Bitcoin Difficulty Derivative (BDD)I'm very pleased to announce Bitcoin Difficulty Derivative, which will be listed on Havelock Investments under B.MINE, B.SELL, and B.EXCH.
BDD allows users to speculate on the future difficulty of Bitcoin mining via a Mining-bond-like contract (B.MINE) and a contract that is 'short' of the value of B.MINE (B.SELL).
Those of you that were active on BTC-TC may remember
Deprived's DMS asset, to which this is similar, but not identical. I enjoyed trading DMS, so I felt compelled to bring a version of it back to the market. I greatly respect Deprived; however, he has nearly completely disappeared in the past few months. I wish him the best and hope that he is well but I do want to keep the idea of a difficulty speculation contract alive. To be clear,
this asset is in no way related or connected with Deprived or DMS, this is a totally separate contract with its own overview and contract-holders.
Bitcoin Difficulty Derivative is different from, and I believe improved over, DMS in the following ways:
- The funds held in reserve for dividends will not be invested whatsoever. I understand the reason why Deprived instituted investment for the benefit of SELLING holders, but it clearly led to quite a few problems with liquidity and a near-miss with Coinlenders' default
- All of the BDD's funds will be held in escrow by Havelock - I will not have access to the funds whatsoever. This greaty reduces counterparty risk, as I cannot simply run with the funds. There is still always the risk of Havelock's future insolvency, but I do not regard this as a significant risk
There is no Management Fee. DMS included a 3% management fee to compensate Deprived for his time to run the fund. I have worked out an alternate method of compensation with Havelock A Management Fee of 2% is included, lower than DMS' 3% Management Fee.- There will be a target of 200 days of dividends, not 400 days of dividends as with DMS. I believe that this will allow for a bit shorter time horizon before reset, which brings up the next point:
- There is a definitive end-point. DMS never had an actual end-point in the case of continued Difficulty increases. BDD does have an 'End-Game' for both Difficulty increases and stagnation/decreases.
Please see the overview below for a detailed overview of the set of contracts. This overview is subject to change indefinitely.
Bitcoin Difficulty Derivative (BDD) is a set of three distinct linked contracts, B.MINE, B.SELL, and B.EXCH, that allows users to speculate on the future of the Bitcoin Network Difficulty.
They are listed on Havelock Investments as B.MINE, B.SELL, and B.EXCH respectively.
B.MINE acts as a 5 GH/s (5 GigaHash per second) Mining Bond
B.SELL is a bet that buyers will overvalue B.MINE
B.EXCH is the contract that can be purchased to receive a BDD Pair (1 B.MINE and 1 B.SELL)
OverviewBDD exists to allow users to speculate on the future of the Bitcoin Network Difficulty (Difficulty) via the trading of the value of theoretical Bitcoin mining equipment.
In reality, Bitcoin mining equipment’s value is derived from the amount of Bitcoin that the mining equipment will produce over its useful lifetime. The amount that the equipment’s useful lifetime is normally considered to cease once it no longer mines enough Bitcoin to pay for its power costs.
However, in order to determine the value of Bitcoin mining equipment in advance, foresight of future Bitcoin Network Difficulty changes would be required. Since the Difficulty changes based on the computation power of Bitcoin miners in aggregate (the Network Hashrate), and since the aggregate computation power of Bitcoin miners is constantly in flux, it is practically impossible to estimate Difficulty changes with precision over a significant time period.
BDD, therefore, allows users to either purchase a contract that pays dividends as if they own Bitcoin mining equipment (B.MINE) or to, essentially, short the value of a B.MINE contract, believing that the market value of that contract is overvalued (B.SELL). The amount of B.MINE and B.SELL on the market will always be equal, as the only method of procuring ‘new’ contracts of either B.MINE or B.SELL is to purchase them as a pair from the Manager (B.EXCH).
The Manager will only determine the value of B.EXCH, which is set at the NAV/U (Net Asset Value per Unit) plus 3%. The Manager will only issue equal pairs of B.MINE and B.SELL in exchange for B.EXCH. Only the holders of B.MINE and B.SELL will determine the price of those contracts on the open Market.
B.MINE
B.MINE allows its holder to receive daily dividends of the theoretical mining output of a 5GH/s Bitcoin miner. Dividends will be paid to holders of B.MINE at 12:00PM Eastern Time each day.
