Helium is a blockchain network with a native cryptocurrency (HNT) used to incentivise individuals around the world to provide coverage on a global peer-to-peer wireless network. This is done using a Helium compatible hotspot, which to date provides coverage for low-power IoT devices. Traditional networks such as WiFi do not suit IoT devices well because of their lower range compared to other types of networks such as LoRaWaN. To solve this problem, Helium pioneered LongFi, which represents a mixture of LoRaWaN and blockchain technology. In the past, there were not enough incentives for participants to operate LoRaWaN hotspots resulting in higher costs for companies using IoT devices. With the invention of LongFi and using HNT to reward participants to grow the decentralised network, IoT companies now have a cheaper alternative to use. Helium has already secured multiple partnerships with IoT companies, such as Salesforce, Lime, Airly, Nobel Systems, and more. Network users pay ‘Data Credits’ (fees) to the Helium network to transmit data for any IoT device such as a tracker, temperature sensor, water meter, etc. Hotspots earn rewards (paid for by companies with IoT devices) when an IoT device has used it directly for transmitting data (e.g. to update the companies’ servers about the geolocation of the IoT device). Previously, hotspots played a role in the consensus of the network. However, Helium governance has now voted in favour of introducing validators to replace hotspots in transaction consensus. The new proposal, HIP-25, alleviates the network pressure that hotspots currently endure from validating transactions and transfers consensus work to validators.
Helium introduced 4 core primitives to allow their decentralised wireless network to grow.
The first major design decision was to introduce HoneyBadgerBFT as the consensus layer for the network. HoneyBadgerBFT does not require a leader node, tolerates corrupted nodes, and makes progress in adverse network conditions.
The second major design decision was to introduce hotspots. Helium hotspots are the epicenter of the Helium wireless network. Hotspots are purchased from external providers (currently ~$500) and then plugged into a power source and connected to WiFi. Hotspots act similarly to a WiFi router but with a coverage range orders of magnitude greater (5–15 kilometers); their primary role is to send and receive messages from Helium compatible IoT device sensors and update data from IoT devices to the cloud.
The third major design decision was Helium’s invention of LongFi. LongFi is a type of network design that utilises LoRaWaN and blockchain, which is especially designed for low-bandwidth data (5–20kbps) and variable packet sizes — perfect for IoT devices.
The fourth major design decision of the Helium network was to introduce Proof-of-Coverage. Put simply, Helium hotspots verify the location of hotspots in the LongFi P2P network. Hotspots issue challenges (via challengers) every 240 blocks to targets (other hotspots), whereby the target hotspot must prove their geolocation via transmitting radio frequency packets back to the hotspot challenger. Other hotspots in close proximity to the transmitter (up to 5) must witness and attest to the challenger that the target has responded to the challenge. Previously in the Helium network, 6% of HNT inflation rewards were dispersed to hotspots sending, submitting, and witnessing location proofs. All that is about to change with the introduction of HIP-25.
Due to the sheer growth Helium has experienced, it proved no longer feasible for Hotspots to act as block producers in Helium and issue, submit, and witness location proofs. In general, more hotspots joining the Helium network should be encouraged to join. However, right now, there is a trade-off whereby the more hotspots that join the network, the slower the network becomes. A slow network is detrimental for Helium because the network relies on large volumes of transactions being sent at rapid speeds due to the wide plethora of use-cases Helium network enables (e.g. pet-tracking, air-quality monitoring, art temperature checking, car-park availability alerting, COVID-19 case tracing and much more). When block times are slower, inflation of HNT is also slower, which also impacts the viability of setting up a hotspot to participate in the network. Hotspot addresses change and move, perfect for connecting IoT devices but not so much for verifying on a blockchain undergoing exponential growth. To alleviate the pressure off of hotspots, governance voted on introducing validators in HIP-25 that will run infrastructure to secure the Helium blockchain allowing Hotspots to focus on their core purpose. The role of the validator is a specialised one in blockchain and it is understandable that Helium now wants to utilise reliable node operators to ensure network performance is optimal. We were excited by the news that we would now be able to contribute to such a unique network and are strong believers in the long-term potential of Helium.
