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The HEX One protocol presents a unique approach to stablecoins, leveraging the distinctive characteristics of the HEX protocol’s T-Shares, not HEX tokens directly, to offer a yield-bearing stablecoin pegged to the US dollar. I’s first stablecoin that does not require borrowing and lending to accumulate fees as the yield comes from future HEX payments. This article aims to provide a comprehensive explanation of HEX1, encompassing its mechanics, features, and potential benefits within the HEX ecosystem.
Deconstructing HEX T-shares: the foundation of HEX1
To understand HEX1, it is essential to first grasp the concept of T-shares, which form the bedrock of this innovative stablecoin. T-shares, an abbreviation for Trillions of shares, are not merely tokens but represent future HEX payments within the HEX ecosystem. They are acquired by staking HEX for a predetermined duration, similar to a certificate of deposit (CD) in traditional finance.
When a user stakes HEX, the protocol awards them T-Shares proportional to the amount of HEX staked and the chosen stake length. Longer and larger stakes yield a greater number of T-shares, leading to higher rewards upon maturity. The value of T-shares is fundamentally intertwined with HEX. As more users stake HEX, acquiring T-shares becomes progressively more challenging and potentially more rewarding, mirroring the principle of scarcity driving value.
TLDR of the HEX One protocol
The HEX One protocol creates the HEX1 stablecoin, which is pegged to $1 through an overcollateralization system of T-shares. Users can deposit HEX into the HEX One vault and mint an equivalent amount of HEX1 token, allowing them to borrow against their holdings. This system benefits both borrowers and the broader HEX ecosystem. Borrowers can access liquidity without selling their HEX, while the HEX1 stablecoin generates yield. The demand created by repaying borrowed HEX1, along with a 1% borrowing fee used to buy back and burn the stablecoin, puts upward pressure on HEX’s value. Since HEX1 is backed by HEX locked in T-shares, which can’t be redeemed until maturity, the protocol also shields users from impermanent loss.
The mechanics of the HEX1 yield-bearing stablecoin
HEX1 utilizes the unique properties of T-shares to establish a stablecoin model that intrinsically generates yield. The process unfolds in three key stages:
- Collateralization:
Users initiate their participation in the HEX One protocol by depositing HEX in the wrapper contract, which undergoes an automatic conversion into T-shares. The T-shares in this secure vault serve as collateral for the HEX1 stablecoin that is minted against them. A defining feature of the HEX1 vault is its commitment to maintaining a collateralization ratio exceeding 100%, guaranteeing that the value of HEX held in the vault consistently surpasses the total amount of HEX1 in circulation.
- Minting HEX1:
Upon successfully depositing HEX and securing their corresponding T-shares in the vault, users receive an equivalent value in HEX1. For instance, a user depositing $1,000 worth of HEX would be eligible to borrow up to 1,000 HEX1.
- Embedded Yield:
The inherent yield mechanism of HEX1 stems from the continuous generation of HEX rewards by the collateralized T-shares over time. As these T-shares mature and generate HEX rewards, the overall value of the collateral underpinning HEX1 appreciates. This built-in yield mechanism, derived directly from the HEX protocol’s reward structure, distinguishes HEX1 from conventional stablecoin models, making it a potentially attractive proposition for those seeking passive income.
Maintaining the peg to ensure HEX1's stability
Maintaining a stable peg between HEX1 and the US dollar is paramount to its functionality as a stablecoin. HEX1 employs a multi-layered approach to ensure peg stability:
- Overcollateralization:
The HEX1 vault operates on a principle of robust overcollateralization, steadfastly maintaining a collateralization ratio significantly surpassing the minimum 100% requirement. This strategy provides a substantial buffer to absorb potential price fluctuations in HEX. Even in scenarios where HEX experiences a price downturn, this overcollateralization acts as a safeguard, mitigating the impact on the peg and bolstering its stability.
- Liquidations:
To prevent instability arising from extreme price fluctuations, HEX1 incorporates a liquidation mechanism. If the value of a user’s collateral drops below a predefined threshold, currently set at 250%, their position becomes susceptible to liquidation. This process allows other participants within the ecosystem to step in and repay the outstanding HEX1 debt associated with the jeopardized position. In return for their intervention, these participants can claim the underlying T-shares at a discounted rate, providing an incentive for active participation in maintaining peg stability.
- Decentralized Oracle:
Accurately determining the value of HEX is crucial for both minting HEX1 and managing liquidations. HEX1 relies on a decentralized price oracle to achieve this, drawing price data from five distinct liquidity pools on PulseX V1. This multi-source approach mitigates the risk of manipulation by a single entity, enhancing the oracle’s reliability and security. Furthermore, any participant can contribute to the oracle’s operation by running the price feed bot, earning rewards in HEXIT, the protocol’s native incentive token.
