[BTCT][BFMINES] - Mining Contracts Now Available - Bonus Divs First Months

[xaviarlol]

When will people learn that buying mining IPO's is riskier than dancing with a grizzly bear.

Unfortunately, ASICMINER is just way too well run.

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[Deprived]

Hm, I'll need to recheck this when I get back. You may be right and if so I'll update the article.

*¤&%&%&!!!

I just spent three hours writing a full response, and the browser crashed. *sigh*

OK, here we go again, luckily most of the work was in validating the numbers...

I checked again, and you are wrong. However, by forcing me to recheck everything, you pointed me to a mistake I had made in my first model. I'll explain that and post the updated numbers, but let me first explain why you're wrong, and let me do so with the extreme example you had.

In my model, I am deducting the dividends earned by the competing contracts from the prices of contracts currently mining. This means that in the analysis, any dividend earned works in favor of the competitor. I believe you mentioned this wasn't fair and that one couldn't compare minig with a non-mining asset, but you may have misunderstood the model as it already accounts for this.

However, If difficulty goes up 1 million percent then no dividends will be earned at all, so no price deduction takes place.

Of course, this also means that everyone loses everything, so the question really becomes who pays more for their shares because that determines how much an investor will lose. Because BFMines is priced lower than competitors per mhs, that means investors lose less with BFMines (they would lose 0.00468 with TAT.VM and 0.00400 with BFMines).

To be accurate, this depends on when the difficulty goes up by a million percent. If that happens next week, then dividends earned until next week will reduce the loss.

To err on the site of caution, for my model, I have actually assumed that no difficulty changes happen in July at all. This favors competitors, due to the balance between the BFMines bonus being lower and the decrease in reduction from the competitors, the effect isn't too great (a percentage point or two). If I include the changes during July, it favors BFMines.

Now to my error.

In my first model, I had wrongly reduced the dividends by the same rate as the hashrate increase. In other words, if hashrate increased 15% then dividends would decrease 15%.

This is obviously wrong, because if the difficult went up 100%, the dividends would then be zero, when they should be 50%.

In the fixed model, I now correctly use the growth in difficulty to calculate the returns. Although not entirely correct for a physical mining operation, I have used the formula from DMS.Mining, as I'm sure you'll approve of that being correct (or at least equal for all).

I should mention that when designing the contracts, I used the correct method.

So, the results...

My statement from the article is that the chosen difficulty shouldn't affect comparing the assets 'too much' (only mining investments in general). The 'too much' is of course a relative term, so let me show you what it means in practice.

Here are the results from the updated model using 15% as the monthly change:



Here are the results from the updated results using 30% as the monthly change:



As you can see, the change from 15% to 30% affects TAT.VM competitiveness by 1% point only. This is due to the reduced price reduction countered by the reduced bonus. I'm thinking this is within the limits of what you can call 'not too much'.

The overall effect on mining profitability, however, is reduced by just over 14% for all assets.

I had spent a long time describing the formulas before my browser crashed, and I can't be bothered to rewrite it all again, so I've uploaded the Excel sheet to Google Drive so you can verify the formulas yourself.

https://docs.google.com/spreadsheet/ccc?key=0Am7kSNaxKrIMdGg1WnI1ZFp2RTh1ZXp2NVpCNkxIVGc&usp=drive_web#gid=0

I should point out that if updated with today's prices and the reduced dividend payout time for competitors until September 1 (still not accounting for price drops), BFMines is again the cheapest mining investment per mhs on BTCT:



This does not include any transaction fees, however, which would further favor BFMines by a percent or two, depending on what the transaction fees are. Of course, if the transaction fees goes through the roof, that further increases the benefit to BFMines contract holders, as unlike TAT.VM at least, the dividend is based on real mining rather than a return formula.

Speaking of which, and slightly off-topic; does DMS.Mining pay out transaction fees?

The effect you mention with your extreme example slightly affects the analysis if the increases are within normal expectations only, but the effect is so small that I call it, with good conscience, 'not too much'. For a doubling from my chosen numbers, the effect is around 1%; for a quadrupling, the effect is another percent.

However, from there on, the effect is turning around and is eventually cancelled out, so if there's an increase of 240% per change, BFMines is faring better again, and with a change of 1 million percent, the effect is all but cancelled out. In other words, BFMines, with its lower price and bonus is effectively priced at the same level as TAT.VM was when I wrote the article.

With the price rise on TAT.VM today, BFMines is the cheapest mining contracts on BTCT, regardless of whether you include any of the factors that would further favor BFMines.

.b

Thanks for the detailed reply - now I'll have to do some math as well (or maybe not).  A few points I can comment on without even doing math:

1.  I agree that at current prices, if you make the assumption that your PMB will be profitable then it represents better value than the PMBs you compared to at their current prices (possible exception being PAJKA if their extra hardware arrives very soon - and I make no comment on comparisons to assets that aren't PMBs).  However : your whole basis of comparison assumes profitability - by measuring it based on selling price rather than on returned capital.  Specifically, if yours makes a loss (and if it does, so do the other PMBs you compared to) then the small difference becomes increasingly larger as a percentage of any of returned capital (total dividends paid), loss made etc.  I don't make this point to argue you should project total earnings - that would be unreasonable and I dont think ANYONE can do that accurately (certainly not for any model which involves profit being made) - just to point out that the whole basis of comparison you use assumes profitability.

2.  At a cursory glance it appears you may have mistakenly forgotten to apply the difficulty change to your bonus calculation.  Increased rate of change doesn't just change the value at the start of September but also the rate at which it drops DURING september hence having a double-whammy impact on it.  Rather obviously when your miner arrives so will be the rest of that load - so there should be a spike in difficulty not a levelling out.  That won't have a huge impact on anything - though if the difficulty change-rate were continued over the whole period in which the bonus was generated it would have a more significant impact.