For an individual who wants to enter the Bitcoin mining space, purchasing B.MINE has the following advantages over purchasing a physical Bitcoin miner, or a miner-backed security:
• Mining payouts start immediately – there is no pre-order or shipping delay
• Since the payout is calculated via formula instead of on actual mining hardware performance, there are no mining pool fees, no risk of hardware failure, no risk of power outage, no risk of mining hardware underperforming its specifications, and no electricity bills
• Dividends are paid daily and not subject to minimum dividend payment limits
• B.MINE may be sold at any time into the Market for the Market Price, provided that there are buyers for it
Buyers can purchase B.MINE in one of two ways:
1. Purchasing B.MINE on the open Market from another user, or
2. Purchasing B.EXCH; exchanging it for a BDD Pair (1 B.MINE and 1 B.SELL); and selling the B.SELL on the open Market
B.MINE’s daily dividend payout is calculated using the following formula:
B.MINE Hash Rate * Block Reward * 86400 * ((65535 / 2^48 )/Difficulty)
B.MINE Hash Rate is the set hash rate, in H/s (hashes per second) of B.MINE. This is set at 5GH/s (5,000,000,000 H/s)
Block Reward is the Bitcoin Network Block Reward for the current Difficulty. This is currently at 25 BTC per Block and will remain so until about sometime during 2016. However, When the actual Bitcoin Network Block Reward halves, this value will halve as well.
86400 is the number of seconds in a day, which is relevant because Bitcoin mining computation power is measured in hashes per second (H/s)
65535 / 2^48 is the constant which is divided by Difficulty to produce the likelihood of producing a Block in a single hash
Difficulty is the Bitcoin Network Difficulty at 12:00 PM Eastern Time on the day that dividends are paid out
B.MINE and Difficulty
Bitcoin Difficulty Derivative’s goal is to always keep 180 days (six months) worth of daily dividends at the current Difficulty in reserve for B.MINE. To provide a bit of a buffer, BDD aims to keep 200 days of daily dividends in Reserve (20 days in excess of the 180 day goal). The formula for calculating B.MINE’s dividend payout is based partly upon the Bitcoin Network Difficulty (the Difficulty). As the Difficulty changes, the fund’s target Reserve will change proportionally.
If the Difficulty increases then, at the Difficulty change, the total capital required to hold 200 days of B.MINE’s dividends will fall. If Difficulty falls, the total capital required to hold 200 days of B.MINE’s dividends will rise. If difficulty increases, a 5GH/s miner would pay out less in daily dividends; If difficulty falls, a 5GH/s miner would pay out more in daily dividends.
B.SELL
Holding B.SELL allows the holder to, in essence, short the value of B.MINE. For a comparison, imagine that a Bitcoin user holds 5GH/s miner in their hand. They have a calculation to make here – would it be more profitable to mine with the equipment or to sell it to someone else?
This calculation would depend on two factors:
1. How much Bitcoin the user thinks that the miner will mine over its useful lifetime, and
2. What people are paying to purchase a comparable 5GH/s miner
A rational decision would be: I believe that this miner will mine X amount of BTC over it’s lifetime, but people are buying this miner for Y amount of BTC on the market. Whichever amount is greater (X or Y; the mining value versus the sale value), the user would choose. In this example, the user has determined that the amount that people are paying for the miner (Y) is overvalued, so he will sell that miner.
Of course, no one can know how much a 5GH/s miner will mine over it lifetime; the user needs to do his own math and decide what he believes will happen with the Difficulty in the future.
Buyers can purchase B.SELL in one of two ways:
1. Purchasing B.SELL on the open Market from another user
2. Purchasing B.EXCH; exchanging it for a BDD Pair (1 B.MINE and 1 B.SELL); and selling the B.MINE on the open Market
B.SELL and Difficulty
Holders of B.SELL believe that B.MINE is overvalued by the Market. As mentioned in ‘B.MINE and Difficulty’ above, the amount of capital required in reserve for B.MINE changes proportionally with the Difficulty.
At each Difficulty change, the Reserve of 200 days of B.MINE daily dividends will be recalculated. If the funds on hand per unit (at Net Asset Value per Unit, or NAV/U) exceed 200 days of B.MINE daily dividends (the Reserve), then a dividend for this surplus amount will be issued proportionally to B.SELL.
The total amount of units for calculating NAV/U is the total outstanding number of B.SELL or B.MINE units (there will be an equal number of units outstanding).
