Opinion: XEN’s doomed failure and the benefits for Ethereum

In recent days, XEN Crypto, a project founded by Jack Levin, who claims to be Google's 21st employee, has caused FOMO in communities at home and abroad. Due to its unique Proof of Participation mining mechanism, XEN Crypto has raised the original single-digit Gas fee on Ethereum to around 30 gwei, and it is still continuing. At the beginning of its launch, facing such a novel model, social media all called it a revolution. MEXC, which has always been chasing hot spots, forced XEN to go online early (XEN Crypto claims that it will never go on CEX). However, less than 3 days later, more and more voices of doubt appeared, and the price of XEN fell by 99% in one day, and MEXC had to temporarily suspend its trading.

In my opinion, XEN Crypto is doomed to fail because it underestimates the determination of the freeloaders and mistakenly equates long-term holding with value investment.

Proof of Participation Mining Mechanism

PoP proof of participation, as the name suggests, is just a literal meaning. Anyone who participates in the minting of XEN has full ownership through self-disposal. To briefly analyze its principle, XEN has no upper limit on supply. It starts from zero supply. Each address can mint once. Users can choose the minting waiting period (can only be claimed after expiration). The longer the waiting period, the more XEN can be claimed. After the waiting period, in addition to selling it after claiming it, it can also be used for staking mining, but only a very small number of people choose to do so.

There are two basic formulas for minting XEN:

1. Minting quantity = log2 (global ranking - address ranking) * minting waiting period * reward amplifier * (1 + early participant amplifier (%))

Among them, the reward amplifier (AMP) starts from 3,000 at the time of creation and decreases by 1 every day until it reaches 1;

The Early Access Amplifier (EAA,%) starts at 10% and decreases linearly by 0.1% for every 100,000 increase in global ranking. (Both data can be viewed in real time on the official website data panel)

2. Waiting period limit: Global address ranking ≤ 5000, the maximum waiting period is 100; > 5000, waiting period limit = 100 + log2 (global ranking) * 15

This means that the earlier you participate in the minting, the lower the address ranking, and the more addresses that participate, the more XEN you will get during the minting waiting period; the longer the waiting period you choose, the more you will get. In addition, as more and more addresses mint XEN and the global ranking continues to rise, the upper limit of the waiting period will increase logarithmically, and the upper limit of the waiting period for the 5001st address is about 287.5 days.

Although XEN has no upper limit, its two basic formulas are logarithmic functions. The naturally inclined output curve is logarithmic in nature, which means that as more and more wallet addresses participate in the interaction, it will become increasingly difficult to obtain more XEN. Therefore, the amount of XEN obtained by new participating addresses will become less and less, and the game point is whether it is worth adding more casting waiting periods to obtain more tokens.

The interface presented to users is very simple: data panel - minting - pledge - record - chart. Even a novice who only knows how to use a wallet will know how to operate when he opens this interface. He only needs to manually select the waiting period and then click minting.

Gaming

The value of XEN depends on the difference between the inflation rate and the built-in allocation, because the more addresses participate, the higher the difficulty of XEN minting. Value is created by the market forces of the participants. As more and more market participants participate in minting XEN, the amount of minted XEN will decrease, and the total amount will gradually stabilize, which has the effect of suppressing the inflation rate to a certain extent. The only way to mint more XEN in the future is to extend the waiting time required to obtain the coin.

1. In addition to paper hands and diamond hands, there are also wool parties

Because the waiting period can be set manually, some users will choose 1 day, and some may choose to wait for hundreds of days to receive more tokens. Users who choose 1 day can receive their XEN faster, although the amount received is far less than that of users who wait for hundreds of days, but the advantage is that in the early stage of the project, the popularity is high, the circulation is small, there is hype, and it can be realized faster. It is understood that for the addresses that participated in the casting in the early stage, the cost was less than 5u Gas fee. After MEXC went online, it can be realized to obtain 500u or even more, and the return rate is more than 100 times.

But if it is just paper hands and diamond hands, then perhaps this experiment can still go on. In addition to the two, there are still a large number of wool parties, with dozens of addresses at a time. They do not hesitate to mint GAS costs, batch generate a large number of addresses to mint 1d XEN, and then cash out. As long as the number of receipts * market price > minting + receiving GAS (<10u), the wool party has profit space. Even if the address that was just minted yesterday morning has about 50,000 XEN this morning, at a market price of $0.0004, each address still has a profit space of 10u. Although the profit space has been compressed very small, it cannot withstand the large number of addresses. When this profit space still exists, the price of XEN is impossible to rise, which is why the price of XEN fell by more than 95% within 1 day after MEXC went online. In particular, when the next 100 days expire, the first 5,000 interactive addresses will have a strong selling pressure again. In addition, we can also get some clues from the ratio of XEN pledged to the total amount. The XEN pledge rate is only 1%, and user loyalty is very, very low. Basically, after receiving the Token, they sell it directly.

2. Long-term holding ≠ value investing

The slope of the logarithmic function y=loga x was very steep in the early stage. As the x-axis (here x is the difference between the global ranking and the address ranking, and the variable is the global ranking) moves, the number of addresses participating in the minting increases, the slope gradually becomes gentle, the number of newly added XEN decreases, and the total amount y tends to be stable.

Due to the traffic and popularity brought by the project created by "Google employees", there are many users participating, and in order to obtain more XEN, early participants will inevitably take advantage of the heat and frantically recommend it to others, so as to drive more users to enter the market, thereby increasing the difference between the global ranking and the self-address ranking. XEN Crypto does not have any measures for inflation, but only relies on the later stage of the logarithmic function characteristics, but does not take into account that the inflation in the early stage can instantly annihilate a project and cannot last until the later stage. Less than 3 days after its birth, the supply of XEN has expanded from 0 to more than 4 billion. This expansion rate is very crazy and has long been far greater than the buyer power in the market. The price of XEN has also plummeted. After the listing of MXEC, the price did not even last for 1 day. After experiencing the previous LUNA decoupling event, the price drop caused by the crazy expansion of supply is very terrifying. After a 99% drop, there is another 99%. As long as the casting gate is still open and the arbitrage space still exists, the price can only go down. Even if LUNC is shut down now, it has become a MEME, and its market value may not return to its peak. For those institutions that have pledged LUNA for a long time, the book value of LUNA in their hands will disappear as soon as the supply expands.

Back to XEN Crypto, even if there is a period of time when the arbitrage space is very small and the early users have not unlocked the tokens, the price must be in a state of half-death. In short, for all kinds of market participants, there is nothing worth buying, and it has no utility except for minting and staking. Now the identity of the founder as a "Google employee" has been questioned by more people, and this form of pyramid scheme has also been criticized. When the heat is over, the real users involved will become scarce; when the arbitrage space is very small, the wool party will also retreat and be unwilling to mint; the secondary market participants are already in a weak position, and they will not buy a token that has neither value nor MEME at this time. As the waiting period of more addresses ends, the profitable participants will most likely cash out directly, and the unprofitable ones may have long been forgotten as the heat dissipates.

3. Return to ETH, which is the most valuable

In this XEN Crypto incident, what I felt most was the strength of Ethereum's economic model after the Merge and EIP-1559, which also strengthened my determination to long ETH. The FOMO caused by XEN Crypto alone destroyed more than 2,000 ETH in two days and caused ETH to fall into deflation. If it is in a bull market, with the prosperity of the Ethereum ecosystem, there will be more valuable applications that can cause community FOMO, which will eventually feed back to the ETH price itself.