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Author Topic: [GLBSE] PureMining: Infinite-term, deterministic mining bond  (Read 34906 times)
Meni Rosenfeld
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February 22, 2012, 10:11:09 PM
 #1

tl; dr: Every PureMining bond entitles the holder to coupons in the value of the average Bitcoin mining output (w/o tx fees) of 1 MH/s, forever. So far 20000 bonds have been issued, ~16000 have been outstanding for a while and now recalled.

Introduction. Mining assets are common on GLBSE. This is understandable given the need to match investors who have funds to stake on their belief in the long-term viability of mining, with people who have the opportunities and skills to operate mining hardware efficiently.

Such assets usually come in the form of shares in a company which owns mining equipment, and which pays dividends based on the actual output of this equipment, minus any operating costs. I believe that this model entails too much involvement of investors in the details of the company's operations, with the following disadvantages:
1. Complexity. Valuating shares of such a company requires an analysis of its particular costs and risks.
2. Competence. This requires reliance on the operator's competence in utilizing his equipment effectively, which is difficult to determine.
3. Honesty. Because the exact output of a remote operation is difficult to verify, the company could easily falsify their data to obtain more than their fair share of the revenues, without risking damaging the reputation of the people behind it.

PureMining offers to people who want to invest in mining, without physically purchasing and operating hardware, a simpler, "purer" alternative to this model. It is a bond asset for which the holder gets a steady payment equivalent to the mining output of a certain hashrate (1 MH/s per bond). The amount of coupons due can be deterministically and easily verified from blockchain data (which is external to the issuer and publicly available).

Coupons. Coupons for a bond over a period of time emulate the statistical expectation of the mining output of 1 MH/s (MegaHash per second) over this time period - coinbase only, no transaction fees, merged mining or alternative uses of hashing are considered. The exact procedure for the calculation is as follows.

Coupons are handed out on a schedule based on chunks of 336 blocks. The number 336 was chosen because it is the GCD of 2016 and 210000, meaning that within each such chunk, the network hashed at a consistent difficulty and block reward, so the average output of 1 MH/s over this time period can be easily calculated by multiplying the time span, the hashrate, the chance for a hash to be a block, and the block reward.

Every block with height 1 less than a multiple of 336 is a key block. Whenever a key block is found and confirmed by 5 more blocks, its vital data is recorded and used in the calculation of the coupon for the period between the time the previous key block was found and the time this key block was found. Letting

T = Difference, in seconds, between the timestamps of this key block and the previous key block.
B = Block reward (new generated coins) in this block
D = Difficulty of this block

The coupon is (T*B*10^6)/(D*2^32) per bond, rounded to within a reasonable numerical precision.

The time of physically paying out the coupons via the GLBSE mechanism is on a best-effort basis. It will usually be no more than 36 hours after a key block is found. If a period of unavailability is expected, I will make an effort to announce it in advance. When available I will pay coupons equal to the sum of due coupons for all unpaid key blocks.

Note that the total coupons in a time period are not subject to variability due to the number of blocks found. If blocks are generated more rapidly than usual, the next coupon will be paid sooner but will be proportionally smaller due to the smaller timespan. The blocks are used only as a reference for the difficulty and coinbase parameters the network worked on at a given time.

Information on key blocks and due coupons is available at http://bitcoinpuremining.com. This website is informational only and is in no way binding.

The first key block for which coupons will apply has height 168335.

Expiration. The bond does not expire. Coupons according to the described schedule are due forever if the bond is held that long. In practice, due to advances in hardware technology and diminishing coinbase, the prospects of the bond many years into the future are of little practical current value. But the infinite term gives a more consistent framework to think about the bond, and allows persistence of the asset by obviating the need for different assets for different times.

One way the bond can expire is if calculations of SHA-256 can no longer be used for mining Bitcoin. Since the bond is defined as corresponding to one million double applications of SHA-256 per second, and there is no universal way to translate this performance to other computations, the bond will become worthless in this scenario and no longer entitle for any coupons. It is highly unlikely that SHA-256 will be eschewed completely in the foreseeable future.

If GLBSE where the asset is traded ceases operation, an effort will be made to either call the bonds or replace them with a privately issued equivalent.

Also see calling below.

Calling. This is a callable bond. To limit my potential losses in case unforeseen financial, technical or legal issues arise, I maintain the right to buy back the asset, at a price per bond equal to 20% above the highest price it was traded at over the last month.