3.  Annual yield appears to be calculated as though once your Miner arrives all ASIC manufacturers will immediately stop producing ASICs out of sympathy - i.e. there'll be no further difficulty rises for a year.  Calculating an accurate annual yield would be hard - but implying that difficulty will never rise again is rather horribly misleading.  The column is misleading giving an entirely false impression of what returns investors could expect in a year.

4.  You asked about DMS.Mining and transaction fees.  DMS.Mining does NOT pay any equivalent of transaction fees.  Nor do any existing PMBs (that I'm aware of).  That's because all current PMBs pay based on theoretical output from mining rather than actual output from mining.  That means no transaction fees but also no Stales, no orphans, no reductions if net connection dies, no reductions if hardware breaks down etc.  You now appear to be saying you pay based on actual mining results - are you saying if the hardware breaks down you'd suspend dividends?  If not then how would you be calculating transaction fees for periods when your hardware was inoperational?  The approach I took with DMS.Mining (and taken by all current PMBs that I know of) if that the loss of transaction fees is more than compensated for by 0% down-time and 100% efficiency.

5.  Your repeated references to "cheapest on BTC-TC" should be changed to "cheapest of the ones on BTC-TC I chose to compare to".  That you choose not to compare to DMS.Mining is your choice - and your right (even if the stated reason - price volatility - is debatable and irrelevant for investors rather than speculators).  But you can't make a claim about "cheapness" that includes it (which any claim relating to "all" does) when you chose not to include it in your comparison.  NO PMBs (unless yours is an exception) are actually mining securities - as ALL of them have payouts defined independently of the output (or even existence) of mining hardware.  The ones that actually have hardware only have it as proof of capability to pay - not as the source of dividends (as they ALL are committed to paying out even if the hardware fails/is stolen).

[furuknap]

No matter what, 15% estimated difficult increase is far too low, probably by a factor of 2, like Deprived said. This next difficult increase is going to be around 15% just by itself!

So I doubled it. Results were the same, like I said.

I quardupled it. Results were the same, like I said.

At 250% growth per change, guess what, the result were the same, and I use 'the same' as being within 2%.

In fact, if I ran the extreme examples of one million percent, it favored BFMines compared to the others by 'more', being defined as 4%.

I'm wondering when people will realize that there are other people that aren't just out to scam everyone, but who actually builds something meant to benefit all in a fair way.

.b

[furuknap]

Thanks for the detailed reply - now I'll have to do some math as well (or maybe not).  A few points I can comment on without even doing math:

1.  I agree that at current prices, if you make the assumption that your PMB will be profitable then it represents better value than the PMBs you compared to at their current prices (possible exception being PAJKA if their extra hardware arrives very soon - and I make no comment on comparisons to assets that aren't PMBs).  However : your whole basis of comparison assumes profitability - by measuring it based on selling price rather than on returned capital.  Specifically, if yours makes a loss (and if it does, so do the other PMBs you compared to) then the small difference becomes increasingly larger as a percentage of any of returned capital (total dividends paid), loss made etc.  I don't make this point to argue you should project total earnings - that would be unreasonable and I dont think ANYONE can do that accurately (certainly not for any model which involves profit being made) - just to point out that the whole basis of comparison you use assumes profitability.

Actually, I explicitly avoided any price speculation as including that would create another assumption; that of a rational market.

I can't predict what people will pay for anything; they surely aren't judging a mhs as a mhs when comparing assets (AM's price per mhs is 10x that of BFMines, TAT.VM, and DMS.Selling, without any upgrades for months, and months behind on deploying the 62TH they claim to have in March)

The comparison does not deal with price, long-term difficulty evolution, or profitability at all. If prices on mining assets were to crash, it is likely that it will crash across the board, so it is irrelevant in terms of comparing assets to each other. There can, of course, be exceptions like we've seen with 100th today, but I'd rather hold the assumption that the operators competing for the lowest price (yours included) are rational, honest, and try their very best for achieve fairness. I may be gullible.

2.  At a cursory glance it appears you may have mistakenly forgotten to apply the difficulty change to your bonus calculation.  Increased rate of change doesn't just change the value at the start of September but also the rate at which it drops DURING september hence having a double-whammy impact on it.  Rather obviously when your miner arrives so will be the rest of that load - so there should be a spike in difficulty not a levelling out.  That won't have a huge impact on anything - though if the difficulty change-rate were continued over the whole period in which the bonus was generated it would have a more significant impact.

I did address this is the article. The bonus will be anything in excess of expenses, which is guaranteed at 20% minus operating expenses. I've used 5% as a max estimate for that, thus the 15-20% range.

However, it is likely that the hardware will overperform like all other ASICs. AM blades and sticks, for example, overperform by around 30% from specs, which would lead our hardware to run at 156% of guaranteed rate. If so, the bonus would be 51% each of the first six months.

I don't know, though, so as an assumption, I've countered the increase in difficulty against any overperformance and used the low end of the estimate at 16.6% at the September rate. This makes the calculations easier because that means that the bonus will be exactly 100% of September dividends.

3.  Annual yield appears to be calculated as though once your Miner arrives all ASIC manufacturers will immediately stop producing ASICs out of sympathy - i.e. there'll be no further difficulty rises for a year.  Calculating an accurate annual yield would be hard - but implying that difficulty will never rise again is rather horribly misleading.  The column is misleading giving an entirely false impression of what returns investors could expect in a year.

Again, I don't speculate in profitability beyond saying it won't give you 500% and it won't give you 0%. The ROI was added to show that a change in difficulty impacts overall mining profitability by orders of magnitude more than it affects comparison between assets.

Also, I should mention that the limit to Metabank impact on the hash rate is less than 50TH as that is everything they sold. This does mean a 25% increase from today's numbers, but that is also easily countered by the estimated 30% increase per month (or a higher number, which still does not affect the analysis). It affects overall profitability for all miners only.

