[BTC-TC] ET.DIFF: Future to speculate on next difficulty change

[eltopo]

The ET.DIFF assets are a construct of 3 securities to speculate on the next change in bitcoin mining difficulty.

ET.DIFF.FUTURE: Is an asset that only exists to be converted into ET.DIFF.LONG and ET.DIFF.SHORT
ET.DIFF.LONG: Is a bet that the next difficulty change will increase more than current market prices suggest
ET.DIFF.SHORT: Is a bet that the next difficulty change will increase less than current market prices suggest

As you may realize, the construct of ET.DIFF resembles the superb DMS assets by Deprived. It's an opportunity to offer investors an easy way to short a security without the issuer having to bet against his own investors.

I appreciate your feedback on ET.DIFF!

Contract

The ET.DIFF assets are a construct of 3 securities to speculate on the next change in bitcoin mining difficulty.

The contract for the 3 securities ET.DIFF.FUTURE, ET.DIFF.LONG and ET.DIFF.SHORT is the same.

ET.DIFF.FUTURE is a security that only exists to be converted into ET.DIFF.LONG and ET.DIFF.SHORT. After a difficulty change, ET.DIFF.FUTURE will be put up to sell at a price of 0.0204 BTC, 0.02 plus 0.0004 BTC management fee (2%). After buying ET.DIFF.FUTURE, Investors have to send their shares to the account ETOPS and will get back the same number of shares of ET.DIFF.LONG and ET.DIFF.SHORT. The NAV/U (Net Asset Value per Unit) of ET.DIFF.FUTURE is always 0.02 and is the same as the combined book value of ET.DIFF.LONG and ET.DIFF.SHORT.

While trading, ET.DIFF.FUTURE can be sold back to the issuer at a price of 0.02. After a difficulty change, every outstanding ET.DIFF.FUTURE (that was not converted to ET.DIFF.LONG and ET.DIFF.SHORT) gets a dividend of 0.02, followed by a force-buyback at a price of 0.00.

ET.DIFF.LONG is a security that speculates on the next difficulty change. ‘LONG’ in this case means, that the buyers estimation about the next difficulty change is higher than the current market prices of ET.DIFF.LONG and ET.DIFF.SHORT suggest. ET.DIFF.LONG can be bought directly or by buying ET.DIFF.FUTURE and selling ET.DIFF.SHORT.

After a difficulty change, ET.DIFF.LONG gets a dividend calculated in the following way:

((current difficulty - last difficulty) / last difficulty) / 100 * 4

• The current difficulty is the new difficulty after the change
• The last difficulty is the difficulty before the change
• 4 is a factor to quadruple the dividend, reducing the profit needed by the investor to break even, but it also introduces a cap on dividends at 0% difficulty increase at the bottom and 50% difficulty increase at the top

If difficulty increases by more than 50%, the dividend will be capped at 0.02 for ET.DIFF.LONG. In this case the dividend for ET.DIFF.SHORT will be 0.00.
If difficulty does not increase or decrease, the dividend will be 0.00 for ET.DIFF.LONG. In this case the dividend for ET.DIFF.SHORT will be 0.02.
The dividend is rounded to 8 decimal places.
After the dividend has been paid, there will be a force-buyback of all outstanding ET.DIFF.LONG at a price of 0.00.

ET.DIFF.SHORT also speculates on the next difficulty change. ‘SHORT’ in this case means, that the buyers estimation about the next difficulty change is lower than the current market prices of ET.DIFF.LONG and ET.DIFF.SHORT suggest. ET.DIFF.SHORT can be bought directly or by buying ET.DIFF.FUTURE and selling ET.DIFF.LONG.

ET.DIFF.SHORT is the direct opposite to ET.DIFF.LONG, as it gets all dividends that are not paid out to ET.DIFF.LONG.

After a difficulty change, ET.DIFF.SHORT gets a dividend calculated in the following way:

0.02 - dividend paid to ET.DIFF.LONG

• 0.02 is the NAV/U of ET.DIFF.FUTURE and the sum of all dividends to be paid out
• Dividend paid to ET.DIFF.LONG is the dividend paid to ET.DIFF.LONG

The dividend is rounded to 8 decimal places.

After the dividend has been paid, there will be a force-buyback of all outstanding ET.DIFF.SHORT at a price of 0.00.

