networks have this same issue that ultimately leads to domination of ASIC-based mining, unnecessary environment pollution, and hash rate cartelization that compromises security.
HEX externalizes maintenance costs, so that miners cannot directly suppress its value. Miners are still paid for their work with fees paid for HEX transactions and contract calls, but those fees are paid in the network’s native currency ETH. The supply inflation in HEX can thus only reward stakers which can decide whether to sell their interest or not, rather than being forced to sell due to mining related costs. This way, HEX uses the Ethereum network for what this was originally built for, as a general blockchain platform connecting contracts and users in a huge ecosystem.
HEX has its use cases strongly integrated in the code
In practice, few coins share this property with HEX. For example, ETH has its network utility token use case encoded in the Ethereum client code. Monero (XMR) has its fungibility and privacy related use case encoded in the consensus mechanism. Many other coins do not have built-in use cases and rather rely on narratives. The initial white paper narrative of Bitcoin was digital peer-to-peer currency, which is also the main use case integrated into its code. Once the early adopters realized that the currency aspect does not really work due to lack of scalability, no fungibility, and high volatility, the narrative was changed to the store of value (SoV, also known as “digital gold”). The SoV narrative was more suited for the simple game theory element integrated in the Bitcoin code, the miner reward halvening every 4 years with the 21M coins cap.
The blockchain certificate of deposit use case of HEX is the integral part of the HEX smart contract code. The complex game theory elements that can become the basis for additional use cases are also part of the immutable code (but this issue deserves a separate article).
One key security issue of cryptocurrencies running on their own blockchain mainnets is the social enforcement of the code. In case miners collude, the code can be changed which results in a blockchain fork. Forks may be useful for correcting bugs and upgrading the system. Yet, we have seen too many contentious forks in cryptocurrencies. Change of socially enforced rules can cause the demise of even the most successful blockchain. Just remember the contentious forks the Bitcoin block size wars caused. Now, imagine how much outrage a change of some hardened rules, like the 21M Bitcoin cap, or the halvening rule, would cause.
HEX employs the innovative aspect of smart contracts to solve the social enforcement problem. Smart contracts use blockchain immutability to provide immutability of the code. The code then executes in a censorship resistant manner.
Enormous use case potential
The concept of locking your assets for interests is the basis of a bank product called Certificate of Deposit (CD). It is estimated that only in USA and China combined, the value locked in CD’s is about 7 trillion USD. Banks currently provide close to zero interest for CD’s. The money locked in bank CD’s stands on accounts and is not used for any productive purpose. It is not lent out to borrowers, or used to finance enterprises. Banks are only allowed to use CD’s as a fractional collateral for printing more money. For example, if a bank customer deposits 1M USD in a CD, the bank is allowed to print 100M USD (actual ratio depends on regulations). Therefore, CD’s cause money supply inflation that affects the users of the currency.
HEX does nothing shady of this kind. Instead, the contract provides an overall annual inflation of 3.69%, but this inflation is not issued directly into circulation. Stakes can only print the inflated supply upon stake maturation. Even though inflation causes the value from liquid HEX to slowly bleed into stakes, staking causes scarcity, which in turn increases coin value at equal demand. This way the holders reward the stakers for responsibly regulating supply.
Emergency end staking is allowed, but penalised in such a way to redistribute supply back to remaining stakers. Self-balancing mechanisms provide incentive for staking when staking ratio is too low, and provide incentive to not stake when the staking ratio is too high. In particular, since the entire inflation is shared only by stakers, the actual annualized interest rate the staker class get is defined by the equation:
Interest_rate% = 369% / Staking_ratio%
(for example, if staking ratio is 25%, the interest is about 15%). This interest is distributed to individual stakers in proportion to the number of shares they own.
The Solidity code was audited by CoinFabrik and Chainsecurity. The financial audit was also performed. This is of utmost importance when dealing with immutable smart contracts. HEX may just have the most thoroughly audited code in crypto.
HEX runs on the most secure blockchain network currently available. Ethereum doesn’t have as much issues with regional and mining pool centralization, as some other cryptocurrencies have. It is also GPU mineable and not ASIC dominated. The Ethereum code is developed by the largest community of the best blockchain developers. The code is modular, thus more easily upgraded after it is audited and verified on a testnet.
Integration with the Ethereum ecosystem
Ethereum network is the place where most of decentralized finance (DeFi) movement is growing. HEX complements the DeFi with trustless interest, which remained unaddressed up to now. It already successfully integrated such innovative tools like the Uniswap exchange (version 2 of Uniswap contract has just been deployed). This decentralized exchange is run by a smart contract that allows swapping ERC-20 tokens and ETH without any counterparty risks. HEX is currently the token with most volume and liquidity on Uniswap. Furthermore, the HEX community created their own frontends for Uniswap, as the official frontends are too slow to update their list of tokens, and are censored in China, UAE, and some other countries (e.g., hexdex.win, hexwhales.win). Other DeFi smart contracts using HEX are currently being built. Gambling DAPPs built on top of HEX also abound.