4.  You asked about DMS.Mining and transaction fees.  DMS.Mining does NOT pay any equivalent of transaction fees.  Nor do any existing PMBs (that I'm aware of).  That's because all current PMBs pay based on theoretical output from mining rather than actual output from mining.  That means no transaction fees but also no Stales, no orphans, no reductions if net connection dies, no reductions if hardware breaks down etc.  You now appear to be saying you pay based on actual mining results - are you saying if the hardware breaks down you'd suspend dividends?  If not then how would you be calculating transaction fees for periods when your hardware was inoperational?  The approach I took with DMS.Mining (and taken by all current PMBs that I know of) if that the loss of transaction fees is more than compensated for by 0% down-time and 100% efficiency.

I'm hoping you can see why I avoid the terms PMB now and rather use mining contract.

The approach with zero TX fees is only a benefit if Bitcoin does not gain adoption. If Bitcoin succeeds and TX fees increase, the loss to investors will be far greater than the downtime estimates. If TX fees reach 8%, for example, our miner can be down one full month of the year before the downtime outweighs the loss in transaction fees from a virtual contract or PMB.

I'll address the payout in a later article to clarify because I see that the contract does not make it entirely clear, but BFMines pays out based on actual mining. In case the hardware is permanently damaged, the contracts will be rebought at market+10%.

That said, for temporary or short-term issues, I bear the risk and guarantee mining. Payouts from that will come from my pocket, which is why I need the surplus of the mining output (whatever is above 1mhs/contract) after the hardware warranty. I was thinking that I should use either an average of reported TX fees or an average of previous X days TX fees, whichever is most beneficial to contract holders.

I'll clarify this later, though.

5.  Your repeated references to "cheapest on BTC-TC" should be changed to "cheapest of the ones on BTC-TC I chose to compare to".  That you choose not to compare to DMS.Mining is your choice - and your right (even if the stated reason - price volatility - is debatable and irrelevant for investors rather than speculators).  But you can't make a claim about "cheapness" that includes it (which any claim relating to "all" does) when you chose not to include it in your comparison.  NO PMBs (unless yours is an exception) are actually mining securities - as ALL of them have payouts defined independently of the output (or even existence) of mining hardware.  The ones that actually have hardware only have it as proof of capability to pay - not as the source of dividends (as they ALL are committed to paying out even if the hardware fails/is stolen).

BFMines is the exception, but it's not really a PMB either. I do, however, keep the commitment to payout, even if the hardware fails or is stolen, with the caveat that I'll buy out the contracts with a 10% bonus of market if there is permanent damage.

.b

[twentyseventy]

No matter what, 15% estimated difficult increase is far too low, probably by a factor of 2, like Deprived said. This next difficult increase is going to be around 15% just by itself!

So I doubled it. Results were the same, like I said.

I quardupled it. Results were the same, like I said.

At 250% growth per change, guess what, the result were the same, and I use 'the same' as being within 2%.

In fact, if I ran the extreme examples of one million percent, it favored BFMines compared to the others by 'more', being defined as 4%.

I'm wondering when people will realize that there are other people that aren't just out to scam everyone, but who actually builds something meant to benefit all in a fair way.

.b

I don't like any of the PMBs. In any case, you can't compare them to BFMINES based on price if you aren't even mining yet.

Even with a 15% difficulty increase, with you receiving the equipment on 10/1 (which is optimistic), each share will only produce 0.00087677 BTC before 1/1/2015! 

[furuknap]

I don't like any of the PMBs. In any case, you can't compare them to BFMINES based on price if you aren't even mining yet.

Yes I can, and I've explained why and how several times now.

Even with a 15% difficulty increase, with you receiving the equipment on 10/1 (which is optimistic), each share will only produce 0.00087677 BTC before 1/1/2015! 

And like I've also explained several times, if you believe in the PPG theory, no mining investments will ever make sense.

.b

[FloatesMcgoates]

Clearly furuknap believes as we do that nobody who invests in BFmines will actually make their money back, as this is how he profits in the first place. He has to make a face in public in order to trick people into wasting their money on his bond. Arguing with him is pointless.

[furuknap]

Clearly furuknap believes as we do that nobody who invests in BFmines will actually make their money back, as this is how he profits in the first place. He has to make a face in public in order to trick people into wasting their money on his bond. Arguing with him is pointless.

What a silly statement. I've clarified, several times as well, why I'd rather sell this as an asset than mine myself. You may chose to believe that or not and based your decisions on that belief.

.b

[eltopo]

Even with a 15% difficulty increase, with you receiving the equipment on 10/1 (which is optimistic), each share will only produce 0.00087677 BTC before 1/1/2015! 

You have to add the remaining shareprice to the sum of all received dividends to calculate the overall profit or loss (not that this would make it significantly better for the investors).

And like I've also explained several times, if you believe in the PPG theory, no mining investments will ever make sense.

.b

The PPG term is rather idiotic. 1% average increase per jump qualifies as "PPG" too, and then a mining investment would make very, very much sense. For every specific statement ("difficulty will be 200,00,00 at the end of the year") you can calculate the average increase per jump. After about a year the mining equipment (or the PMB) will be worthless anyway, so we don't have to think about difficulty jumps in the far away future (and in Bitcoin country, 12 months is far away).

[twentyseventy]

Even with a 15% difficulty increase, with you receiving the equipment on 10/1 (which is optimistic), each share will only produce 0.00087677 BTC before 1/1/2015! 

You have to add the remaining shareprice to the sum of all received dividends to calculate the overall profit or loss (not that this would make it significantly better for the investors).

True, but I'm assuming that a share yielding less than 1 satoshi per week in dividends will be worth effectively 0BTC at that time.

There's a chance that the share/bond price could increase short term, but the increasing nature of difficulty will only result in a decreasing share price over the long term.

[furuknap]

Updates to Contract - Upcoming Motion

I will be posting a motion to update the BFMines contract today. The changes to the contract are done for a few reasons.

Technically, no motion is required as contracts do not have voting rights. However, I wish to include contract holders in the decision process. Edit: please see Deprived's argument below, to which I fully agree. This was an unfortunate wording on my behalf.