For example:
In Period 1, Difficulty is 2,514,532 and B.MINE is paying out 1 BTC per day. 200 Days of B.MINE daily dividends is 200 Days * 1 BTC = 200 BTC, so the fund needs to hold in Reserve 200 BTC.
At the next Difficulty change, for Period 2, the Difficulty increases 20% to 3,017,438.
At each Difficulty change, B.MINE’s daily dividend is recalculated. Since the formula to determine B.MINE’s daily dividend moves proportionally with the Difficulty, a 20% increase in Difficulty would cause B.MINE’s daily payout to decrease by 16.666% (as difficulty increases, miners generate less BTC) to 0.8333BTC per Day.
200 Days of B.MINE daily dividends, at the new Difficulty, is 0.8333BTC * 200 = 166.666BTC.
For Period 1, the fund held 200BTC in reserve. Now, for Period 2, the fund is only required to hold 166.666BTC on hand, leaving a surplus of 33.333… BTC (200BTC – 166.666BTC = 33.333BTC).
B.SELL contracts would then be issued a proportional dividend of the 33.333BTC surplus, as those funds are no longer required to be held for B.MINE’s 200 days of daily dividends.
If the funds required for B.MINE’s new 200 days of daily dividends do not leave a surplus (due to Difficulty stagnation or decrease), then B.SELL will not receive a dividend for that Period (nor will B.EXCH).
Example of the Effect of Difficulty Change on Fund Reserves:
20% Difficulty Increase
No Difficulty Increase OR Difficulty Decrease
B.EXCH exists to provide a means through which B.MINE and B.SELL can be distributed into the market in equal amounts without being sold directly by the Manager. B.MINE and B.SELL must always be issued in equal amounts, and remain in equal amounts outstanding, to ensure that each B.MINE contract is backed by the funds of a B.SELL contract.
A user can purchase B.EXCH from the Fund Manager for the NAV/U (Net Asset Value / Unit) plus 3% on the Market. The 3% surcharge breaks down into 2% as a Management Fee paid to the Manager, .4% to cover the Exchange Fee assessed by Havelock Investments on all sales on the site, and .6% back to the fund itself. The Fund Manager may issue an unlimited number of B.EXCH into the Market via direct sales to users on the Market, but only at the NAV/U + 3%. Once B.EXCH is purchased by a user, the exchange will automatically buy back the EXCH contract(s) at zero value and issue one B.MINE contract and one B.SELL contract (a BDD Pair) for each B.EXCH contract purchased. The user can then sell or hold one or both of the contracts.
The Period NAV/U is calculated at the beginning of each Period, which begins after a Difficulty change. The Manager will also provide a Daily Published NAV/U on the Bitcointalk thread. The NAV/U is calculated by dividing the total assets of the fund by the total number of issued contract pairs (number of B.SELL or B.MINE issued).
B.EXCH Buy-Back
The Manager will buy back equal pairs of B.MINE and B.SELL at the last Daily Published NAV/U less 2%.
This buy-back provides an opportunity for arbitrageurs to profit if the Market Price for both B.MINE and B.SELL are too low, as they can buy both contracts on the Market and then send them to the Manager for redemption at the NAV/U less 2%
To sell back a BDD Pair, simply send an equal number of B.SELL and B.MINE to the Manager –
bitcoinderiv@gmail.com . After the pair is received, the Manager will buy them back for the amount described above.
Bitcoin Difficulty Derivative End-Game
There are two possible end-game outcomes for BDD:
BDD End-Game via Increase
The first possibility is that Difficulty continues to increase and the daily dividend payments become smaller and smaller as time passes. However, at some point, the dividends will become too small to pay out in any meaningful amount. In the event that the fund Reserve (200 days of dividends) is calculated after a Difficulty increase to less than 0.0002 BTC (0.2 mBTC) per unit, then each B.MINE contract will be bought back (forced) by the Manager for 200 Days of Dividends at the new daily dividend rate.
B.SELL contracts will be bought back (forced) by the Manager for the proportional value of the excess capital (total excess capital after B.MINE buyback divided by total B.SELL contracts outstanding).
Example: It is determined that, after the Difficulty change, the NAV/U is 0.00023 BTC and that 200 days of daily dividends (the Reserve) is 0.00017 BTC.
