Reflections on DeWi Mining Economics (Nov’22)
OTC pricing, treasury mechanics, issuance & dilution, miner paybacks, and data‑transfer unit economics across MOBILE, HNT, Pollen, and XNET.
Reflections on DeWi Mining Economics (Novʼ22) Heliumʼs $MOBILE token - while it has not yet been listed on exchanges - is trading OTC with some level of liquidity around $0.0005, implying a circulating market cap of $12M (based on our projections for circulating supply at the end of the genesis period in Q1ʼ23, or $106M on a fully-diluted basis. With $HNT currently trading at $2.50, implying a fully-diluted market cap of $530M, we struggle to rationalize relative valuations and the general attractiveness of mining $MOBILE. Each $MOBILE token represents a claim on the $HNT held in the subDAOʼs treasury. There is a maximum supply of 213M $HNT, of which 132M are currently circulating and 81M are locked. Of the locked amount, 10M will go to LoRa miners and veHNT stakers 12%, 24M will go to $HST holders 30%, and 47M will be distributed to subDAO treasuries 58%. In theory, the fair market price of $MOBILE/$HNT should reflect: 1 MOBILʼs percentage of the 47M subDAO HNT, as governed b y HIP51 utility scores. 2 an appropriate discount rate, given HNT earnings will occur in the (uncertain) future. 3 future $MOBILE issuance, which dilutes tokenholdersʼ claim to the treasury. 4 a potential speculative premium (or discount) to the underlying treasury assets. We assume a discount rate of 6%, in line with HNT staking yields, and zero speculative premium. That takes care of of #2 and #4. Then, at the current relative prices of the tokens, the market is telegraphing two key beliefs about #1 and #3 The market believes the majority 75% future subDAO rewards will go to MOBILE. The market believes $MOBILE will be fairly-valued in the near-term (ʼ2325E supply). Is #1 justifiable? If so, the LoRa network (and future subDAOs) will be worth a tiny fraction of MOBIL. Heliumʼs documentation suggests that - at le ast to start LoRa will continue to earn the vast majority of rewards 70%. MOBILʼs utility score will ramp up following paid data transfer. The x-axis in the table above represents the blended average MOBILE utility score over all future HNT rewards. However, the nature of exponentially declining rewards means that the majority rewards will be distributed by Q1ʼ25…. Driving paid data transfer onto the network quickly is the single biggest lever towards driving the intrinsic value of $MOBILE (relative to $HNT. Reflections on DeWi Mining Economics Novʼ22 1
Letʼs assume the LoRa network stays stagnant from where it is today, with roughly 550K active hotspots and $75 of daily data transfer demand. Letʼs assume Heliumʼs MOBILE network grows the number of active nodes by 10x 7K 70K and that the average “active userˮ uses 20GB/mo of total mobile data, of which 25% is offloaded onto Helium at $0.50/GB. The table below shows the range of veHNT delegates and active mobile users required to achieve a certain utility score under these assumptions. The green boxes - with a utility score 75% show that MOBILE must win 75% of the veHNT vote and acquire 1M active users in order to reach these targets. Is #3 justifiable? Itʼs worth noting that the subDAO treasury provides $HNT/$MOBILE liquidity based on “all locked $MOBILE tokensˮ HIP53, which we assume means max supply. In other words, the treasury would only pay out $0.0003 worth of $HNT per $MOBILE, even though the pro-rata share of the treasury is worth more $0.0010 in ‘23E. With no treasury backstop, miners making economic decisions based on ‘23E or ‘25E supply are trusting a “greater foolˮ to do the same in the not-so-distant future. All that said… crypto markets have - at least so far - mostly been willing to support circulating market caps while ignoring unrealistic FDVs. Clearly, this can be a recipe for disaster - especially in combination with leverage - and it remains to be seen whether the trend will survive in the post-FTX/Alameda era (see: Chris Burniske and Jason Choi let ters). DeWi teams have so far been reasonably respectful of fixed supply schedules, so we believe its reasonable to use ‘23ʼ25E, supply especially given 12 year miner payback expectations. This puts $MOBILEʼs current valuation at $35$53M (a median Ser ies A valuation) and $PCN at $2637M (a top- quartile seed valuation). Given zero data transfer of either network, we look at relative valuations on “book valueˮ multiple basis, where book value = cumulative miner hardware investments. Reflections on DeWi Mining Economics Novʼ22 2