The introduction of node operators onto Helium introduces one key change to the staking economics of the network because those participating in consensus have changed. Previously, when hotspots participated in Proof-of-Coverage consensus, they received a consistent share in relation to all other hotspots of the 6% annual HNT inflation rewards. The economics of Helium Network are clear — there is approximately 5M HNT minted every month. Validators now participate in the consensus group and stand to earn 6% of the 5M HNT inflation that hotspots used to earn as rewards.
This means that the consensus group stands to earn 300,000 HNT per month, or 1.8m HNT annually. To run a node on Helium, there is a 10,000 HNT self-bond requirement. The requirement per node on Helium is strict, meaning you cannot be below or above 10,000 HNT per node. If you are below you will not be able to earn staking rewards and if you are above you will not earn any extra rewards for over-staking. The capital and technical requirement in Helium’s Proof-of-Stake network is high. For this reason, Chorus One is offering a Validator-as-a-Service solution for HNT holders that have enough HNT to stake, meaning we will provide infrastructure for HNT stakers who do not have previous experience running nodes. From our calculations, we estimate a staking APR between ~6–36% for HNT stakers.
There are still meaningful incentives for users to set up hotspots given the rewards allocations to data transmission and Proof of CoverageHotspot owners will continue to earn proportionate HNT rewards (up to 32.5% of the inflation rewards per epoch) if IoT devices utilise their hotspot during the duration of an epoch (30 minutes). Hotspot owners will also continue to earn rewards for verifying geographic locations of their hotspot or others in their vicinity (known as challenges, mentioned above).
In Proof-of-Stake networks, inflation is not the only element that contributes to staking rewards. Another key component contributing to staking rewards in PoS networks comes from transaction fees within the network. One interesting aspect of the economics in Helium is their use of data credits to pay for transaction fees. You can think of Helium as somewhat similar to how an algorithmic stablecoin network (such as Terra) would operate. The token HNT is burned to pay for Data Credits (DC), denominated in USD. One data credit is equal to USD $0.00001. In this sense, 100,000 DC would be equal to USD $1. Anyone is able to view the list of fees that are used in Helium. The most common transaction in Helium would include Hotspots sending or receiving IoT data, which costs 1 DC per 1 transfer of packet data. If hotspots needed to send and/or receive 100,000 packets of data and held 1 HNT in their wallet (worth USD $10 at the time), the user would burn 0.1 HNT to receive 100,000 data credits, enough to pay for 100,000 transfers of data to IoT devices.
Now we understand how the economics of the network works, we can dig in a little deeper to what is actually going on in the network right now. As of June 2 2021, there are 48,319 hotspots on Helium. Using the Helium block explorer, in 24h we calculated there to be ~200k transactions. In 30 days, extrapolated this would mean 5.9m transactions and in 365 days, extrapolated this would mean 71m transactions. Using the Helium block explorer, we can see that there were 22.5m DC spent in 30 days. In USD terms, that means that $225 was spent from users sending and receiving data across IoT devices in 30 days. If there are 5.9m transactions per month and this results in $225 USD of HNT burnt (for use as DC) — this means that every 26k transactions generates $1 USD (in other words $1 USD amount of HNT is burned). We can plug in the above current network activity and model it to find out just how much $USD will be used to buyback and burn HNT.
As you can see, a 100x in transaction growth on the Helium network is likely to lead to $270k worth of HNT being burned from circulation annually. Not only that, but stakers stand to earn between 6–36% APR annually as well. This means that there is demand for HNT to buyback and burn when network activity increases and stakers stand to benefit from this the most as their HNT stack increases over time from the staking rewards they are earning. In the past 30 days, the amount of hotspots that are connected in the Helium network increased from 34,550 to 48,130 (39% MoM). If the demand for hotspots continues at this monthly growth rate (CMGR) there will be 5,340% more hotspots than there are today by the end of the year (1.8m). One constraint of the Helium network is that sometimes there is so much demand there is not enough supply of Hotspots from manufacturers. However, more demand for hotspots over time will lead to economies of scale for hotspot manufacturers and is likely to entice competitors to enter the market to fill the demand. This in turn, translates to cheaper prices for hotspot buyers, meaning they can recover their initial costs (hotspot purchase) faster. Our friends at Multicoin capital called this the Flywheel Effect.
