A deeper look at the HT to HTX token switcheroo

Since early 2018, crypto exchange HTX has had its own token called HT +1.91% token, named after the exchange’s original branding, Huobi. The token was widely supported by the exchange and it offered perks, such as discounts on trading fees.

However, token holders were in for a surprise in January when the exchange said that all these benefits were being withdrawn from the HT token and handed over to an entirely new token. This wasn’t an upgrade allowing all token holders to get an equal share of the new tokens. Instead, token holders were just supposed to accept they had lost their benefits and that they should be grateful some of the new supply was being allocated to them.

Unsurprisingly, many HT token holders were not too happy about it.

“I invested heavily on HT ($169,000) and my average is $7,” said one HT token holder who requested to remain anonymous. “When Justin [Sun] decided to shut down HT and convert it to HTX, the price of HT was around $2.3. So, for me I had no other choice rather than get on with the conversion.”

“They literally made HT a shit coin and cornered the holders to forcefully convert,” they added.

Other token holders displayed frustration on HTX’s official Telegram channel, questioning the decision to move away from HT. They voiced their disbelief regarding the HT-HTX conversion rates and pointed fingers at Justin Sun — who still claims he’s merely an advisor to HTX despite his apparent executive role in making key announcements.

The announcement came just a few months after the bridge to the HECO Chain — the blockchain run by HTX that natively supports the HT token — was exploited for $86.6 million. The exchange was also seemingly exploited for $23.4 million. At the time, Sun said the exchange would compensate for any lost funds. Withdrawals continue to be suspended on the HECO Chain to this day, including for the HT token, showing the situation has still not been fully resolved.

In all, it’s a rather peculiar situation. So we took a look at the details of the token transition to understand what's going on. And it seems like token holders are truly getting the short end of the stick.

Choosing a DAO structure

A big element of the token change appears to be the handing over of control from the HTX exchange to a decentralized community. After the switch, the token that provides benefits on the exchange won’t be officially owned by the exchange itself.

This may have something to do with recent regulatory action. If a token is run by a company and offers benefits that could drive up its value, this could be used to argue that it’s a security. By moving to a DAO model, the goal might be to avoid this kind of risk.

“It is true that decentralization can impact the securities analysis of a transaction involving a token," said Teresa Guillén, a partner at Baker & Hostetler LLP and former attorney at the SEC. "For example, if there is decentralization such that there is no expectation of profits based on the efforts of others would render the third prong of the Howey test unmet — either because there is no expectation of profits, or any expectation of profits is based on each participants’ efforts and not just efforts of another.”

“But decentralization is also the ethos of much of the crypto community, so the impetus may not be related to a securities law analysis,” she added.

HTX announced that it had partnered with the HTX DAO and claimed the HTX DAO is “an open and transparent decentralized autonomous organization with the governance token of the HTX token.” It said that this DAO is offering some tokens to HT holders who want to convert across. 

Yet it’s hard to see that this DAO exists in any meaningful format yet. The HTX DAO’s official website shows the governance features are not yet active, meaning token holders can’t vote. This implies that some group of individuals — seemingly those at HTX — wrote the new token's whitepaper and are making all these decisions. When asked for the names of any current DAO members, the DAO’s official email (something that most DAOs don't have) did not respond.

When reached for comment, an HTX spokesperson said, "It's crucial to clarify that HTX DAO is not controlled by the HTX exchange, which also doesn't decide the ecosystem's value distribution. The creation of HTX DAO, detailed in its white paper, was aimed at enriching the ecosystem through decentralized governance by $HTX token holders and contributions from builders, not avoiding regulatory scrutiny."

When asked to name a single individual — or point to a pseudonymous account — who is part of the DAO and is not an employee of HTX, the spokesperson declined to answer.

The whitepaper also tries to maintain distance from HTX while in reality not really doing so. In the whitepaper, it said that while HTX shares a “similar name” to HTX — as in identical — it isn’t intended to be exclusive to the exchange or an upgraded version of the HT token. In fact, the X supposedly stands for “adaptability, inclusivity, and the potential for exponential growth.”

Leaving token holders in the cold

The second most notable decision in this token maneuver is that the HT token is not getting migrated to the HTX token — rather the new token is taking the value from previous token holders and only giving them a part of it back.