Based on our current best estimates of miner rewards and average costs, and at current market prices, we estimate DeWi miners earn 7 month paybacks on consumer deployments and 10 month paybacks on enterprise deployments. Itʼs worth noting these returns are based on proof of coverage eras, which should normalize over time given enterprise radiosʼ higher data transfer capacity (as well as idiosyncratic factors, like Pollen hex limits, temporarily reducing the rewards upside on outdoor / high-powered nodes). The cost assumptions underlying paybacks are supported by feedback from many of the largest active mining fleets, which we believe to be a representative sample of the broader network. Miners with structural cost advantages (e.g., an existing WISP or MVNO businesses) will see shorter paybacks. Residual Value For Helium LoRa miners - given the non-existent secondary market for consumer grade LoRa radios - itʼs common practice to measure returns in terms of “months to a 1x paybackˮ, implicitly assuming zero residual value. Cellular radios are a different story. Certain hardware vendors, especially their higher-end models, have real utility for ISPs. Secondary markets for CBRS radios are developing, and as the band sees more widespread usage we believe ISPs 3K across the US will be natural buyers of last resort for certain (but certainly not all) radio models. Residual value changes return profiles significantly, and the “time to 1x paybackˮ metric fails to capture the economic reality. For example - the chart below assumes a 9% monthly mining yield. With zero residual value LoRa method), this equates to a 12-month payback. However, if miners can sell radios for 50% of the original purchase price, the payback period reduces to 6 months. After twelve months, the difference is a 0% vs 100% IRR (naturally, on a long enough time period, returns converge to the same underlying mining yield). Reflections on DeWi Mining Economics Novʼ22 3
Data Transfer Unit Economics Another factor I believe is being under-appreciated by the DeWi mining community - perhaps by the biggest margin of all - is long-term data transfer unit economics. What will be the economic reality when someone eventually transfers 10GB of data over the Helium network? $5 worth of HNT is burned, of which $1.50 goes to HST holders 1, $0.35 subsidizes LoRa and other networks 2, and the remaining $3.15 is deposited in the MOBILE subDAO treasury (in HNT. 💡 1 The percentage of HNT rewards earned by HST holders is currently 32%, decreasing down to 15% over time. In total (blended average), HST holders will earn 30% of all future HNT emissions. 2 This optimistically (for MOBILE miners) assumes a 90% MOBILE subDAO utility score. Under Heliumʼs current plans, achieving such a score would require millions of users actively roaming on the LTE network and 75% of veHNT delegating to MOBILE. The subDAO treasury has many mouths to feed. Only 40% of MOBILE emissions reward actual data transfer 31% including pre-mined tokens), implying only $1.00$1.25 of economic value accrual to MOBILE miners per every 10GB of data transfer. More pessimistic readers may choose to consider the redeemable value: recall that HNT in the treasury is not (as far as we understand it) redeemable “at parˮ, but only after accounting for the full remaining dilution in the network. For example, in Aug-2023, we believe roughly 25% of MOBILEʼs max supply will be unlocked, in which case $3.15 in the treasury is redeemable for only $0.79. If you assume a more realistic near-term MOBILE utility score - say, 60%, which is still highly ambitions (requires 100K roaming users and 80% veHNT delegates) - then an incremental $1 out of every $5 of data transfer revenue would be redirected to LoRa rewards. In other words, continuing the case above, $2.15 would be deposited in the MOBILE subDAO, the economic value to MOBILE miners would be $0.75, and the redeemable value would be a mere $0.54. Reflections on DeWi Mining Economics Novʼ22 4