Conversion of ET.DIFF.FUTURE

To converte ET.DIFF.FUTURE into ET.DIFF.LONG and ET.DIFF.SHORT, transfer ET.DIFF.FUTURE to the account ETOPS on BTC-TC. As fast as possible, the same amount of ET.DIFF.LONG and ET.DIFF.SHORT will be sent back to the sender (the process will be automated if possible).

The process after a difficulty change

In the 24 hours after the difficulty has changed, trading on all 3 securities will be halted, followed by the dividend payment to all outstanding shares (0.02 to ET.DIFF.FUTURE, and the corresponding dividends to ET.DIFF.LONG and ET.DIFF.SHORT according to the result of the dividend calculations). After the dividend payment is finished, all outstanding shares of the 3 securities will be bought back at a price of 0.00. After the force-buyback is finished, the trading of all 3 securities will be resumed and new shares of ET.DIFF.FUTURE will be put up at a price of 0.0204.

Important: The securities cannot be halted automatically. So after a difficulty change, the dividend payment to the securities will be known, but the trading will continue several hours until it will be halted manually. Every security bought at a price above the known dividend will result in a loss.

Risks

Third party risk: Investors have to trust BTC-TC and the issuer. Any malfunction or hack at BTC-TC or the possibility that the issuer might not be trustworthy and embezzle investors deposits could result in a total loss of the investment.

Caps on dividend payout: In the possible case, that difficulty increases more than 50%, the dividend for ET.DIFF.LONG will be capped at 0.02. Dividend for ET.DIFF.SHORT will be 0.00 and ET.DIFF.FUTURE will get 0.02. If difficulty does not increase or decrease, the dividend will be 0.00 for ET.DIFF.LONG. In this case the dividend for ET.DIFF.SHORT will be 0.02 and ET.DIFF.FUTURE will get 0.02.

All proceeds from the sales of ET.DIFF.FUTURE are held in the account ETOPS for the benefit of the holders of the ET.DIFF securities. The assets of the account can be seen at any time by going to https://btct.co/portfolio/frc5DKI= . The proceeds are held until a difficulty change, at which time they are used to pay the ET.DIFF.LONG, ET.DIFF.SHORT, and ET.DIFF.FUTURE dividends, and the remainder (the management fee) is paid to the fund manager. Any fees associated with maintaining or operating ET.DIFF are paid by the manager, and are not paid from the proceeds of sales.

To impede account hacks, the issuer account at BTC-TC uses 2FA.

Contract changes

The contract can be changed one-sided by the issuer every time after a force-buyback is done. The changes have to be announced on BTC-TC and bitcointalk forums at least 3 days before they take effect.

Blockchain errors or other unforeseen circumstances

If there are any problems to calculate dividends (like a broken blockchain), the issuer will do his best to calculate fair dividends, based on last market prices or the average of the last 3 difficult changes. The decision about the calculation is up to the issuer.

Examples

Difficulty changes from 86,933,018 to 111,111,111:

Dividend for ET.DIFF.LONG:

((111,111,111 - 86,933,018) / 86,933,018) / 100 * 4 = 0.01112493

Every outstanding ET.DIFF.LONG would get a dividend of 0.01112493.

Dividend for ET.DIFF.SHORT:

0.02 - 0.01112493 = 0.00887507

Every outstanding ET.DIFF.SHORT would get a dividend of 0.00887507.

The combined dividend payout for ET.DIFF.LONG and ET.DIFF.SHORT is always 0.02.

End Contract

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[eltopo]

FAQ

Q: How do you “read” the market prices to recognize the estimated difficulty change by the market?

A: If you want it precisely, you have to put the prices in the suitable formula. If you want a roughly estimate, take the market price of ET.DIFF.LONG, divide it by 2 and multiply it by 100 (a market price of 0.01 for ET.DIFF.LONG would estimate a difficulty increase of 25%: 0.01 / 4 * 100 = 0.25 = 25%)

Q: Why do you pay a dividend followed by a force buyback of 0.00 instead of simply buyback at the right price?

A: Because there are no fees to be paid this way. Buyback fee is 0.2%, and 0.2% of 0.00 is… 0.

Q: Where can I view the public portfolio and account balance?

A: Here: https://btct.co/portfolio/frc5DKI=
The account balance should always be higher than (outstanding ET.DIFF.FUTURE + outstanding ET.DIFF.LONG) * 0.02

Q: So you think you can create a security with your rather short posting history, without a published real name and an improvable english?

