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Crypto currency (IF banned from CA)

LinekersLegs said:
Bloomberg's Matt Levine on Hex

Hex​

Here is an economic system, or a system anyway:

  1. I make up a crypto token called MattCoin. I can issue an unlimited amount of MattCoins, since I made them up.
  2. I sell them to people for money.
  3. You can use MattCoins to make term deposits, with me: You can give me back your MattCoins and I will keep them for some specified time period (say, a year), and at the end of the period I will hand them back to you with interest.
  4. The interest is paid in MattCoins.
  5. The interest rate is high, say, 38% per year.
  6. This is the only thing you can do with the MattCoins. They’re not useful for payments, they don’t run smart contracts on a blockchain, all you can do is trade them on crypto exchanges and deposit them for a 38% yield paid in kind.
So you pay me $100 for 100 MattCoins, you deposit them with me for a year, and at the end of the year I give you back 138 MattCoins.

At the end of the year, how much would you expect your 138 MattCoins to be worth? I think the main options are[1]:

  1. $138. You put in $100 for 100 MattCoins, meaning that they are worth $1 each, and in a year you get back 138 MattCoins. If they are still worth $1 each, then 138 MattCoins are worth $138.
  2. $100. You put in $100 for some MattCoins, absolutely no economic activity happened, and in a year you get back 138 MattCoins. This is like a stock split: You had 100 shares of a pot worth $100, now you have 138 shares of a pot worth $100, each share is worth less but the pot hasn’t changed.
  3. $0. You put in $100 for some MattCoins, absolutely no economic activity happened or will ever happen, in a year you get back 138 MattCoins, but I keep the $100 and you don’t get to exchange your 138 MattCoins for real money again. There is not actually a pot with $100 in it; I just took the $100! You put in $100 and got back a pile of magic beans that are not redeemable for anything. The pile grew bigger over the year, but it remains worthless.
  4. More than $138. You put in $100 for 100 MattCoins, those MattCoins offered a 38% yield, other people see that 38% yield and said “I want some of that,” they buy some MattCoins, the price of MattCoin rises, still other people see the rising price and say “ooh I want some of that,” the price rises further, it’s a virtuous cycle, eventually each MattCoin is worth like $10,000 and your 138 MattCoins make you a millionaire.
I think that Answer 3 is the standard answer that traditional financial analysis would give you: You bought an electronic token with no cash flows ever, so it’s worth zero. I am drawn to this traditional analysis, but it has not really worked all that well for understanding crypto.

I think that Answer 4 is the standard answer that crypto would give you. This is a completely accepted mechanism of crypto finance: You have some token, the main thing that the token does is generate more tokens, you call those additional tokens “yield,” people are attracted to the yield, they buy the token and its price goes up. The “yield” does not come from any economic activity in the real world; it just comes from printing more tokens. “Ponzinomics,” people sometimes say. Loosely speaking, this is the thought process behind crypto “Ponzicoins” like OlympusDAO and Wonderland. Loosely speaking, it is the thought process behind many algorithmic stablecoins like TerraUSD. Loosely speaking, it is the thought process that Sam Bankman-Fried once described to me on Odd Lots: “You start with a company that builds a box and in practice this box, they probably dress it up to look like a life-changing, you know, world-altering protocol that's gonna replace all the big banks in 38 days or whatever. Maybe for now actually ignore what it does or pretend it does literally nothing. It's just a box.”

Anyway here’s a US Securities and Exchange Commission enforcement action against a crypto project called Hex[2] and its founder, a guy named Richard Schueler who apparently goes by Richard Heart:


There is a lot going on in the complaint, including a very fun paragraph detailing Heart’s spending:


But mostly I love Hex’s economic model. Here it is:



Notice how you earn your interest on Hex: You send it to a dead address so no one can ever use it again. This is not what banks do to pay interest: Banks take deposits and use them to fund lending to support real-world economic activity. It is not what, say, Ethereum does to pay staking rewards: Ethereum stakers validate transactions and thus arguably add to the economic value of the Ethereum network. Hex does absolutely nothing, but it just prints some extra tokens (which cost it nothing!) to pay “yield.” This is inflationary, but the staking is arguably deflationary (you can’t sell the tokens that you’ve sent to the dead address), so if everything works out just right the value of Hex tokens goes up and your 38% in-kind yield is great.

This was in 2019, back when a lot of people found this economic model plausible, so it all did work out for a while. From the SEC complaint:


And then it didn’t; Hex peaked in 2021 at about $0.49, and trades at about $0.006 today, down almost 99% from the peak.

