ve3,3: fees, not price!

A short piece about why price for ve3,3 tokens like $HYDX is not the metric to watch. In the end, it all boils down to fees, and here is why.

If you stumbled across this article by accident, none of the following paragraphs will make sense to you. In that case, I recommend reading this before you go on: https://docs.hydrex.fi

Price can’t keep going up, unless…

The price of ve3,3 tokens like $HYDX should always be linked to the fees the protocol can accumulate — not hardcoded, hard-linked, but due to the interaction of token lockups and rewards.

Let’s first set one important precondition: for the sake of the following math, let’s assume 1,000 Earning Power equals $1 USD in voting rewards per week. That number has been circulating in the community for a while now and it is roughly accurate.

Imagine this:

• You purchase 1,000 $HYDX tokens at $1 per token. Locking these up into a Flex Account gives you 1,300 Earning Power. You have spent $1,000 USD to receive 1,300 Earning Power.
• This amount of Earning Power gives you roughly $1.3 USD per week. You will need about 770 weeks (~15 years) to break even with your initial investment of $1,000 USD.

Obviously, those numbers do not look attractive at all. You will take on a massive amount of risk! Waiting 15 years just to break even is something that might work with some nearly risk-free traditional investment products. But in a space like this, it’s simply too much.

Now let’s tweak the numbers a little and slash the token price by 90%.

• You purchase 1,000 $HYDX tokens at $0.10 per token. Locking these up into a Flex Account gives you 1,300 Earning Power. You have spent $100 USD to receive 1,300 Earning Power.
• This amount of Earning Power gives you roughly $1.3 USD per week. You will need about 77 weeks (~1.5 years) to break even with your initial investment of $100 USD.

1.5 years to break even is not bad at all! Most investors in any area would be very happy with a result like that.

What this means is: lower token prices are good for users who want to use the $HYDX token for its intended purpose. In this scenario, a high token price is really not desireable at all, because it will simply move the breakeven time frame into a far more distant future.

So, what everyone really wants is for the price of $HYDX to drop as low as possible to receive more Earning Power for less cost! Unless…

Fees are the savior

All the math above assumes that 1,000 Earning Power = $1 USD.

Let’s assume activity ramps up, crypto markets are in a great place, the world is at peace, and everyone is ready for some risk. Trading activity will rise, Hydrex will aquire way more trading fees.

So let’s push it to 1,000 Earning Power = $3 USD, and go through the math from before.

• You purchase 1,000 $HYDX tokens at $1 per token. Locking these up into a Flex Account gives you 1,300 Earning Power. You have spent $1,000 USD to receive 1,300 Earning Power.
• This amount of Earning Power gives you roughly $3.9 USD per week. You will need about 256 weeks (~4.9 years) to break even with your initial investment of $1,000 USD.

So, three times the rewards means that all time windows get slashed to 33% — no surprise there! The risk you take on is much reduced, but still not quite at a point where it’s comfortable. Now let’s see what happens at a $0.10 token price:

• You purchase 1,000 $HYDX tokens at $0.10 per token. Locking these up into a Flex Account gives you 1,300 Earning Power. You have spent $100 USD to receive 1,300 Earning Power.
• This amount of Earning Power gives you roughly $3.9 USD per week. You will need about 26 weeks (6 months) to break even with your initial investment of $100 USD.

You would have to be an absolut lunatic to not buy the token! Lock it up and receive those voting rewards with a 6 months time frame to breakeven. Risk does still exist, yes, but at 200% APR it’s the cozy, comfortable type of risk.

As a result, people will buy the token, lock it up, and the price of the token will increase. It’s not some external factors (marketing, hype), but purely a function of fees accumulated and therefore rewards paid out to voters that should drive the price of the token up.

What I mean to say by all of this is:

It doesn’t make sense for the $HYDX token to reach astronomical levels (unless this is supported by fees) and it also doesn’t make sense for the token to be worth nearly nothing (unless this is supported by fees).

It should always find some sort of reasonable equilibrium with the rewards received by the voters.

Should, because markets are irrational, and sometimes the token price can be way too low or way too high for a long time before our human brains catch up to what reasonable price level means. But in time, fees will automatically push the price of the token up or down.

Summary

A too high token price means:

• The voting rewards for locking tokens up are too low.
• You would take on too much risk by purchasing and locking the tokens at these price levels.
• The token price will always come down to more reasonable levels in line with the current voting rewards.

A too low token price means:

• The voting rewards for locking tokens up are very attractive.
• The risk of purchasing tokens is far more manageable, so you will be willing to roll the dice more easily.
• The token price will increase because buyers will want to have a piece of the juicy rewards.

Or, in other words: In the end, it’s all about the fees!