HashKey Hao Kai: Interpreting the Decentralized Wireless Communication Network Helium Token Model and Ecological Progress

This article is sourced from HashKey Research, authored by Hao Kai, who works at HashKey Capital Research.
Helium is a global, distributed open network. Through Hotspots (Hotspots specifically refer to the hotspots in the Helium ecosystem), Helium can provide public wireless network coverage for IoT devices that support the LoRaWAN protocol, making it easier for IoT devices to connect to the internet and transmit data.

Through the PoC mechanism (Proof of Coverage), Helium can continuously verify the location of Hotspots and the wireless network coverage they create. There are three roles in the PoC consensus mechanism. First is the challenger, who can challenge random hotspots in the network every 240 blocks. Second is the challengee, the challenged hotspot, which, upon receiving the challenge information, will initiate a non-discriminatory radio broadcast based on the challenge information. Third is the witness, which are the hotspots surrounding the challengee that receive the radio broadcast and will relay the information back to the Helium network for verification.

The PoC mechanism used by Helium has similarities to various storage proofs used in distributed storage networks. For example, in the Filecoin project, storage providers must prove that they have stored user data and that it has been stored for a certain period as required by the client. Storage providers use Proof of Replication (PoRep) to prove to clients that the data has been replicated to a unique dedicated physical storage, while users use Proof of Spacetime (PoSt) to check whether the storage provider is storing their data.

The workflow in the Helium ecosystem is roughly as follows. Miners purchase and deploy Hotspots, which can provide wireless network coverage for IoT devices within range. Other users' IoT devices can access the internet and transmit data through this wireless network. In this process, users need to pay usage fees.

Token Model

Currently, there are two types of tokens in the Helium ecosystem, namely HNT and Data Credits.

HNT

According to official documents, the total supply of HNT tokens is 240,000,000, to be fully issued over 50 years, with 60 million issued in the first year, followed by halving every two years. Since the actual issuance in the first year was 43 million, the actual total supply of HNT tokens is approximately 223,000,000.

The main ways to acquire HNT tokens currently include: becoming a challenger, challengee, or witness, joining consensus groups to participate in Helium blockchain consensus, participating in network data transmission, and tokens from the Helium team and investors. The distribution of HNT tokens is shown in the table below.

Table 1: HNT Token Distribution

The main functions of HNT are: to incentivize miners to deploy Hotspots and maintain wireless network coverage, and to encourage users in the ecosystem to participate in PoC and Helium blockchain consensus. The price of HNT is variable and determined by secondary market traders.

Data Credits

Data Credits are primarily used to pay for fees incurred while using the Helium network. For example, transfers between Helium wallets, data transmission by IoT devices, adding new Hotspot nodes, declaring Hotspot locations, etc.

Unlike HNT, the price of Data Credits is stable, with each Data Credit priced at $0.00001. Users obtain Data Credits by destroying HNT, and the number of Data Credits received depends on the price of HNT at the time of destruction. For example, when the price of HNT is $1, destroying 1 HNT yields 100,000 Data Credits.

Data Credits are similar to Ethereum's gas, but there are significant differences. First, the price of Data Credits is fixed, while gas prices can be set by users. Second, Ethereum's gas is paid in ETH, which is received by the miners who create blocks; Data Credits are obtained by destroying HNT, which means they are no longer in circulation, and Helium miners do not receive this portion of HNT. To allow Helium miners to participate in network data transmission, 32.5% of the HNT token distribution is allocated as incentives for this purpose (as shown in Table 1).

When the amount of HNT destroyed for generating Data Credits in an epoch (which includes 30 blocks, totaling approximately 3424.65 HNT) exceeds 1113 (32.5% of 3424.65 HNT), all Hotspots that participated in work during this epoch will proportionally share 1113 HNT. When the amount of HNT destroyed in an epoch is less than 1113, for example, if the actual amount destroyed is N (N<1113), all Hotspots that participated in work during this epoch will proportionally share N HNT, and the remaining (1113-N) HNT will be distributed to challengers, challengees, and witnesses.