The updated contract is shown on the BFMines home page at http://bfmines.com/contract/

In summary, the changes are the following:

• New Clause for Further Changes
  I'm introducing a new clause for implementing contract changes in the future. The clause will allow me to change the contract unilaterally only if those changes are to the reasonably perceived benefit of contract holders or are of no consequence (such as a name change, spelling corrections, and so on). If changes are required that are not to the benefit of contract holders, changes must be accompanied by an offer of a buy-back as per the terms in the contract.
• Rebranding as a Mining Contract
  Although I took care to explain mining bonds as part of the contract, it is apparent that not everyone has understood the differences between a traditional PMB and BFMines. As such, I have removed references to PMB and bonds in the contract, to be replaced with the term mining contract. To elaborate on the differences, I have written an article and I ask you to review that before casting your vote.
  http://coin.furuknap.net/comparing-bitcoin-mining-contracts-and-mining-bonds/
• Removal of Named Hardware Provider
  The initial contract stated Metabank as the hardware provider. However, to allow for replacement providers in case of issues with Metabank and to support future expansions as per the contract, I have removed the reference to Metabank and replaced it with a general reference to hardware.

No other major changes are done at this time, but changes that benefit contract holders are in the planning stages.

Although BFAssets is still the majority share holder, I will not trumph these changes. Edit: please see Deprived's argument below, to which I fully agree. This was an unfortunate wording on my behalf.

However, my recommendation is that you vote Yes to approve these changes.

.b

[Deprived]

Updates to Contract - Upcoming Motion

I will be posting a motion to update the BFMines contract today. The changes to the contract are done for a few reasons.

Technically, no motion is required as contracts do not have voting rights. However, I wish to include contract holders in the decision process.

When you enter a contract with someone NEITHER party has the right to unilaterally change the contract.  These aren't shares in a company - where there's shared ownership - they're contracts/bonds.  Removal of voting rights only means investors have no say in actions you're allowed to do WITHIN the contract - it in no way, shape or form, allows you alter the contract itself.

If you genuninely believe you have a RIGHT to change the contract terms however you see fit then you really badly need to be removed from any participation in issuing securities.  Totally removed.

Theoretically the only way you could change the contract AT ALL would be if every single bond-holder agreed - that's because the nature of them is that each is a seperate contract between you and the holder.  In practice, so long as the change is clearly in the favour of investors, I'd expect burnside to allow it if a vote passes (though any investor who objects should be refunded the full price they paid - as noone should EVER be forced to accept a change in a contract).

Don't start going all usagi on us and claiming contracts can be unilaterally amended or that a controlling interest can act against the interests of minority investors by virtue of having more shares.

[Deprived]

In summary, the changes are the following:

• New Clause for Further Changes
  I'm introducing a new clause for implementing contract changes in the future. The clause will allow me to change the contract unilaterally only if those changes are to the reasonably perceived benefit of contract holders or are of no consequence (such as a name change, spelling corrections, and so on). If changes are required that are not to the benefit of contract holders, changes must be accompanied by an offer of a buy-back as per the terms in the contract.
• Rebranding as a Mining Contract
  Although I took care to explain mining bonds as part of the contract, it is apparent that not everyone has understood the differences between a traditional PMB and BFMines. As such, I have removed references to PMB and bonds in the contract, to be replaced with the term mining contract. To elaborate on the differences, I have written an article and I ask you to review that before casting your vote.
  http://coin.furuknap.net/comparing-bitcoin-mining-contracts-and-mining-bonds/
• Removal of Named Hardware Provider
  The initial contract stated Metabank as the hardware provider. However, to allow for replacement providers in case of issues with Metabank and to support future expansions as per the contract, I have removed the reference to Metabank and replaced it with a general reference to hardware.

No other major changes are done at this time, but changes that benefit contract holders are in the planning stages.

Although BFAssets is still the majority share holder, I will not trumph these changes. However, my recommendation is that you vote Yes to approve these changes.

.b

First to address the last setence.  BFAssets is NOT the majority share-holder.  The majority of shares are still treasury ones and unsold.

The changes are NOT clearly in the interests of investors - some parts are NOT in the investors' interests and other parts are open to debate.

First there's the weasel words of "the reasonably perceived benefit of contract holders".  Reasonably perceived by whom?  If by contract holders then why are you trying to allow it unilaterally - when there's voting system that allows factual determination of what the perception of contract holders is.  If you mean "reasonably perceived" by yourself then it's meaningless - as it gives you free reign to do anything you want so long as you claim it's "reasonably perceived" by yourself.

In any event, any change that tries to make the bonds/contracts into some kind of communal ownership asset - where some holders can vote to change the rights of others - should NOT be allowed for anything claimed to be a bond.  It removes the certainty of expectation that holding a bond should deliver.

The second part appears to be attempting to remove your obligation to pay the equivalent of 1 MH/s of mining output and instead replace it with the actual output of your hardware.  That removes all guarantee of payment - and changes the entire nature of payouts from being PMB-like to be equivalent to owning shares : just with a much larger management cut than things openly admitting to be shares charge.

A 1.1% transaction fee bonus in no way compensates for stales, orphans, loss of net connection, equipment breakdown etc.

Even in your article you appear confused over this yourself - on the one hand saying invnestors get what's mined and on the other saying (in big type) :

"Note: During the first six months, while the hardware is still under warranty, the surplus mining power  in BFMines is paid out as a bonus to contract holders, meaning that for half a year, contract holders get more dividends than guaranteed."

What's guaranteed if it becomes a contract?  What is the absolute minimum investors will get paid per dividend?  There isn't one.

The third change is the worst of the lot - it would be fine with one change.