I believe that the call terms are generous enough to bondholders so that it poses very little risk of loss, and hence, should not greatly subtract from the bond's value.

Comparison with hardware purchase. When valuating the bond, investors should consider the following advantages over purchasing mining hardware of equivalent hashrate:
1. No electricity costs. For large-scale investments, no need for special facilities which can supply unusual power draw.
2. No effort spent on purchasing, setting up and maintaining the equipment. No physical space occupied by equipment, and no heat or noise generated.
3. No variance, pool fees, invalids, downtime or losses due to improperly run pools.
4. Ability to scale down the investment, as much as a single MH/s.
5. No dealing with hardware failures, which involve additional hassle at best, renewed purchase at worst.
6. Friction-free way to exit the investment via selling on GLBSE.

The following disadvantages should also be considered:
1. No income from transaction fees. These would have greatly complicated verification of due payments. Tx fees will also be for the most part insignificant for the foreseeable future, and whatever significance they have can be fairly easily estimated and entered into the valuation.
2. No income from merged mining or alternative uses of hardware (this includes exit strategies for a scenario where Bitcoin fails or ceases to use SHA-256).
3. No ability to control what goes in a block. Do note however that I have no intention to knowingly condone double-spending or DoS attacks on the Bitcoin network.

ROI projections. At the current network parameters (as of Jun 24 2012), the following ROI values can be calculated:
Issue price - 0.28 BTC
Difficulty - 1726567
Block reward - 50 BTC
Daily return - 582.6 uBTC (0.2081% ROI) = 86400 * 50 * 10^6 / (1591075 * 2^32)
Weekly ROI - 1.457% (linear, non-compounded) = 7 * 0.2081%
Monthly ROI - 6.347% (linear, non-compounded) = 30.5 * 0.2081%
Annual ROI - 112.60% (compunded weekly) = 1.01457 ^ (365/7) - 1

This means that, if the network parameters remain unchanged, the investment will more than double in a year. Of course, the parameters will not remain unchanged, so this value will not be fully realized. By investing in this bond, you are essentially betting that the difficulty will not rise too much.

Applicability for other miners. Although I am the issuer of this bond, its existence could benefit anyone who wishes to raise funds for a mining operation and share some of the risk. Such a person could borrow PureMining bonds, committing to return them at a later time, plus interest, plus any coupons due over the loan period. Selling the bonds will both supply funds and hedge the risk; should the profitability of mining decrease, so will the price of the bond, and hence the cost to pay back the obligation. A market allowing selling such bonds on margin would further facilitate this.

Trustworthiness. I, Meni Rosenfeld, am issuing the PureMining GLBSE asset, and committing to fulfilling the terms of the bond as described. I am a veteran of this forum and other Bitcoin communities, and own a Bitcoin business. I am using my real name which can be linked to my identity via my extensive online presence, and I have verified my identity with GLBSE.

My obligations are backed up by a partnership with Inaba in which I will purchase mining hardware and he will run them for me in his datacenter. So far I have ordered 13 BFL single units and half ownership in a BFL mini-rig. I have included the call clause to allow me to live up to the terms should the worst happen. I have also instructed my family how to handle the bond in case something happens to me.

The only way I can conceive not honoring the terms is if a malicious cracker hacks into my GLBSE account and issues new bonds on my behalf. The obligation thus created is arbitrarily high and there is no way to commit to it (of course, if the damage is within reason I will absorb the losses). I am using a strong password for GLBSE and keeping my computing environment reasonably secure, but cannot absolutely preclude this scenario. Do not buy newly issued shares unless I announce them on the forum, and in case of suspicious activity you would do well to verify via additional channels. Going forward I will look for robust ways to limit the plausibility of this scenario.

Contract appendix. The asset comes with contractual terms to which I wish to commit cryptographically, but which are too long for the asset contract. The next post will list these terms. Their hash, a7a7e87fe219bed1c4e6cc5b19d42fa607781abe8944fb305eea5c482480f956, is included in the contract.

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February 22, 2012, 10:11:55 PM
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Coupons are computed as follows.