I want to mention this case for two reasons. One is that it is absolutely a time capsule of crypto in 2019: Hex’s economic model was allegedly just “buy our token and we will give you more of our token and that’s how you will make money,” and in 2019 enough crypto investors were like “sure that makes sense” that Heart was able to raise a billion dollars. There is something magnificent about raising so much money with such a tissue-thin idea.

The other is that the SEC is suing Heart for securities fraud, arguing that Hex tokens were securities, under the traditional US securities-law analysis that we have discussed a lot around here, which says that a security is “an investment of money in a common enterprise with profits to come solely from the efforts of others.” And so the SEC cites evidence that the profits of Hex were to come from the efforts of Heart:



But look at that economic model! The profits that Hex promised didn’t come from anyone building anything; they came from (1) printing more Hex and (2) people buying it. This was not an investment in some promised ecosystem that was being built by a dedicated team of technologists to revolutionize computing or whatever; this was … an investment in nothing? This was so transparent a Ponzi, in the SEC’s own telling, that I’m not even sure it’s a security.
Click to expand...
Thanks Matt for writing an article about HEX in bloomberg, thank you also for highlighting how you do not understand it at all as I will explain;

So you pay me $100 for 100 MattCoins, you deposit them with me for a year, and at the end of the year I give you back 138 MattCoins.

HEX is traded on the open market, I do not need to go to Richard Heart to buy HEX, in fact the Origin Address (the wallet a lot of people think is controlled by RH) has never sold a single token, all verifiable and provable on chain.

HEX is not deposited with anyone, If I want to stake HEX I do not deposit them into Richard Heart's account. The function of staking is me interacting with a smart contract, trustlessly, which means there is no one else involved apart from myself and the smart contract, which isn't controlled by anyone, there are no admin keys! If Richard died tomorrow I could still stake my hex and HEX smart contract would keep on running, it can't just be switched off.

If you stake HEX for 1 year like in his analogy, the yield you would earn is about 10-12%

So the whole article begins with his explanation of how HEX works, yet he has completely failed to understand it. Good job Matt

Notice how you earn your interest on Hex: You send it to a dead address so no one can ever use it again
Click to expand...
Not true, the HEX is burnt when staked and then when YOU decide to end your stake you mint your hex and the contract calculates the yield earnt

It is not what, say, Ethereum does to pay staking rewards: Ethereum stakers validate transactions and thus arguably add to the economic value of the Ethereum network
Click to expand...
This comparison of eth staking to hex staking is just completely idiotic, it is like comparing apples and oranges. You can't compare a whole blockchain to a contract that runs on that blockchain, they are two completely different things and to compare them is disingenuous.

“an investment of money in a common enterprise with profits to come solely from the efforts of others.” And so the SEC cites evidence that the profits of Hex were to come from the efforts of Heart:
Click to expand...
Hex was launched as a complete product. There was no pre sale, there was no pooling of money in a common enterprise in order for RH to create a product, it was launched complete, with no admin keys and immutable.

JimmyJeffers said:
Big early shout here 👏
Click to expand...

One of the funny things is, I have read the whole SEC complaint and not once does it use the word 'Scam', 'Ponzi', or 'Pyramid scheme' despite however many of you claiming it is for the past couple of years, the SEC clearly don't think so. Go search the term ponzi or scam in the SEC website and you will see countless cases they bring up against other crypto ponzis, but not HEX, funny that. In the past two years, the most you can call HEX is a terrible investment, it is down a lot, but this is crypto it happens all the time. The HEX contract works flawlessly, with 100% uptime and no bugs or hacks. It does exactly what it says it will, stake your hex for a period of time and get more hex back, simple.

I have gone on and on for years in here about how important it is in crypto, to not trust middlemen and to be in custody of your private keys. Why do you think I keep going on about this, because it is the very first principles of crypto, it is literally the reason it was created. Satoshi was not happy with central banks crashing economies after gambling on mortgage backed securities, getting bail outs and the common man picking up the tab, so he invented BTC. It solved the double spend problem and meant we no longer had to rely on any of these corrupt banks or governments to transact with each other. Don't forget that the right to transact underpins all other rights in the modern day. Now BTC is old and slow and there are better things out there. Satoshi, started this with key first principles, show me any other crypto or founder that tries to build on these principles more than HEX and RH. You can't.

Like I said earlier, I have read the complaint and they have made errors in their understanding just as bad as 'Mattcoin' , I am not going to post them and explain them because there is no point. The Richard Heart documentary, 'The highest of stakes' has just come out and will be screened in 12 cineworlds across the UK (sadly none in Liverpool), I say go and watch it and make your own mind up. At least then you will have some idea what you are talking about, shouting scam and ponzi at something you don't understand makes you look stupid.

I could go on and on here, but I repeat myself so much in these posts that it's not worth it. Do your own research, go watch the film and enjoy it!
 



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