As your proposal stands, if the original hardware doesn't show up you could then order from someone else - and evenn if it didn't arrive for another year investors would be locked in at the same price and receive minimal return when hardware finally arrived.  If you want the flexibility to use other hardware then a fair change would be to allow other hardware to back the bonds/contracts so long as it was operational by the end of September (the originally defined target time-scale).  That removes the loophole in your proposed change where you can keep changing proposed hardware sources until either hardware prices are tiny OR market price is so low you can just buy back per the contract and pocket a fat profit without ever having mined anything.

[furuknap]

When you enter a contract with someone NEITHER party has the right to unilaterally change the contract.  These aren't shares in a company - where there's shared ownership - they're contracts/bonds.  Removal of voting rights only means investors have no say in actions you're allowed to do WITHIN the contract - it in no way, shape or form, allows you alter the contract itself.

You're right, that was badly worded by me.

The contract changes will be done to include the ability to unilaterally change the contract, but also to ensure that contract owners that do not approve of these changes will be given a contractual right to a buy-back. I should have included this in the initial contract, which was an oversight on my end in the heat of battle. I was more concerned with protecting contract holders against bad events than opening for the chance of good events.

The planned changes are to the benefit of contract holders only and will be published in advance with due notice. I intend to give contract owners a chance to sell back contracts if they strongly disagree that the changes are in favor of them. I wish to be very relaxed on execution of this policy, but included the phrase 'resonable' to avoid exploitation.

However, the way the contract is formulated now, there is no chance for me to improve the terms. For the sake of an extreme example, if we suddenly got 1000 Metabank miners instead of one as a nice gesture from Metabank, that would be great and I'd love to improve the hash rate of the contracts, but right now I cannot.

Another example (not planned, just an example) of a change that would not be clearly in favor of contract holders would be to permanently include the excess hashing power in dividends. This would give contract holders better dividends, but because this also introduces more risk of loss due to hardware failure, it is not completely and undeniably a benefit and would thus be implemented only combined with an offer to buy back contracts from those that wish.

.b

[Deprived]

When you enter a contract with someone NEITHER party has the right to unilaterally change the contract.  These aren't shares in a company - where there's shared ownership - they're contracts/bonds.  Removal of voting rights only means investors have no say in actions you're allowed to do WITHIN the contract - it in no way, shape or form, allows you alter the contract itself.

You're right, that was badly worded by me.

The contract changes will be done to include the ability to unilaterally change the contract, but also to ensure that contract owners that do not approve of these changes will be given a contractual right to a buy-back. I should have included this in the initial contract, which was an oversight on my end in the heat of battle. I was more concerned with protecting contract holders against bad events than opening for the chance of good events.

The planned changes are to the benefit of contract holders only and will be published in advance with due notice. I intend to give contract owners a chance to sell back contracts if they strongly disagree that the changes are in favor of them. I wish to be very relaxed on execution of this policy, but included the phrase 'resonable' to avoid exploitation.

However, the way the contract is formulated now, there is no chance for me to improve the terms. For the sake of an extreme example, if we suddenly got 1000 Metabank miners instead of one as a nice gesture from Metabank, that would be great and I'd love to improve the hash rate of the contracts, but right now I cannot.

Another example (not planned, just an example) of a change that would not be clearly in favor of contract holders would be to permanently include the excess hashing power in dividends. This would give contract holders better dividends, but because this also introduces more risk of loss due to hardware failure, it is not completely and undeniably a benefit and would thus be implemented only combined with an offer to buy back contracts from those that wish.

.b

Part of the problem - which you detailed above - is that historically contracts on BTC-TC and Bitfunder have always tended to include a lot of operational stuff that really shouldn't be in the contract at all.  So in practice what ends up in the "contract" section tends to include things that are a contract (and thus totally unchangable) and other things which are operational issues - that should be able to be modified either following a vote OR unilaterally.  The problem then, of course, is determining which is which.

I messed up on that score myself with LTC-ATF (though not too badly) and included in the contract things which shouldn't have been there (at that time when issuing securities there weren't all the other sections that now exist).  As a result whenever I make changes to that contract now I don't vote myself until others have voted - and will vote against if any significant opposition (10% or more).  I also offer a buy-back at MORE than would be paid were the closure clause to be executed (with the surplus over NAV/U paid by myself).

That's on a fund - which should have more room for manouver than a bond or contract.  Bonds and contracts should be got right first time - there's no real scope for changing them once started as they're by nature individual rather than collective and debt/obligation rather than equity.

[furuknap]

First there's the weasel words of "the reasonably perceived benefit of contract holders".  Reasonably perceived by whom?  If by contract holders then why are you trying to allow it unilaterally - when there's voting system that allows factual determination of what the perception of contract holders is.  If you mean "reasonably perceived" by yourself then it's meaningless - as it gives you free reign to do anything you want so long as you claim it's "reasonably perceived" by yourself.

Reasonable is a fairly well-understood term and is perfectly usable in legal contracts. The term "beyond a reasonable doubt" is an example of this. It will not be unilaterally determined by me as I can be very unreasonable at time. That is why the intent is to publish changes well in advance.

An example of an unreasonable objection may be that "I don't want these changes because I don't like the color of your car". This is clearly unreasonable because the color of my car is not in any way related to the operation of the contract.

An example of a resonable objection may be that "I don't want these changes because I think difficulty will drop by 50%". This is reasonable because, although someone may disagree or agree with the prediction, it is a reason that would affect the operation of the contract.

In any event, any change that tries to make the bonds/contracts into some kind of communal ownership asset - where some holders can vote to change the rights of others - should NOT be allowed for anything claimed to be a bond.  It removes the certainty of expectation that holding a bond should deliver.

This is one reason why the rebranding is required; this is not a bond, it is a mining contract. I'd be happy to treat it as a bond like the original contract stated, but this will effectively remove benefits from contract holders, and I'll elaborate more on this in a moment.

The second part appears to be attempting to remove your obligation to pay the equivalent of 1 MH/s of mining output and instead replace it with the actual output of your hardware.  That removes all guarantee of payment - and changes the entire nature of payouts from being PMB-like to be equivalent to owning shares : just with a much larger management cut than things openly admitting to be shares charge.

