A pyramid scheme is a sketchy and unsustainable business model, where a few top-level members recruit newer members. Those members pay upfront costs up the chain to those who enrolled them. As newer members in turn recruit underlings of their own, a portion of the subsequent fees they receive is also kicked up the chain. Often called “pyramid scams,” these operations are illegal in some countries.
Most people have had a friend or family member come up with a “golden opportunity”. All you had to do was put in some money and bring in only 5 friends to earn passive income for life. 10 times out of 10 this ended in a loss.
There are people who have accused HEX of being a pyramid scheme. To see if there’s any truth to that, let’s look at how people who invest in HEX make money:
- Sell HEX at a profit.
Once you’ve bought HEX, you can keep it in your wallet and sell it like Bitcoin, Ethereum and most other cryptos whenever you want. You are not committed to anything and there is no waiting list to get your money out.
- Stake HEX.
Besides buying/selling, you can also stake (lock) your HEX for a number of days of your choice. The minimum is 1 day, the maximum 5555 days.
You will receive interest on your staked HEX. When your stake has ended, you will receive the amount of HEX that you had staked + interest. You can then sell it. Currently (May 2021) $3.2 billion has been locked up in HEX for an average duration of 5 years.
These are simply the two ways you can make money with HEX.
The questions regarding a pyramid scheme are as follows:
“Do I have to bring in new people to make money?”
No. If you buy HEX and the price goes up, you can sell it for a profit. Just like you can buy shares in Amazon and when the price rises, you can sell it for a profit.
In a pyramid scheme it is about whether you can only earn money when you bring in new people. The answer is no in HEX. Making people aware of this cryptocurrency is of course always useful when you want to grow something. That’s why marketing and sales are enormous industries. However, it is not necessary for the value of your portfolio to go up.
“Where does the interest come from?”
At the moment, the interest you receive for a stake of average duration (5.63 years) is 38.03% per year. That is an incredibly high interest rate. Of course you wonder where it comes from and how this is sustainable.
The answer to this is inflation and fines.
Almost all cryptos have inflation. When the marketcap remains stable, the value per coin would decrease as more and more coins are added. In Bitcoin this is due to mining. The maximum number of Bitcoin that will ever exist is 21 million, but at the moment only 18.5 million exist. So extra Bitcoin is being mined every day.
The problem with inflation in Bitcoin is that these new coins, which are currently $40,000 each, are going to the miners. These are companies that have to sell the Bitcoin they mine to pay the big electricity bill, staff costs. In addition to that, they want to take profit in fiat. Inflation therefore has a negative effect on the price of Bitcoin.
The inflation in HEX is fixed at 3.69% per year.
Unlike Bitcoin, HEX is not being mined. The new coins created by inflation are distributed among the stakers. They are being rewarded for locking up their funds. The longer your stake, the more interest you will receive. In the banking world this is called a certificate of deposit. The longer you lock up your money, the greater the reward.
The interest you receive on your stakes is flexible. It depends on the amount of HEX that is staked. More staked HEX means a lower interest rate. The image below shows how the interest rate works in HEX.
If 100% of all HEX was staked, everyone would receive 3.69% interest per year. If it was 1%, everyone would receive 369% per year. As you can see, 9.38% was staked in November 2020 making everyone receive 39.92% APY. Since then, more HEX has been staked, causing interest rates to drop to 38.03% in May 2021.
The interest rate is therefore paid by inflation, not by 5 newly recruited people who then recruited 5 people again. Of course it is true that if no one would buy HEX, the price would go to 0. Then you can earn 38% interest, but if no one wants to buy it from you, this is useless. However, you can say this for any crypto and even any industry. When everyone wants to sell Bitcoin and no one wants to buy anymore, it goes to 0. The same goes for Tesla or Amazon.
Do you want to buy HEX but not stake?
No worries. If you had bought $1000 HEX 13 months ago, you would now have $100,000 without staking anything. Since January 2019 the price has even increased 1000x. Of course, this is nothing compared to the 6,000,000x Bitcoin has done in the last 10 years, but it’s a nice start.
In addition to distributing inflation among the stakers, they also receive 50% of the proceeds from fines.
Suppose you place a stake of 10,000 HEX for 500 days. It’s technically a promise you make not to touch your 10,000 HEX for 500 days. In return you receive interest. Suppose the price of HEX has risen enormously after 200 days and you would like to sell that 10,000 HEX to buy a car, then you can Emergency Endstake at any time.
This means that you end your stake before you have completed the full term. Since you have not kept your promise, you will be fined. The amount of the fine depends on how long your stake was and what percentage of your stake you had completed.
In StakerApp you can see how big your fine will be if you unstake right now. It’s very important to check this before you endstake as you can not only lose your interest, but also (a part of) your principal. You certainly do not want to Emergency Endstake a 10-year long stake on day 50, because then you will lose your accrued interest + principal.
All in all, it is very naive to say that HEX is a pyramid scheme. Often this is said by people who have heard it from someone else who have heard it again from someone else. If you have found reasons that show that HEX is a pyramid scheme, please let me know!