The process of destroying HNT to obtain Data Credits can be automatically completed by the Helium wallet. Data Credits cannot be traded or transferred and can only be used by the wallet owner. The destruction mechanism has a deflationary attribute, which can help balance the impact of HNT inflation to some extent. However, if a large amount of HNT is destroyed, it may not be beneficial for the overall stability of the ecosystem. Therefore, the Helium team will also introduce a Net Emissions mechanism (net issuance, which can be understood as net increase). If m HNT are destroyed in an epoch, then m HNT will be additionally generated in that epoch to keep the net increase of HNT consistent with the plan.

Discussion on the Token Model

Due to factors such as speculation and hype, many blockchain projects experience significant price fluctuations in their tokens, which is not conducive to using tokens as payment tools for purchasing products and services within the ecosystem. As blockchain ecosystems develop, a single token may not meet diverse needs, leading some blockchain projects to adopt a dual-token model. In this model, one token has a stable price and is primarily used for payment fees, ensuring that the commercial stability of the entire ecosystem is not affected by price fluctuations; the other token has a fluctuating price, representing project revenue rights, governance rights, etc., and can also meet speculative demands.

Since Data Credits are generated by destroying HNT, Helium does not strictly qualify as a dual-token model. Users must hold HNT to generate Data Credits. Users do not want significant price fluctuations when using Helium, so they may choose to destroy HNT to generate Data Credits when prices are high and wait when prices are low. The price fluctuations of HNT will affect the usage mindset of Helium users.

Ecological Development Status

The Helium ecosystem is developing very rapidly, with 80,575 Hotspots currently deployed and still growing rapidly. Hotspots are primarily distributed in the United States and Europe, with a fast growth rate in China. The Helium team believes that each city needs 150-300 Hotspots to effectively complete network coverage, and for super-large cities like Beijing and Shanghai, approximately 500-3000 devices are needed to achieve sufficient network coverage. Therefore, to realize a global, distributed open network, more Hotspots will be deployed in the future.

Figure 1: Distribution Map of Hotspots (Data Source: explorer.helium)

Theoretically, any IoT device that supports the LoRaWAN protocol can connect to the Helium network. The Helium official website lists dozens of specific application scenarios and cases, including pet tracking, air monitoring, and food traceability. For example, Conserv uses the Helium network to organize museum and private collection artworks; NOWI connects leak sensors to the Helium network to alert maintenance personnel of leaks for timely remediation.

Currently, the main reason for the rapid development of the Helium ecosystem is speculative demand. According to the token distribution mentioned above, 5 million HNT are newly generated each month, of which 34% belongs to the team and investors, while the remaining 66% is obtained by participants in the ecosystem, approximately 3.3 million HNT. Considering the existing 80,575 Hotspots in the Helium ecosystem, each Hotspot can earn an average of 41 HNT per month, which is about 1.36 HNT per day (this is not an actual average distribution, but for convenience of calculation). According to coinmarketcap price information, the market price of HNT is $12.1, so each Hotspot can earn $16.5 per day. The equipment cost for Hotspots is $350, which can be directly deployed at home, with very low power consumption, so other costs can be ignored. Under the current situation, the payback period for purchasing a Hotspot is only about 21 days.

Figure 2: HNT Price Changes (Data Source: coinmarketcap)

Driven by this profit-making effect, more and more participants will join the Helium ecosystem and deploy new Hotspots, which has a complex impact on miners in the ecosystem. Miners' earnings mainly depend on two variables: the amount of HNT obtained and the price of HNT.

Regarding the amount of HNT obtained, as more Hotspots join, the number of HNT miners can earn will decrease. In 2019, Hotspots could earn an average of 100 HNT per day, which has now decreased by more than 98% compared to then. As for the price of HNT, the addition of more Hotspots will increase attention and expand the application range, which is beneficial for the price of HNT to rise.

Of course, the surge in the number of Hotspots does not necessarily indicate that the Helium project has succeeded; it is also essential to pay attention to the actual participants and real business volume of application cases in the ecosystem, as well as how much ecological value the HNT token can capture.