A 1.1% transaction fee bonus in no way compensates for stales, orphans, loss of net connection, equipment breakdown etc.

It does not. That is the purpose of the excess capacity, as stated in the contract. However, the excess capacity will not be paid out so it will only benefit contract holders as an added insurance.

However, let's again as an extreme example say that friedcat's predictions of a 100% transaction fee by 2016 comes true. This will effectively double the output of the contracts, and that will be paid out to contract holders.

Even in your article you appear confused over this yourself - on the one hand saying invnestors get what's mined and on the other saying (in big type) :

"Note: During the first six months, while the hardware is still under warranty, the surplus mining power  in BFMines is paid out as a bonus to contract holders, meaning that for half a year, contract holders get more dividends than guaranteed."

What's guaranteed if it becomes a contract?  What is the absolute minimum investors will get paid per dividend?  There isn't one.

This is actually one of those planned changes, and because this is not now (edit: spelling) a public forum, I'll reveal the details of that particular upcoming change. I eluded to this in the article, but I'd like to iron out the final details before I include it in the contract.

Please note that the following is a preliminary change and will not be worded this way in the final contract.

Unlike PMBs, mining contracts guarantee the output of a certain hash rate from actual mining. This means that in theory, that mining output may be zero (and in theory can be any remaining block reward forever).

Due to this variance in output, contract holders would normally have an unpredictable output that may very well be below expectations. It will also introduce significant overhead to the operation and dividends must be paid daily and cannot be scheduled. Dividends must also be paid out after the mining occurs, although this is a minor effect as the total impact would be the interest of one day with a daily dividend payout.

To ensure a stable output, BFMines will pre-schedule daily dividends on the basis of an average output using the expected dividends (likely using the DMS.Mining and TAT.VM formulas as they seem to be the commonly accepted standards).

Then, on a weekly basis, surplus dividends from lucky streaks and transaction fees will be paid out.

However, under no circumstance will that additional dividend be negative or affect future dividends payments. In other words, like the PMB style of the original contract, there is an absolute guarantee of the expected output from 1mhs. If the real output is lower, that will be covered by the operator.

This change benefits contract holders beyond a resonable doubt (in my opinion) as such:

• It guarantees a mining payout equivalent to a PMB
• It offers contract holders the upside of good luck
• It offers protection against bad luck
• It offers an additional payout of transaction fees once per week

The third change is the worst of the lot - it would be fine with one change.

As your proposal stands, if the original hardware doesn't show up you could then order from someone else - and evenn if it didn't arrive for another year investors would be locked in at the same price and receive minimal return when hardware finally arrived.  If you want the flexibility to use other hardware then a fair change would be to allow other hardware to back the bonds/contracts so long as it was operational by the end of September (the originally defined target time-scale).  That removes the loophole in your proposed change where you can keep changing proposed hardware sources until either hardware prices are tiny OR market price is so low you can just buy back per the contract and pocket a fat profit without ever having mined anything.

That is also one of the proposed changes that would be added, but for which the details are not defined.

I am working under the assumption that contract holders would benefit from starting mining as soon as possible. I realize this is not absolutely true in all cases; some are just speculating.

Right now, I'm in the process of securing hash power from additional sources to serve as backup power for BFMines. However, the way the contract is formulated, hashing will not commence until Metabank delivers. That means that (although in theory) the backup power can be available tomorrow, it would just sit idle for months if Metabank is delayed.

There is no clause that says a specific date for when the IPO funds would be returned if hardware does not arrive, which is really another oversight. If I were dishonest, I could hide behind this oversight forever with the current terms, and this would go against the best interest of contract holders as well as my intent.

As such, I've proposed to remove the named hardware and when details about hardware delivery are more firm (whether from the backup sources or Metabank) a fixed date will be added, at which either mining commences or IPO funds are returned.

However, because I do not yet know the details of when neither Metabank or the backups arrive, I cannot yet fix this date, so I'm not including that change in this proposal. I'm keeping everyone, contract holders or others, up-to-date on every development I learn, positive or negative, so the moment I know, I will reveal this information.

.b

[Deprived]

[Reasonable is a fairly well-understood term and is perfectly usable in legal contracts. The term "beyond a reasonable doubt" is an example of this. It will not be unilaterally determined by me as I can be very unreasonable at time. That is why the intent is to publish changes well in advance.

There's nothing wrong with the concept of "reasonable" - nor did I claim there was.  What was missing (and remains so) is the second part necessary - the definition of who determines whether it is reasonable.

Publishing well in advance still doesn't define who determines whether something is reasonable - nor do the examples you presented.  Specific examples are of no use when trying to define a general process.

You'd probably agree with me that 1+1=2 is true.
You'd likely also agree that 1+1=3 is NOT true.

That, however, gets us nowhere nearer to defining how resolution of whether any statement in general were true would be achieved.  If there's some logcially robust system for determining whether a change  could be reasonably considered in the interest of investors then please reference it as being the basis on which that will be determined.

What you're maybe missing here is the fundamental difference in nature between stocks and bonds/contracts.  With stocks it is usually the case that the interests of managers and investors are generally in agreement - tha the company do well and is profitable.  Bonds and contracts are a very different beast - being an exchange of commitments - where any change in the interest of one party will frequently be to the detriment of the other.  With stocks the shared intent is, in general, to increase the size of a pool of assets/revenue streams  to which all parties have some entitlement or interest.  With bonds/contracts there's no such common interest - rather all changes will increase or decrease one party's obligation the other which is almost inevitably favourable for one party and unfavourable for the other.

More specifically, your hardware will generate some number of coins over its lifetime.  Some portion of those will go to your investors - and the rest to you.  It's therefore the case that any change in what investors will receive is going to have an opposite impact on what you receive (this is obviously a simplification).  It's thus impossible for you make decisions on their behalf - as you have an explicit conflict of interest.  That's why contracts for bonds/contracts should (in general) never be allowed to be changed other than unanimously as there's no shared interest between the issuer and the counter-parties.