Since the Reserve is less than 0.0002 BTC, all B.MINE will be bought back for 0.00017 BTC each (200 days of dividends at the current rate). The excess per unit, 0.00006 BTC, will be paid out to B.SELL contracts when they are bought back.
BDD End-Game via DecreaseThe second possibility is that Difficulty stagnates or decreases and the fund Reserve is deficient (no longer holds 200 days of dividends at current Difficulty). In this scenario, B.MINE will continue to receive daily dividends until the fund’s capital is exhausted. If the difficulty continued to decrease or stagnate, B.SELL would receive no further dividends and all B.SELL contracts would be bought back (forced) for no value after the fund’s capital is exhausted (as all funds would have been paid out to B.MINE).
In cases of changes between increase and decrease/stagnation in Difficulty, the fund’s Reserve will be the determining factor as to whether B.SELL receives any dividends. There must be in excess of 200 days worth of current B.MINE dividends for B.SELL to receive a dividend.
Important Notes and Addendums
All Fund Held In Escrow by Havelock
Havelock Investments will hold all funds in escrow. The Manager CANNOT withdraw funds from the Manager account to an external BTC address, nor should he need to in any case, except for closure of the Exchange.
Fund Initialization
To begin the fund, the Manager will issue B.EXCH contracts at a value of 210 days of dividends at the current Difficulty. This addition of 10 days of dividends will provide a small capital buffer in case of slight Difficulty stagnation / decrease before the first fund Difficulty change calculation.
BDD Risk Factors
It is important to note that none of the three contracts offer
any guarantees of return or value.
B.MINE will pay out the equivalent of a 5GH/s miner each day up until the BDD End-Game. At the End-Game, either B.MINE’s dividends will have decreased to below the minimum threshold (0.0002 BTC) due to Difficulty increase, or the fund’s reserves will be exhausted due to Difficulty stagnation / decrease. A true physical 5GH/s Miner would instead mine until the user sells it or until it is otherwise disposed of.
B.SELL is similarly susceptible to Difficulty stagnation or decrease. If the Difficulty does not increase, or decreases over a long enough time period, there will be no further dividend payouts to B.SELL until these contracts are bought back at no value. B.SELL holders must remember as well that, in the End-game via Increase, B.MINE holders will receive the fund Reserve (200 days of dividends) as a final payout.
Difficulty Increases and Time
Dividends will be paid at 12:00PM Eastern Time daily, based upon the Difficulty at that time. In cases of Daylight Savings Time or any other time changes / discrepancies, 12:00PM in New York City, New York, USA will be the prevailing time.
Dividend Payout Times
All reasonable care will be taken to pay out dividends on time. In the event that the Manager is available to pay out dividends on time, for any reason, then dividends will be paid out as soon as possible afterwards. The holders of the contracts are entitled to receive dividends at the time that the Manager pays the dividends, not at the scheduled time at which dividends are normally paid.
Blockchain Forks / Errors / Roll-Backs
In the event that there is an error with the Bitcoin Network Blockchain (Blockchain), a Blockchain fork, Blockchain roll-back, or other issue that affects the Bitcoin Network Difficulty, the Manager will have discretion over what Difficulty is used to calculate dividends and NAV/U.
Contract / Calculation Discrepancy
In the event of any discrepancies in this contract or the calculations within, the Manager will perform his duties and calculations as best possible in the spirit of the contract. In cases of B.MINE versus B.SELL, the calculations will most likely be to the benefit of B.MINE, as those contract dividends are the crux of this contract.
Immediate Closure / Exchange Shutdown
In the very unlikely case that the Exchange upon which BDD is listed must cease operations, shut down, or otherwise does not provide sufficient functionality to operate the fund, the Manager, at his sole discretion, may either re-list on another Exchange or take the contract off-exchange to a direct format.
VotingIn the case where the Manager, in his sole discretion, decides that a change must be made that could affect the Fund’s payouts to B.SELL, the manager may call a vote. All holders of sell will be allowed one vote per B.SELL contract that they own at the time of the vote. The vote will be conducted in a manner decided by the Manager.
EDIT:
1/24/2014 1040AM ET: Updated example SELL/EXCH Dividend Payout calculation error - Thanks Rannasha!