The announcement stated the benefits of holding the HT token would be migrated to the HTX token from early February. This included removing trading fee discounts from HT tokens and adding them to the HTX token, while using HTX tokens to boost a users' Prime membership levels and the number of Rockets they have (another engagement tool). The exchange said it was also removing the HT Earn program and adding an HTX Earn program. Plus, it noted it would scrap spot trading of HT tokens and remove multiple pairs for it.

Everything that gave the HT token purpose, and largely value, is being handed to the new token. It’s no wonder then that the HT token price has fallen in half since the announcement. But despite all of this, the exchange maintains that the new token is not a replacement for the old one.

“It’s crucial to understand that HTX is NOT a direct upgrade or replacement of HT - there is no one-to-one correspondence; rather, it represents a broader role with a wider array of ecosystem contributors,” said the HTX spokesperson. 

According to the HTX token whitepaper, this will include tokens going to partnerships and platform development. For instance, some of the funds are allocated for paying developers, something that could include HTX employees.

In short, the HTX DAO is reclaiming a lot of the value from the HT token (by transferring its benefits to a new token) and then whoever is in charge of the DAO — which seems to be HTX for now — is getting to control the lion’s share of it.

The HTX DAO said it has allocated some of the new tokens to old token holders. Yet the HTX spokesperson clarified that this will be less than 19% of the HTX token supply. As a result, if every HT token holder converted to the new token, they would essentially be getting diluted by 400%.

What this shows is that the core reason for switching to the HTX token can’t have been simply to decentralize it. That would have been a straightforward upgrade without token holders losing out. Instead, HTX has elected to recapture the majority of the value of the token for itself — all under the guise of decentralization.

The nitty gritty of the token conversion process

When it comes to the token conversion process, this too is convoluted and opaque — and decided by HTX. 

To start with, the exact rates of conversion over time are not defined. “More assets and earlier conversion will reward you with a more favorable conversion rate,” was the only detail that HTX provided. This means it will vary over time and by the amount but the exact details do not appear to be public. The conversion process is taking place on the HTX exchange.

When we tested the conversion process in January, 1 HT token was able to be swapped for 1.6 million unlocked tokens and 900,000 locked tokens. Accounting for the massive difference in the two token's total supplies, this results in a roughly 1:0.83 conversion rate for the unlocked tokens, but a 1:1.4 conversion rate including the locked tokens.

In order to get the locked tokens, users have to do certain tasks on the HTX exchange, such as hitting a certain amount of trading volume and paying a certain amount of trading fees. It also takes into account the number of Rockets you have, which are given out based on your holdings on the exchange.

This means that even at that early stage, users were not able to get the same portion of the new supply of tokens as they had with the old token — without spending money trading and unlocking the extra tokens. 

Looking at the conversion of 1 HT token today, the rate is 1:0.22 for unlocked tokens and 1:0.34 including locked tokens. That means someone owning 1% of the supply of the HT token would get 0.34% of the supply of the HTX token — and only if they do a bunch of tasks for HTX. The website itself notes that doing so would mean swapping $2.43 of tokens for $1.27 of tokens, which seems a rather unfavorable trade.

Since HT token holders are only getting a small percentage of the new supply, it’s not possible for all holders to convert their tokens across at a 1:1 ratio (while accounting for the differences in the two tokens’ total supplies). Instead it seems that early migrators were able to get a larger percentage of the new supply — if you include locked tokens — but that later migrators are losing out.

"Regarding the $HT to $HTX token conversion, it is a voluntary process, designed to acknowledge and value the contributions of HT token holders, offering them governance rights and potential for future growth," the HTX spokesperson said.

In total, the HTX token maneuver seems to have been designed for a few things. First, it may be to get regulators off the exchange’s back — although the same plan didn’t seem to work for Ooki DAO. Second, it seems to have been to recapture value from the HT token into the hands of the HTX DAO, which appears to still be under HTX’s control for now. Third, for token holders to keep some of the value being taken from them, they need to do tasks on HTX, which could boost the exchange’s trading volume.

So it certainly seems like it did well for HTX. But token holders? Not so much.

Additional reporting by Danny Park.