Now there ARE exceptions to the above - areas where the amount to be shared out can potentially be increased for example.  The contract shouldn't be covering those areas in the first place - so, for example, your contract (rightly) doesn't define which pools you'll mine on as there IS a shared interest there for you pick whichever gives the most income.  In general anything which changes the basis on which payments to investors is calculated will have a conflict of interest - where it would be entirely inappropriate for unilateral changes to be allowed.

FWIW your clarification of how you intended to change from a PMB to a contract (where you guaranteed PMB minimum payments) definitely IS a change in favour of investors.  But why are you having the vote before you've finalised the new contract?  Get it all done at once THEN have the vote.

[furuknap]

More specifically, your hardware will generate some number of coins over its lifetime.  Some portion of those will go to your investors - and the rest to you.  It's therefore the case that any change in what investors will receive is going to have an opposite impact on what you receive (this is obviously a simplification).  It's thus impossible for you make decisions on their behalf - as you have an explicit conflict of interest.  That's why contracts for bonds/contracts should (in general) never be allowed to be changed other than unanimously as there's no shared interest between the issuer and the counter-parties.

Now there ARE exceptions to the above - areas where the amount to be shared out can potentially be increased for example.  The contract shouldn't be covering those areas in the first place - so, for example, your contract (rightly) doesn't define which pools you'll mine on as there IS a shared interest there for you pick whichever gives the most income.  In general anything which changes the basis on which payments to investors is calculated will have a conflict of interest - where it would be entirely inappropriate for unilateral changes to be allowed.

Actually, this is not quite the case with BFMines. All revenue from the mining operation goes to the benefit of contract holders. I get nothing, except from the proceeds of the contracts I hold myself (and like previously disclosed, I do hold contracts).

The surplus of the mining (the 15-20%) does not go to me, but is used to cover expenses, provide repairs or replacement hardware if required, cover unforeseen events, downtime, and so on.

I do not use this surplus to pay for backup hardware. I pay for that from my own funds and while that hardware is mining, I get the proceeds from that. Because I bear the responsibility of downtime with BFMines, however, it is in my best interest to use my own hardware as backup in case of prolonged downtime or catastrophic failure (until contracts can be repurchased).

If using my backup hardware is required, I intend to charge the cost of that (ie loss to my personal income) to the funds accrued from the excess capacity in BFMines, but beyond that, I get no other benefits than other contract holders have.

The net effect is that BFMines has 1.2mhs of power per contract, but that only 1.0 is paid out as dividends. I considered including this model in the original design, but it would complicate decision making and the 'cleanliness' of having just a contract for a certain hash rate so I opted to use the output of a fixed amount of hash instead.

FWIW your clarification of how you intended to change from a PMB to a contract (where you guaranteed PMB minimum payments) definitely IS a change in favour of investors.  But why are you having the vote before you've finalised the new contract?  Get it all done at once THEN have the vote.

The contract changes I'm putting to the vote now is the finalized contract to the extent possible. I don't know the details required to include all the planned changes. The changes I've described so far, however, are not the only ones on the schedule, so I'm clarifying my intent on how to handle those changes rather than wait for all details to be clear (which could take months, for reasons that will also become clear).

.b

[Deprived]

More specifically, your hardware will generate some number of coins over its lifetime.  Some portion of those will go to your investors - and the rest to you.  It's therefore the case that any change in what investors will receive is going to have an opposite impact on what you receive (this is obviously a simplification).  It's thus impossible for you make decisions on their behalf - as you have an explicit conflict of interest.  That's why contracts for bonds/contracts should (in general) never be allowed to be changed other than unanimously as there's no shared interest between the issuer and the counter-parties.

Now there ARE exceptions to the above - areas where the amount to be shared out can potentially be increased for example.  The contract shouldn't be covering those areas in the first place - so, for example, your contract (rightly) doesn't define which pools you'll mine on as there IS a shared interest there for you pick whichever gives the most income.  In general anything which changes the basis on which payments to investors is calculated will have a conflict of interest - where it would be entirely inappropriate for unilateral changes to be allowed.

Actually, this is not quite the case with BFMines. All revenue from the mining operation goes to the benefit of contract holders. I get nothing, except from the proceeds of the contracts I hold myself (and like previously disclosed, I do hold contracts).

The surplus of the mining (the 15-20%) does not go to me, but is used to cover expenses, provide repairs or replacement hardware if required, cover unforeseen events, downtime, and so on.

I do not use this surplus to pay for backup hardware. I pay for that from my own funds and while that hardware is mining, I get the proceeds from that. Because I bear the responsibility of downtime with BFMines, however, it is in my best interest to use my own hardware as backup in case of prolonged downtime or catastrophic failure (until contracts can be repurchased).

If using my backup hardware is required, I intend to charge the cost of that (ie loss to my personal income) to the funds accrued from the excess capacity in BFMines, but beyond that, I get no other benefits than other contract holders have.

That's a lot of waffle to totally miss the point.

Either the changes DO alter what investors get or they don't.

If you're saying they get extra but it doesn't come from you then where is it coming from?  Or was there some cash that would be sent to a null address in the old contract?  The surplus is used to cover costs that YOU have responsibility for - so anything coming from that IS coming from you indirectly (as YOU have to cover the costs - so if less gos to that from the surplus then more has to go to it from you).

And it isn't legitimate to have a motion where the content of the motion is hosted elsewhere and so able to be amended during or even after the vote.  The contract to be voted on should be posted in the motion OR cryptographically signed and the hash posted in the motion.

[furuknap]

That's a lot of waffle to totally miss the point.

Either the changes DO alter what investors get or they don't.

They don't. The contract states (and will state, barring undeniably beneficial updates) that investors get the mining output from 1mhs of Bitcoin mining power.