Launch Model

Building an infrastructure that provides wireless network coverage for IoT devices is very challenging. During the project launch phase, a significant amount of funding and manpower is required, including leasing venues, purchasing hotspot devices, maintaining and operating the wireless network, and labor costs. Many similar projects led by traditional telecom operators have slow construction speeds and have not developed ecosystems. In contrast, Helium may be the fastest-growing wireless network, with Hotspots already spread across the globe and a trend of continuous expansion.

Advantages of the Helium Model

The biggest advantage of the Helium model is the introduction of HNT token incentives, which attract participants to purchase Hotspots, thereby transferring the construction costs of the project launch phase. Compared to traditional telecom operators, the Helium team does not need to purchase hotspot devices, does not need to be responsible for the maintenance and operation of the devices, and does not need to hire workers. Instead, the Helium team can even generate significant income by selling Hotspots, which greatly reduces project costs.

At the same time, miners who purchase Hotspots will earn HNT, which effectively binds them to the development of the entire project. They will voluntarily help build the Helium ecosystem to increase the value of the HNT they hold.

The Helium team chose to use the LoRaWAN protocol, which does not require the team to develop and promote a new protocol. The LoRaWAN protocol is a popular protocol adopted by IoT devices, known for its high universality, long range, low power consumption, and openness.

Hotspot hardware manufacturers can achieve substantial profits. In a market with high profit-making effects, Hotspots are in high demand, and hardware manufacturers can sell tens of thousands of devices within a few months. Moreover, as the ecosystem develops, they can continue to earn income.

Issues with the Helium Model

First, Helium's business model during the launch phase is not original; popular projects like Filecoin, Chia, and the PlayCloud launched by Thunder in previous years have all adopted similar models. Before going live, these projects launched various types of mining devices such as hard drives and cloud disks, claiming that successful deployment would allow participants to mine and earn corresponding token rewards. Attracted by the early profit-making effect, a large number of speculators flooded in, leading to an increasing number of deployed devices. Subsequently, the average token rewards per device decreased, and if the project lacked actual usage demand, the token price would plummet, causing speculators to leave and ultimately leading to project failure.

Second, Helium plans to establish a global open network, and the issued HNT tokens may face compliance risks in many countries. For example, the Helium team has already laid out and promoted in the Chinese market, but China has very strict regulations on virtual currencies. Currently, there are not many application projects for Helium in China, and participants are more driven by speculative demand to obtain HNT tokens, which may face regulatory scrutiny in the future.

Third, according to the Helium team, the Helium network has a clear price advantage in supporting IoT applications and devices, with the cost of a single LoRa terminal device transmitting a data packet every 5 minutes for a year being only about $1. This reflects Helium's price advantage on one hand, but also indicates that a massive business volume is needed to support the project's market value. Currently, the business volume in the Helium ecosystem is still far from sufficient. The stability of the Helium network and user experience also need further verification in practice.

Fourth, unlike hardware manufacturers, miners or other participants in the ecosystem cannot guarantee profitability. Their profit levels are affected by both mining difficulty and price fluctuations, and the expected mining returns may differ significantly from actual returns, potentially leading to losses.

Conclusion

Helium demonstrates a new model for building wireless network infrastructure. By introducing token incentives, miners and other participants bear the early construction costs, helping to build the network and transmit data, and they may earn excess returns in the future. This model has enabled Helium to develop rapidly and has a trend of continuous expansion. Undeniably, speculative demand plays a significant role in this.

However, this model does not guarantee success. After speculative sentiment fades, the key factors determining the project are actual usage and value capture capability. If the project lacks actual usage demand, its market value cannot be supported.

Blockchain features decentralization, multi-party consensus, and incentive mechanisms, while IoT has characteristics such as numerous devices and large data volumes. The organic combination of blockchain and IoT can achieve large-scale collaboration between devices and complete benefit distribution through incentive mechanisms. Helium's early development was also not smooth, but it was the combination of blockchain and IoT that enabled the project to develop rapidly.