- HEX Buyback and Burn:
A key feature of the HEX1 protocol is the 1% fee charged in HEX for each instance of HEX1 borrowing. This fee serves a dual purpose: Firstly, it contributes to the buyback of HEX1 tokens from the open market. Secondly, the repurchased tokens are subsequently burned, effectively reducing the total supply of HEX1 in circulation. This mechanism is designed to create upward pressure on the price of HEX1, further fortifying its peg to the US dollar.
Addressing impermanent loss to safeguard investment
Impermanent loss (IL) is a known risk in decentralized finance, particularly when providing liquidity to volatile assets. It transpires when the price ratio of the assets within a liquidity pool deviates from the ratio at the time of the initial deposit. This price divergence can lead to a loss of value for liquidity providers.
HEX1, cognizant of this risk, has integrated several measures to minimize IL:
Locked Collateral: T-shares, representing the collateral, remain locked until their maturity date, a characteristic that directly counteracts IL. This lock-up period prevents users from withdrawing only one side of the liquidity pair, a move that could otherwise trigger IL.
Farming Incentives: To further discourage the actions that might lead to IL, HEX1 offers attractive farming opportunities. Users can choose to stake their HEX1 tokens to earn rewards in the form of HEXIT, the protocol’s incentive token. This provides an additional incentive to hold onto their HEX1, enhancing liquidity and contributing to the peg’s stability.
Peg Stability: The inherent connection between HEX1 and HEX plays a crucial role in mitigating IL. Since 1 HEX1 is pegged to $1 worth of HEX, any price discount on HEX1 translates directly into a discounted purchase opportunity for the underlying asset, HEX. This creates an arbitrage opportunity where users are incentivized to purchase HEX1 at a discount and redeem it for HEX, ultimately helping to maintain the peg.
Security as a cornerstone of HEX1
The HEX One protocol prioritizes security, employing a robust framework built on the principles of transparency, community involvement, and rigorous testing.
A fundamental security feature of HEX One is the complete absence of admin keys. This deliberate design choice ensures the protocol operates autonomously, free from centralized control or the risk of manipulation. Once deployed, the protocol functions solely based on its predefined rules embedded in the smart contract, offering transparency and guaranteeing immutability.
Transparency is further emphasized by making the HEX One codebase publicly accessible on GitHub. This open-source approach allows anyone to scrutinize the code for potential security vulnerabilities or flaws, promoting a collaborative environment where the community can actively participate in strengthening the protocol’s security.
To provide an even greater degree of assurance to users, HEX One has undergone three independent security audits conducted by reputable firms. These audits rigorously examine the protocol’s smart contracts for potential vulnerabilities, ensuring its integrity and resilience against attacks.
Strategies to maximize returns with HEX One
HEX1, with its unique features, presents several strategies users can employ to potentially maximize their participation and returns:
Conservative borrowing: while it might be tempting to leverage maximum borrowing power, a conservative approach is generally recommended. By borrowing a smaller percentage of their total HEX deposit, users can maintain a healthier collateralization ratio, mitigating the risk of liquidation, especially during periods of heightened market volatility.
Re-borrowing: As the price of HEX increases, the value of the user’s collateral appreciates accordingly. This appreciation unlocks the opportunity for re-borrowing, allowing users to borrow additional HEX1 against their existing position without the need to deposit more HEX. This allows users to leverage their initial deposit for potentially greater returns.
HEXIT farming: Active participation in HEXIT farming pools offers an avenue for generating additional returns. By providing liquidity to these pools and staking their HEX1 tokens, users contribute to the overall stability of the protocol while earning passive income in the form of HEXIT tokens.
Active monitoring: The cryptocurrency market is inherently volatile, and HEX, despite its innovative features, is not immune to price swings. It is crucial for users to stay informed about market trends, diligently monitor their health ratio, and be prepared to adjust their position accordingly. This might involve adding more collateral during market downturns or repaying a portion of their debt to maintain a healthy collateralization ratio and avoid liquidations.
Conclusion
HEX1 presents a novel take on stablecoins, leveraging the unique characteristics of the HEX protocol. Its embedded yield mechanism, coupled with a robust focus on security and a multi-faceted approach to peg maintenance, distinguishes it from conventional stablecoin models. While it presents an interesting opportunity within the DeFi space, as with any financial instrument, thorough research, an understanding of the associated risks, and careful consideration of personal financial circumstances are paramount.