If you're saying they get extra but it doesn't come from you then where is it coming from?  Or was there some cash that would be sent to a null address in the old contract?  The surplus is used to cover costs that YOU have responsibility for - so anything coming from that IS coming from you indirectly (as YOU have to cover the costs - so if less gos to that from the surplus then more has to go to it from you).

How the asset is backed isn't really relevant to what contract holders get. I could be growing pot in my back yard to get funds for all the contract is concerned (sans the transaction fees and luck, of course).

I included the backing as part of the contract as an added insurance to contract holders that I have taken steps to ensure an operating margin so that there won't be any nasty surprises. Like I said, I designed this with the attitude of protecting contract holders.

I'm surprised you don't ask what happens to the surplus funds if or when the contracts terminate, however. To be pro-active, I'll answer it in any case and say that I don't want to discuss the details of that at this point.

And it isn't legitimate to have a motion where the content of the motion is hosted elsewhere and so able to be amended during or even after the vote.  The contract to be voted on should be posted in the motion OR cryptographically signed and the hash posted in the motion.

Agreed, I'll post the proposed changes here, and ask someone to quote it for reference. I realize that because this is a self-moderated topic, I can delete those quotes, so feel free to post the quote below in other threads or elsewhere for the record if someone feels that is required.

The proposed new contract is as such (I'll remove the note on rebranding and the stricken out use of PMB from the BTCT contract if approved).
 

Contract


Overview
 
BFMines is a perpetual mining bond (PMB) mining contract backed by physical hardware. The contract pays a dividend equivalent to 1 megahashes per second (mh/s) of mining power.
 
Note: The initial term used for this type of asset was perpetual mining bond, but as the term is somewhat misleading, I have rebranded it as a mining contract.
 
Please read the following article to understand what mining contracts are:
 
http://coin.furuknap.net/understanding-mining-bonds/
 
In summary, however, please note the following:
 1.This is a mining contract, not a share in a company. You receive no voting rights and no other income than the stated dividend.
 2.The mining contract is perpetual, which means it will continue to generate dividend until terminated following one of the below conditions. There is no defined termination date of the contract.
 3.The mining contract pays the equivalent of income from 1 mh/s. Any excess payments not explicitly stated in this contract is solely at the discretion of the operator and should not be expected.
 
A total of 100,000 contracts will be issued backed by no less than 120 GH/s of mining power. The excess mining power will be held in reserve to account for operational cost, hardware failure, or other problems. Revenue from the excess mining power will not be paid out to contract holders.
 
Each contract pays exactly 100% of 1mh/s of BTC mining power. All expenses related to the operation will be carried by the operator.
 
Changes to Contract
 
This contract may be updated at any time by the operator if it is to the reasonably undeniable benefit or of no consequence to contract holders. Changes that do not work in favor of existing contracts may be implemented only if the changes are accompanied by an offer to buy back contracts at the terms specified in this contract.
 
Operation and Buyback
 
The mine will operate perpetually and pay daily dividends, to be scheduled at or around the time of difficulty changes.
 
The term perpetual is unlikely for practical reasons, and as such, there exists provisions to close the contracts for one of the following reasons:
 1.The operator becomes incapable of operating the contracts over an extended period
 2.The overhead of operating the contracts becomes greater than its profits
 3.Permanent and irreparable damage to hardware
 4.The operator must close the contract for other reasons
 
If the contract must close for any of the above reasons, the operator or a duly appointed representative, in case the operator is permanently unavailable, can buy back contracts at no less than 110% of the average trading price at BTCT over the previous 7 (seven) days.
 
Please note that this buy-back is a right of the operator, not a duty. Any buy-back is solely at the discretion of the operator.
 
In any case of permanent and irreparable damage to hardware, the operator will pursue any means available to replace hardware as quickly as possible at no cost to contract holders. However, if replacement hardware cannot be obtained at reasonable costs, the operator may choose to suspend operation and dividends and start liquidation of the contract as explained above.
 
Pre-Release Terms:
 
Please note that these terms apply only until the mining hardware has been delivered. Upon delivery, these terms will be removed from the contract.

The contracts are backed by miners that have yet to be released. The scheduled release is September 2013.
 
All funds received as part of the IPO process at BTC Trading Corporation (BTCT) will be held in escrow until said mining hardware is delivered and made operational (the release date). In case the mining hardware fails completely, all funds will be repaid fully at the listing price of 0.004BTC/bond.
 
No dividends will be paid until delivery. On the release date, the IPO funds will be released from escrow.
 
Upon delivery, any excess capacity from the mining hardware will be used to pay contract holders additional dividends for six months. The additional dividends is intended to compensate contract holders for not receiving dividends until the mining hardware has been delivered.
 
Expansion of Operation
 
This contract will always be backed by real mining hardware or equivalent mining assets. In case of expansion of the contracts, those contracts will be offered at a rate not lower than the lowest trading price at BTCT over the previous 30 days. Any expansion will be backed by mining hardware or mining assets.
 
Caveats
 
Please be aware of the following before investing:
 
A mining contract decreases in value as Bitcoin mining difficulty climbs. The biggest return on investment will happen early in the contract’s existence and gradually decline as the Bitcoin mining climbs.
 
Mining contracts are not shares, they are effectively contracts where the mining operator mines bitcoin on your behalf, to be rewarded in dividends based on mining power. The price paid for a mining contract will under normal circumstances not be repaid so your sole income will be from the dividend paid daily.
 
Due to the buy-back clause of this contract, please be careful of paying too much for this mining contract, especially when there are sudden price spikes. The operator may choose to buy back contracts at 110% of trading price so if you pay more than this, you may theoretically lose anything you pay above that.
 
Pre-release only (will be removed once mining hardware is operational): This contract does not pay dividends until the release date. To compensate for this, the first six months of operation will give approximately 20% higher dividends depending on the final performance of the miner. In case the hardware fails completely, the contracts will be repaid for 0.004BTC per bond.