1/29/2014 1000PM ET: Updated Buy-back method and added Manager's email address
1/30/2014 1244PM ET: Updated EXCH exchange mechanism - users no longer need to send contracts to the Manager
2/1/2014 0603PM ET: Removed old EXCH exchange mechanism vestiges
2/4/2014 1000AM ET: Removed additional old EXCH exchange mechanism verbiage, updated for clarity of BDD-End Game via Decrease
3/13/2014 0750AM ET: Updated EXCH Buy-Back calculation to 98% of Daily NAV/U
4/17/2014 1200PM ET: Updated to add Management Fee and reference to Auto-EXCH (Management Fee changes eff 4/18/14 12PM ET)
6/04/2014 0800PM ET: Updated verbiage regarding Fund Manager and contracts, Added Voting mechanism
BDD FAQs and Other Relevant FYIsHow is the Dividend Calculated?
Over the long term, B.SELL will decrease no matter what. This reason for this is that it is matched 'against' B.MINE. If the difficulty continues to increase as it has, there will be excess capital left over after each difficulty period. This capital will be paid out to B.SELL in the form of a dividend. However, the market value of B.SELL decreases by exactly the amount of that dividend - once that dividend is paid, the fund has less capital on hand, so the Net Asset Value of the fund decreases.
If the difficulty stagnates or decreases, the likelihood that all of the fund's capital will be paid out to B.MINE is high, so B.SELL would decrease significantly.
B.SELL is a bet that people will over-pay for B.MINE, which acts as a 5GH/s mining bond - it pays out a certain dividend per day based on the Bitcoin Network Difficulty.
B.SELL may increase over the short term as it becomes more clear what this period's Difficulty Change is going to look like - right now it looks as if the Difficulty is about to increase about 21% in about three days (
https://bitcoinwisdom.com/bitcoin/difficulty).
So, likely sometime on Saturday, the Diff will increase to an estimated 6,067,506,227 - let's use this as an example for the below.
So, if the Difficulty increased to exactly, 6,067,506,227 we would need to calculate what B.MINE would be paying out daily.
Using our formula to calculated B.MINE's Daily Dividend, we get:
5 GH/s in hashes per second * 25 BTC per Block * Number of Seconds per day * (Probability Constant that a hash will generate a block / divided by difficulty)
5000000000 * 25 * 86400 * ( ( 65535 / 2^48 ) / 6067506227)
Plug these values in and we get 0.00041442 (round to 8 digits, always round down) (
http://www.wolframalpha.com/input/?i=5000000000+*+25+*+86400+*+%28+%28+65535+%2F+2%5E48+%29+%2F+6067506227%29).
So, we know that at that new difficulty B.MINE would pay out .00041442 per Day. The fund is required to keep 200 Days of capital on hand in Reserve, so 200 * .00041442 = .082884
So, the new Reserve is .082884, that's what the fund is required to have on hand.
Right now, the NAV/U (Net Asset Value per Unit) is .09611805 as I just reported. We still have three more days of dividends to pay at the current rate, which is 0.00050221 per day. So, the NAV/U less the dividends to be paid is .09611805 - .00050221 * 3 = .09461142
So, we can estimate that our NAV/U will be .09461142 at the end of the period. To calculate the SELL dividend, just subtract the New Reserve from the estimated NAV/U:
.09461142 - .082884 = .01172742
.01172742 would be the upcoming SELL dividend based on the new Difficulty that we used.
I may have gotten too far into how to calculate the dividend here, but it's a good resource for anyone wondering how to do so.
No, and here is why:
I think this is a good time to remind everyone (or make aware to those that haven't done the math) that the Difficulty needs to increase around 6.5% in order for there to be a SELL dividend issued. I say 'around' since it will be somewhat less if there are significant sales of EXCH, which increase the NAV/U.
This is because the Period is started with 200 Days of Dividends and .5% is paid out each day in dividends to MINE (1 Day / 200 Days = .5%). So, at the end of a 10-Day Period, there are only 190 days of dividends remaining at that ending Period's Difficulty.
If there is a Difficulty increase of greater than about 6.5%, then the necessary Reserve of 200 day of dividends has decreased enough to make this a non-issue. If the Difficulty has increased at less than that approximate rate (or stayed the same, or decreased), then the required Reserve is higher than the actual Reserve and there will be no SELL dividend.
TL;DR It's possible that there could be a Difficulty Increase, but no dividends will be issued to SELL for that Period due to the paid Dividends outstripping the decrease brought on by the small Difficulty Increase. But you really should be reading the whole explanation.
