What the HEX?
First, some background. In the traditional financial industry, Certificates of Deposit (CDs) are offered by retail banks and they typically offer a slightly higher interest rate than would be available in a standard savings or checking account. To achieve this higher rate, depositors must agree not to withdraw their funds - usually for one, three, or six months, and sometimes up to five years. The funds are government guaranteed and CDs are an easy way to earn a little extra interest - risk free - on unused funds that would otherwise be held in a current account. Outside of the U.S. CDs are commonly referred to as ‘term’ or ‘time’ deposits.
The HEX project says it is attempting to create a decentralized blockchain-backed version of traditional CDs. Apparently HEX is designed to pay interest to participants who lock up their coins through stake. Those who stake their HEX for longer periods get higher rewards, paid out in HEX tokens. According to HEX, interest payments range from 3.69% to 369% depending on how much of the total HEX token supply is being staked. HEX includes large referral bonuses for participants who bring in newer participants. These participants are entitled to more bonuses as they introduce new people to the project.
Read the disclaimer - no really - READ IT
HEX promoters have this to say on the HEX disclaimer page.
If you've read down this far, congratulations. You will notice the theme of all of the above text is that you should have absolutely no expectations of any sort regarding anything, and if anything goes wrong, you shouldn't look for redress anywhere, and you should receive none. When you send ETH to the contract, you don't get the ETH back. Donations can be made by sending ETH directly to the contract without running the joinXfLobbyfunction. Software is hard. Blockchain software is harder. We're lucky any of this stuff works at all.
In addition, regarding the HEX token itself, the promoters say;
HEX is not a security. There aren't actually any coins, they're just numbers in a distributed database. No one is actually given anything … They're just numbers living on the Internet. The code can do nothing on its own. People can run the code if they want to, or not. The code can do nothing on its own but sit there.
So in summary, if you send them ETH you won’t get it back - your ETH is a donation. You should expect nothing, you will not be given anything and oh by the way, the HEX code can do nothing.
But wait, there’s more...
The man behind the project is Richard Heart, a high-profile crypto Twitter and YouTube personality.
Since Heart and his team revealed plans for the project, they have faced significant criticism. The venture first used the name ‘Bitcoin Hex’. Heart has said that one of the main aims of the project is to redistribute the wealth of the Bitcoin ecosystem.
Not surprisingly, criticism about the project’s design and the motivations of its creator is widespread, and close inspection of the crypto-economics of the HEX ecosystem raises more questions that it answers.
1. The Adoption Amplifier
The Adoption Amplifier is one of the ways through which HEX tokens are created and put into circulation. The first of these is through the Free Claim. Holders of BTC were able to claim their HEX tokens at the rate of 10,000 HEX per bitcoin - though the project is keen to state that this is not an airdrop.
There are significant privacy implications for those who choose to claim HEX in this manner. This is because the participants must reveal their BTC holdings publicly. There are ways to mitigate this, such as the use of obfuscation tools like the Wasabi wallet.
The bulk of the criticism focuses on what Heart calls the Adoption Amplifier. Using this function, participants can choose to send ETH to an address and then get HEX tokens in exchange. The project goes to some lengths to insist that this is not a trade. Instead, the ETH donation ‘creates’ new HEX tokens as the Adoption Amplifier ‘transforms the ETH to HEX.’
Whether this constitutes a sale in the traditional sense or is an ICO, is a matter for regulators. What is known is that the HEX promoters receive the ETH sent by participants who engage with the Adoption Amplifier. The Adoption Amplifier resets every day and since launch the address has received 35,452 ETH (around $5,000,000). The Adoption Amplifier is designed to be live for 353 days.
This has caused alarm in the crypto community. Popular commentator Guy Swann echoed these sentiments on his cryptocurrency-focused podcast Cryptoconomy. Swann explained, “To get HEX after the airdrop, you participate in an ‘Adoption Amplifier,’ which makes a game out of bidding on new HEX tokens by sending ETH into a ‘pool'. That ETH then goes directly to Richard. Everything in this ridiculous token is designed to look like a game and encourage gambling. But the one universal factor in every game element is that Richard gets wealthier and you get a worthless token that he invented for free.”
2. The Origin Address
The biggest issue from critics is the use of an Origin Address feature embedded in the HEX ecosystem. The Origin Address is explained by Kyle Bahr in a document on Hex.win, under the Tech Specs tab. The document is called_ ‘HEX Contract in Layman's Terms’.
Bahr says, “The contract specifies an ETH address as the Origin Address. This address is paid HEX by the contract in a few ways. The Origin is paid half of all HEX reclaimed by penalties (the other half going to the payout pool). The Origin is paid a copy of all bonus payments.”
* Speed claim bonus * Referral bonus * We Are All Satoshi increments * Critical Mass/Virality bonusesIn more straightforward terms, HEX promoters appear to have created a system where the Origin Address will have access to the largest amount of HEX. At the end of the initial launch phase, the Origin Address will have control over a large percentage of the circulating supply of the token. Due to the design of the smart contract, it is not possible to know how many HEX tokens will be created. However, some critics estimate the Origin Address will hold greater than 45% percent of the HEX supply.
This is how the estimates are calculated - the Origin Address receives a copy of all bonus payments. Half of the bonus payments are sent to the pool to be divided amongst other participants in the ecosystem. Say, for example, the bonus payments for a day are four Hex tokens. Then two are sent to the OA and two are sent to the payout pool. As this scenario continues over time, eventually the OA will hold almost half of the HEX paid out in bonuses.
3. The Fines - ouch!
While the project claims that there are hefty interest payments and bonuses for staking HEX, there are also heavy fines if one is unable to complete their staking period.
If a party decides to engage the ‘Emergency Unstaking’ option, then the penalty is the amount of HEX equivalent to half of the profit the party stood to make if they had completed the staking period. However, because of the many interests and bonuses embedded in the ecosystem, the penalty can be so large that the party’s entire capital can be wiped out. Additionally, HEX holdings must be staked or the party is fined until the HEX is finished or they put up the tokens for staking.
Half of all HEX reclaimed by penalties is sent to the Origin Address. This means that the OA is designed to grow its holdings in perpetuity through bonuses and penalties.
Heart has addressed these criticisms about the large amounts of HEX sent to the OA. While he does not expressly deny that he controls the address he stated cryptically, “You keep saying me, by the way. The holder(s) of the private key for the Origin Address are not disclosed. So you should refer to it as the Origin Address, as I do.”
Speaking to CoinTelegraph, he added, “Whoever holds the keys to the origin address is going to be happy.”
On Medium, an anonymous critic describes the scenario in this way, “In reality, Richard has designed an ocean where he is the only whale, far larger than any other whale in any other project. The lone, unkillable Moby Dick of HEX. Richard could even dump all his HEX, and abandon the project, and his Origin Address would still gradually refill over time with everyone else’s penalized HEX: a zombie whale, back from the dead.”
In closing, readers may benefit from a brief reminder from the HEX disclaimer.
*You should have absolutely no expectations of any sort regarding anything… When you send ETH to the contract, you don't get the ETH back. *
Enough said.
OhNoCrypto
via https://www.ohnocrypto.com
Alex Lielacher, Khareem Sudlow