One small remark about the original Flywheel Effect envisioned by Multicoin is that it does not take into consideration the possibility of earning staking rewards (due to the removal of hotspots out of the consensus group). HIP-25 shifts 6% of inflation (consensus rewards) from hotspots to HNT stakers. This in turn, will lead to faster economies of scale for hotspot manufacturers and result in lower hotspot costs for network participants as the hotspots that will be created in future can become ‘dumber’ (i.e. not need to be built to understand the intricacies of consensus). The mining ROI mentioned in the original flywheel effect still applies to hotspots, the only change is that 6% of the hotspot mining ROI will now be earned by users staking HNT to secure the network. If anything, the flywheel effect accelerates with HIP-25 as hotspots will become more minimal and therefore cheaper to buy, thanks to specialised workers (validators) securing the network with specialised infrastructure. One might think of HIP-25 as an efficient re-allocation of resources.
We can hypothesise a consensus rewards model where delegation is possible (note: delegation is NOT possible in phase 1) to display what the offset might look like (ignoring other rewards hotspots earn). If the price of HNT and staking APR remains constant (est. 18%), we ignore the time value of money and assume that hotspot prices will come down to $100 (due to economies of scale) we can model the Proof-of-Stake economic equivalent to Proof-of-Coverage (i.e. what it takes for new participants to recover their initial investment).
Using the hypothesised model, if governance decided to activate delegation for HNT stakers, PoS economics become more attractive than PoC economics (disregarding other hotspot rewards e.g. data transmission) once the network reaches 179,000 hotspots. As of time of writing, there are 52,232 hotspots (growing 39% MoM as mentioned above). Helium’s transition to a PoS is a win-win for the network on the whole, introducing better network economics and performance through the introduction of Proof-of-Stake. It is important to know that this PoS model assumes delegation is possible, whereas right now delegation is not possible (nodes cannot stake less or more than 10,000 HNT from one address). In the future, governance might vote to turn on delegation when the Proof-of-Stake network matures. It is important to note that this model has many assumptions and disregards hotspot rewards earned through data transmission to IoT devices. Hotspot rewards earned through data transmission can be very inconsistent and are therefore ignored in this simple model.
The Demand-Side Helium Flywheel Effect — Companies Purchasing DC to Use Helium Network
The demand-side of HNT comes from IoT companies wanting lower cost networking services globally for their devices that do not require a lot of bandwidth. If a customer were to use a cellular modem for their IoT devices, they would pay 1000x more than if they connected to LongFi and have 200x less range. The benefits of IoT devices being able to connect anywhere in the globe where hotspots are available at a fraction of the cost are profound. The business model for Helium is B2B. Customers are companies that have low-bandwidth devices and want to connect to Helium for the cost-savings compared to connecting to a cellular modem. For example, Lime uses Helium to track the location of its scooters. Companies such as Lime are growing at a similar rate to Helium Network, expanding to countries worldwide. As more scooters and hotspots are set-up across the globe, more Data Credits will need to be burned from HNT in order to use the LongFi network. Helium already has 14 multinational companies using its LongFi network.
Whilst most companies that are using the Helium network now are Western-based, there has been a surge of new hotspots being set-up in China in the past two months (May-June 2021). As new geographies grow and more hotspots are set up across the globe thanks to crypto-economic incentives, it becomes more viable for multinational companies to utilise Helium’s services across borders (e.g. to track an IoT across many countries in Asia).
As more hotspots come online on the Helium network, the range of the network increases, making the LongFi network more appealing for companies. This could be considered a Flywheel effect on the demand-side.
To conclude, we are very excited that Helium is transitioning to a Proof-of-Stake network and that we have the opportunity to be one of the first validators supporting it. We are long-term believers in Helium and can’t wait to help the network scale to reach its full potential. Hotspots for IoT devices are just the beginning for Helium. Helium governance recently passed HIP-27 to create the first consumer-owned 5G network in the world on Helium network. In the not so distant future, anyone with a phone may be able to connect to the Helium network’s 5G hotspots and save costs.
Helium’s ambition to launch new technologies by using crypto-economic incentives to enable consumer-owned economies is one Chorus One fully supports. Stay tuned for a future announcement on how HNT holders can stake their assets with Chorus One.
Our content is intended to be used and must be used for educational purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such. The information is general in nature and has not taken into account your personal financial position or objectives. Before making any commitment of financial nature you should seek advice from a qualified and registered financial or investment adviser. Chorus One does not recommend that any cryptocurrency should be bought, sold, or held by you. Any reference to past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit. Always remember to do your own research.
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