Complex game theory
HEX is the first smart contract and cryptocurrency that has numerous elements of game theory integrated in its immutable code. These elements reward those that respect contract obligations and play by the rules that aim at generating token value. It penalizes those that fail with contract obligations, or act in a way that decreases token value. The performance of these self-stabilizing mechanisms excelled during the early March 2020 crypto dump (most coins had a >40% depreciation). While almost all crypto was tanking, the price of HEX appreciated by 200% from March 8. to 17. with large liquidity.
Big Pay Day (BPD)
The token distribution phase lasts from December 1st 2019 to November 19th 2020. During this phase, everybody can mint their own HEX, either by freeclaiming as a BTC owner, or by transforming ETH to HEX by using an automated daily collective auction system run trustlessly by the smart contract itself (called Adoption Amplifier). Such distribution compressed into 351 days inevitably causes a rapid hyperinflation of the supply.
However, on the BPD, this token distribution phase ends and from that point onward stakers take full control of the supply. Only stakers will be able to mint and burn HEX tokens, essentially autonomously regulating the supply as a decentralized collective of central banks. This means the monetary policy will be in the hands of those who have most vested interest in asset price appreciation.
The reward called BPD that completes the distribution phase is apparently designed to motivate stakers to accumulate the optimal number of shares. This reward consists of all leftover HEX: unclaimable HEX (multisig BTC wallets by exchanges, BTC from Mt. Gox, etc.); and the critical mass and virality bonuses (related to amount and number of freeclaims). These leftovers and bonuses will be distributed to stakers in proportion to their shares. This way opportunistic stakers get the least, while the more serious and strong handed ones get the biggest share. BPD gets added to the interest, so it cannot be compounded, and can only be minted at stake completion to prevent dumps.
The contract sends a copy of all bonuses and half of all penalties to an address called Origin Address (OA). It is currently not known who is the entity that controls this address, but it is likely someone or something that is associated with the founder or developers. This address receives a large portion of total tokens (up to about 50% during the token distribution phase, which may change after BPD).
The OA issue makes HEX not fully independent, as its future performance partially depends on actions of this one entity. Since HEX is not an ICO/IEO or any other type of security, this address cannot really be considered a “founder’s token found”. Founder’s tokens in ICO/IEO were commonly dumped on investors, as most ICO/IEO were just selling vaporware, so it is not unusual that OA and its size became the main point of contempt among the HEX haters.
OA is currently not staking anymore and if it continues being liquid, it already helps adoption by just sitting there doing nothing. Staking interest and market cap are increased by its sacrificial passivity and this stimulates adoption. Due to securities laws, nothing can be expected from the OA. If HEX was a security, it would be easy to make promises of benefits that OA would provide. Experience has shown that cryptocurrencies that use funds for promotion, expansion of their ecosystem, and to prevent the tragedy of commons, fare best. Ethereum foundation is probably the exemplary manager of such a fund.
Currently, the wealth of OA is so much bigger than the liquidity of HEX that it does not represent a serious risk, because by trying to dump on the market it could only liquidate a minuscule part of its wealth before the large majority of its wealth would be destroyed. The more HEX grows the lesser risk the OA represents, as long as it acts as a rational whale.
The OA also serves as a “whale bait”, as it serves as a guarantee for the wealth vs. money dilemma. It also acts as a precedent for other whales to enter without anxiety that the small investors, who do not have to worry about liquidity, possibly dump their coins causing the cascade of selling typical for “shitcoins”.
The staying power
HEX is the only crypto where the time commitment of its investors is fully transparent on chain. A huge volume of capital commits daily for up to 15 years in the future at the cost of huge penalization for breaching contract obligations. The more people and their capital becomes committed, the stronger the incentive is to build on top of the HEX contract, expand its ecosystem, assure the Ethereum network continuously upgrades, and DeFi ecosystem prospers. This future prospective property of HEX has the potential to be the engine propelling crypto to widespread adoption. Verifying the current state of stakes makes it obvious that HEX is here to stay.
The HEX community is the fastest growing crypto community. Colloquially calling themselves as Hexicans or Hexers, they range from developers, serial crypto investors, disgruntled crypto enthusiasts, cypherpunk idealists, and obvious noobs attracted by price performance. There are currently 192k addresses holding and/or staking HEX. The English speaking community on Telegram currently counts 21k members and there are several thousand members in non-English speaking groups. Twitter account has 18k followers. There are also several popular YouTube channels dedicated to HEX.
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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