A: Yeeeeeees

[eltopo]

Dividend payout scheme depending on difficulty change:

Code:

Diff change	DIVIDEND LONG	DIVIDEND SHORT	SUM (DIV LONG + DIV SHORT)
<= 0%		0		0.02		0.02	
5%		0.002		0.018		0.02
10%		0.004		0.016		0.02
15%		0.006		0.014		0.02
20%		0.008		0.012		0.02
25%		0.01		0.01		0.02
30%		0.012		0.008		0.02
35%		0.014		0.006		0.02
40%		0.016		0.004		0.02
45%		0.018		0.002		0.02
>= 50%		0.02		0		0.02	

Calculation based on following formula:

Dividend ET.DIFF.LONG = ((current difficulty - last difficulty) / last difficulty) / 100 * 4

Dividend ET.DIFF.SHORT = 0.02 - dividend for ET.DIFF.LONG

[coco23]

I like the idea, much more appealing than the other difficulty futures out there!

So you basically reset the whole thing after each difficulty change (so every 1.5-2 weeks).
Depending on how it goes it would be nice to see similar contracts for longer period of time as well (several months).

[Progressive]

What about the 0.2% fee you pay for selling the ET.DIFF.FUTURE? Are you covering it from your management fee?

[eltopo]

I like the idea, much more appealing than the other difficulty futures out there!

So you basically reset the whole thing after each difficulty change (so every 1.5-2 weeks).

Right.

Depending on how it goes it would be nice to see similar contracts for longer period of time as well (several months).

If demand would be there, I could think about it.

What about the 0.2% fee you pay for selling the ET.DIFF.FUTURE? Are you covering it from your management fee?

Yes

[Progressive]

Will there be a notification before the start of this security? (e.g. 24h before) Or will you be selling the futures as soon as the security is approved?

EDIT: Could you also provide some reasons why to trust your pseudonym? What does prevent you from withdrawing and disappearing with all the funds?

[eltopo]

Will there be a notification before the start of this security? (e.g. 24h before) Or will you be selling the futures as soon as the security is approved?

Yes, there will be a notification long enough before trading starts.

EDIT: Could you also provide some reasons why to trust your pseudonym? What does prevent you from withdrawing and disappearing with all the funds?

There is no reason to trust me, and there's nothing that prevents me from running with the funds. The portfolio and wallet will be public, that's all I can do (just like any other issuer).

[Progressive]

that's all I can do (just like any other issuer).

Maybe you could ask burnside to disable bitcoin withdrawals from the ETOPS account (you could only withdraw with burnside's asistence). I think he has offered something similar before.

[twentyseventy]

I like it! Great idea, eltopo!

[eltopo]

that's all I can do (just like any other issuer).

Maybe you could ask burnside to disable bitcoin withdrawals from the ETOPS account (you could only withdraw with burnside's asistence). I think he has offered something similar before.

That would be ok with me. I'll contact him about it.

[FloatesMcgoates]

Excellent idea, my only request is that please for the love of god use an automated transfer bot. I remember the days before Deprived started using the bot you had to sit and hope that he got online or whatever before a profit opportunity slipped.

[eltopo]

I'm on it, at least as I don't wanna do every transfer by hand 

[eltopo]

It seems there are no further questions about the asset or contract, so I will register it on BTC-TC tomorrow.

The transfer bot is tested right now and works as intended so far.

[Rannasha]

The transfer bot is tested right now and works as intended so far.

Which one do you use?

[eltopo]

My own 

[eltopo]

The securities are now unlocked on BTC-TC and waiting for approval by LTC-GLOBAL voters.

[Rannasha]

Great, it will be nice to have more future-like securities to speculate with

I did notice a minor typo in your contract:

0.01 + (current difficulty - last difficulty) / last difficulty) / 100 * 2

You have 1 opening bracket and 2 closing brackets.

[balanghai]

Great so will it only cover the next difficulty or will it include some other factors?

[Rannasha]

Great so will it only cover the next difficulty or will it include some other factors?

It's only the difficulty that matters. With each difficulty-adjustment, dividends are paid out according to the formula posted (basically: the higher the difficulty increase the higher the dividend for ET.DIFF.LONG and the lower the dividend for ET.DIFF.SHORT) and all shares are removed. At this point, the thing starts from scratch again, and people can trade to predict the next difficulty increase.