To HEX or not to HEX?
HEX has been capturing the attention of people in the know, due to its insane gains. But should you buy in? Let's have a look!
HEX is a creation of Richard Heart which launched in December 2019, on the Ethereum blockchain. It promises to be the first blockchain certificate of deposit. In my opinion this is a misdescription. I do not really think HEX is a certificate of deposit. In my opinion HEX is more accurately a redesigned Bitcoin.
Richard Heart is a Bitcoin OG who was mining BTC since it was mined on GPUs. He loves dressing up like a Las Vegas magician and wears a lot of Louis Vuitton. There is a lot of product placement in his livestream videos and he owns plenty of expensive watches and loves putting them all on show.
Heart's real name is "Richard Scheuler". Prior to Heart's involvement in crypto he made money from email spam related ventures. The internet has dug up screenshots of "Richard Scheuler the Spam King". There are also accusations that he was part of Panamanian criminal ventures. I don't know the truth or falsity of these allegations.
Up until 2017/18 Heart was a leading influencer in BTC circles. So far as I know, he became disillusioned with BTC during the 2017-18 bear market, believing BTC to be a failed currency. I believe he spent much of 2018 to 2019 working on ways to improve Bitcoin, and these efforts eventually became HEX.
HEX has more in common with Bitcoin than a certificate of deposit as defined by traditional finance. One of our regular contributors, Dr Sauce has spoken in previous articles about "alignment of incentives" and my opinion, HEX is a redesigned Bitcoin with better alignment of incentives. This idea refers to the alignment of incentives between the founder(s) and adopters of a coin. With Bitcoin there are many whales that buy and sell to profit off market manipulation and miners must sell to pay for electricity cost. This hurts holders. In my opinion, Hex's "alignment of incentives" is created at the expense of decentralization.
HEX currently sits as a smart contract layer on top of Ethereum. However HEX will shortly be forked and the entire system state and smart contract moved to Pulsechain, another Richard Heart project. This has been done due to extortionate ETH fees during congestion load, which has been pricing out smaller users of HEX. During the 2021 bull run, I was paying up to $1k USD for a single HEX transaction.
The existence of HEX as a layer on ETH (and soon on Pulse) is a key difference from Bitcoin as there is no need to pay miners an inflation rate denominated in HEX to secure the network. ETH (and Pulse) are arguably already secure. In Bitcoin, the miners mint new coins (inflation) in consideration for the miners securing the network. This results in carbon emissions that are detrimental for the environment.
BTC Miners are forced to sell their coins for fiat currency to pay for electricity. This results in sell pressure on the BTC price. Instead, HEX pays the inflation rate to stakers, who agree to receive a proportion of the inflation rate in consideration for locking their coins up for a time of their choosing. By locking their coins up they receive "interest". This "interest" is really just an inflation rate that under BTC, would be paid to miners as consideration for securing the network. In this way, HEX cuts out the middlemen (miners) as a result improving efficiency.
So far as I am aware, the inflation rate for HEX is set at a constant 3% per year. This means that non-stakers get diluted over time and must rely on token price increases for gains. Currently, CPI is sitting at about 0.5% or so. The BTC inflation rate is about 1.7%. So the HEX inflation rate is higher than both.
The 3% inflation rate is not divided up evenly amongst stakers. Longer, bigger and earlier stakes receive a larger proportion of the inflation rate. My 10 year stakes, committed to in the first year of the HEX launch are receiving as much as a 60% APY. Some stakes committed to after the first year, for a few years are receiving 20%. But some of the stakes committed to for a few years that were started in the first year are receiving 40% or so. It is difficult to know how the contract actually works without delving into the documents.
The genius of the HEX system is that it incentivises people to commit to the project for a time period of their choosing, and not to sell for that period. There are penalties for ending stakes early. The longer the stake, the better. So far, this has resulted in insane price gains for HEX. So far, the price has had very little correlation to the BTC 4 year cycle, like other alts. The price has also had little correlation to the day to day movement of BTC. It has mostly increased or just tracked sideways.
HEX price chart, Coingecko.
Should we bet the house? I don't think so. I have a couple of reservations about HEX, despite its genius, game changing design.
I believe that around 90% of the coins are owned by Richard Heart. This is not the official line that you will hear from Richard, or the HEX team. However I stand by this analysis for two reasons:
Richard is in control of an "origin address" which receives as much as 50% of all HEX penalties, which are deducted when stakers break their stakes.