Note: dark vs light bars represent redeemable value vs intrinsic value for Helium; for Pollen/XNET, represents Ecosystem/Foundation tokens which may be issued to miners. Pollen Mobile has a different model. Because it does not have to subsidize other subDAOs, 10GB of data transfer over Pollenʼs network results in $5 of revenue, of which $0.50 goes to Pollen Mobile LLC, $0.50 goes to bumblebees and network growth, and the remaining $4 is paid directly to the miner that transferred the data. Payments are, of course, in made in PCN an asset that can dilute up to 40% to Pollen Mobile insiders (really 50%, if you include the Ecosystem Fund). But even after the dilution, PCN miners see $2.00$2.40 of economic value accrual, compared to only $1.001.25 for MOBILE miners. This is the most obvious argument against the network-of-networks approach: there are economic incentives for the most valuable subDAOs to be fully-independent. XNET makes further improvements to the mode. By supporting full mobile architecture, XNET will be able to price data transfer at $1/GB (vs $0.50/GB for Helium and Pollen; which is in-line with telco pricing for roaming vs data-only offload). Each 10GB of data transfer results in $10 of revenue: $3 goes to XNETMNO, $3 is used to support network operations, and $4 is used to buy and burn tokens — effectively delivering the value back pro-rata to $XNET holders. Similar to PCN, XNET is an asset that can dilute up to 40% to XNET insiders (really 50%, if you include the Foundation), meaning miners see $2.00$2.40 of economic value accrual after dilution. The difference is that, by charging $1/GB, XNET is able to offer best-in-class per-GB economics to miners, while generating 2x higher revenues for insiders and reinvesting 46x more capital into its network vs Helium and Pollen. We believe the aggressive reinvestment will drive a higher quality and more valuable network in the long-term. Notes / Assumptions In lieu of more specific guidance, we assume the tokens allocated to the Helium and Pollen Foundations vest linearly over a decade. $MOBILE tokens allocated to Nova Labs assume the same. $PCN tokens allocated to Pollen Mobile team and investors unlock with a 3-year vest and 1-year cliff. During the MOBILE genesis period, miners earn a collective 100M $MOBILE per day. This means the initial 10B allocation lasts for 100 days, and will run out on or around Nov 20th. The Helium team subsequently extended the genesis period, with no official end date but guidance towards Q1ʼ23. Once genesis ends, MOBILE issuance will increase to 178M/day, of which 60%, or 107M/day, gets paid out to miners (the rest goes to Nova as mobile core admin, oracles, mappers, and stakers). Now that Genesis will extend longer than expected, $MOBILE issuance will be 100M/day vs 178M/day for a period of time, reducing the maximum supply of $MOBIL. We assume that Genesis lasts through March 31st 2023, which implies a maximum supply of 212B $MOBIL. In order to keep funding Genesis rewards, Nova Labs donated 2.5B (of its original 15B $MOBILE pre-mine allocation, which effectively extends Genesis runway from Nov 20th to December 15th. That leaves another 10.6B $MOBILE Reflections on DeWi Mining Economics Novʼ22 5
shortfall to make it until March 31st. We assume this gets founded out of the Helium Foundationʼs share of tokens (to our knowledge, this hasnʼt been announced… but is just our conjecture). We also believe the accurate max supply for HNT is 213M (vs the typical figure we see thrown around being 223M given block time delays over the past few years. Shoot me a note on telegram @salgala if interested to see the excel backup Disclaimers None of this is investment advice, nor is it legal, tax, financial, or other advice. This is not a solicitation, recommendation, endorsement of any of the assets or products mentioned above. Do your own research. We cannot make representations or warranties about the accuracy of the statements. EV3 may make investments in certain companies, assets, strategies, tokens, and products mentioned. You should not treat any opinion expressed by us as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of our opinion. Reflections on DeWi Mining Economics Novʼ22 6