The HEX launch was designed in a manner whereby it would be very easy for Richard to "wash trade" ETH through the transformation lobby in order to support the price of HEX, but also end up with close to 1:1 ETH.
With the second point, we must delve further.
HEX launched on 3 December 2019 and the launch lasted for one year. The launch was NOT conducted as an ICO. In contrast, HEX was a complete and finished product with no further work to be done. In contrast, an ICO is usually an incomplete or prospective product to be delivered.
HEX was launched through a lobby called "adoption amplifier" where about 510 million HEX was put up for sale every day for 351 days. Buyers deposited ETH into the lobby and the price you received on your HEX was dependent on the amount of ETH that was deposited in the lobby by others, per day. You then received your HEX and Richard Heart received his ETH. See the lobby of the adoption amplifier below.
This would make it possible for Richard Heart to receive ETH from buyers of HEX, then use that same ETH to purchase more HEX from the lobby, and in doing that ,he would receive more ETH, which he could use to purchase more HEX. In this way, he could support the price of HEX in it's crucial start-up phase, and build hype.
A crucial part of the HEX launch was that BTC holders received a free airdrop, if they "freeclaimed" by sending a message on the BTC blockchain. Any unclaimed coins from the BTC allocations were then allocated at the end of the launch to stakers of HEX, which was called the "big pay day". About 2% of BTC holders freeclaimed. However, a few days before the big pay day, almost 90% of the HEX was staked simultaneously, and unstaked after. See chart from HEX.Info.
Is this Richard Heart? It is consistent with almost 90% of the supply being under the control of one entity.
Further evidence can be found on NOMICS.com
How did HEX get to #3 market cap at $98bil with only 52MIL in daily volume? Dogecoin is #9 and it has 3bil in daily volume. Throughout the life cycle of HEX, volumes have been very very low, usually -10x a similar coin of its market cap.
Sites like coinmarketcap and coingecko have refused to rank HEX. Richard Heart cries "censorship!". Binance has refused to list HEX and I do not see this changing. However at some point, if HEX is successful the crypto industry may have to reckon with their censorship of a major coin, in an industry with an anti-censorship mission statement.
I believe that Richard Heart owns a vast majority of the coins and is not selling, to stabilise and boost the price of HEX. This is one explanation for the very low trading volumes and very high market cap.
Are these tactics wrong or immoral? I'm not sure it matters in crypto. The music industry works in exactly the same way. Record labels have been known to buy their stock to push their product up the charts. Obviously, when a song reaches #1, hype reaches fever pitch and more people buy. This manufacturing of herd mentality and hype has been a business model of the music industry for a long time, and these business practices are generally hidden to consumers.
99% of altcoins are driven by Venture Capital (VC) money. The VC model is a great example of misaligned incentives because VC's fund start-ups, then seek an "exit" in profit. In crypto, this normally results in retail investors being dumped on. Would we rather incentives aligned? Richard Heart for the moment appears to be a "benevolent whale" with a long term interest in the success of the coin.
Thus far I have noticed in HEX an absence of dirty whale tactics that have been seen in the BTC markets. I don't think that any whale can presently out-whale Richard Heart, who has a long term vested interest in the success of the project. Everyone in the HEX telegram is making money and we see pictures of houses, RVs and sports cars. I believe only the very disciplined, studious and smart can be profitable at BTC and the rest of crypto.
No trading skills are required to be profitable at HEX. You just buy, and stake.
Crypto is an industry where only results matter, and Richard Heart is probably a genius. Anyone that bought during the adoption amplifier that held onto their HEX has done insane gains, staked or not.
The main risks I see with HEX are:
Founder centralisation is extreme. It's success is tied to Richard Heart's personal fortunes.
Richard Heart himself will probably seek an exit at some point.
It will likely attract the attention of the SEC in the future as it is almost certainly an illegal security.
No major exchanges will support it due to reasons above.
No institutional investors are likely to touch it, ever.
Censorship and no support from big crypto.
Smart contract is inherently less secure than a proof of work blockchain like Bitcoin.
The main strengths I see with HEX are:
Very low supply, due to most retail coins staked and Richard Heart sitting on the majority.
Alignment of incentives all the way down the chain from the founders to the holders.
Control your own private keys.
Receive automated, trustless interest for staking.
Potential for very large profits for very small initial investment and risk.
So what do you think about HEX? Let me know in the comments below.