Every Bitcoin block with height 1 less than a multiple of 336 is a key block. Whenever a key block is found and confirmed by 5 more blocks, its vital data is recorded and used in the calculation of the coupon for the period between the time the last key block was found and the time this key block was found. Letting

T = Difference, in seconds, between the timestamps of this key block and the last key block.
B = Block reward (new generated coins) in this key block (a deterministic function of block height)
D = Difficulty of this key block

The coupon is (T*B*10^6)/(D*2^32) per bond, rounded to within a reasonable numerical precision.

The time of physically paying out the coupons via the GLBSE mechanism is on a best-effort basis.


If Bitcoin changes so that the letter of the above procedure no longer accurately reflects the spirit of the asset, which is that every bond is equivalent to two million applications of SHA-256 per second, the procedure will change to maintain the spirit. If such time comes that computation of SHA-256 can no longer be used for mining Bitcoin, the bond will become worthless and no longer entitle the holder to any coupons.


The bond is callable by the issuer at a price equal to 1.2 times the highest price the asset was traded on GLBSE over the prior 744 hours. If no technical means is offered by GLBSE for the call, it will be carried out as follows:
1. The call and the offered price will be announced.
2. Bondholders will be given 24 hours to cancel any ask orders.
3. A bid order will be placed at the specified price for the entire amount of outstanding shares.
4. Coupons will no longer be paid.
5. Bondholders will manually order to sell their bonds.


Holding the bond does not entitle the holder to any rights, or commit the issuer to any obligations, beyond what is stated in the asset contract and this appendix.

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February 22, 2012, 10:12:58 PM
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(reserved)

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February 22, 2012, 10:59:51 PM
 #4

That is easily the most intriguing venture I have seen in a long time. Following. (BTW, for anybody interested, at current difficulty you would get ROI in about 22.5 months)

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February 23, 2012, 12:58:47 AM
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This is really cool!  Whats the symbol?  I am definitely going to buy some of these!

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February 23, 2012, 01:43:50 AM
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forever?
: )

This isn't quite the same thing, but http://en.wikipedia.org/wiki/Perpetuity might be of interest to people wondering about the time terms.
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February 23, 2012, 05:03:09 AM
 #7

(BTW, for anybody interested, at current difficulty you would get ROI in about 22.5 months)
Right, I wanted to include that figure but forgot, you beat me to it. Everyone should agree that 4.45% monthly return is good on one hand, but that the difficulty will increase on the other hand. By investing in this, you are betting that the difficulty will not increase too much.

This is really cool!  Whats the symbol?  I am definitely going to buy some of these!
The Ticker symbol is PureMining, the asset ID is 3cc7f4be83ff553ecbe53e57e55e5a672397a1d15b7bf7548ec07d996e76971b.

forever?
: )
In practice I will likely buy back all the bonds sometime in the next 50 years, either at market rates or via my contractual right. But this should still leave you with a total value which surpasses what the contract would provide to infinity (it's approximately a convergent geometric series).

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February 23, 2012, 02:58:51 PM
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hmmm
$2.5/MH is a bit overpriced, but I guess it includes labor costs...

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February 23, 2012, 03:01:49 PM
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hmmm
$2.5/MH is a bit overpriced, but I guess it includes labor costs...

Labor costs? What on earth are you talking about?

The idea of this is, in essence, an investment against difficulty increases. If difficulty goes up a lot, it will devalue. If difficulty goes down, it will increase in value.

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February 23, 2012, 04:49:08 PM
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hmmm
$2.5/MH is a bit overpriced, but I guess it includes labor costs...
I priced it by considering both my own costs and risks, and the attractiveness of competing offers. If there is not enough interest at this price I'll consider offering at a lower price, admittedly there's some room for this. The price includes many things when compared to direct hardware purchase, as described in the OP.

and the dividend payment cycle should swing the price intra weekly (higher before dividends, drop after dividends paid, adjusted in time)
This is something which I have considered but unfortunately GLBSE doesn't offer a good solution. My payment cycle is every 2.3 days, most mining companies pay every week. The fluctuations would at worst be about 0.34% which are likely much less than the spreads.

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February 23, 2012, 05:02:31 PM
 #11

Sorry, I'd missed this thread and forgot to add it to my article, I'll update the article to include PureMining.

Nefario

PGP key id at pgp.mit.edu 0xA68F4B7C

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February 23, 2012, 10:00:10 PM
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Sorry, I'd missed this thread and forgot to add it to my article, I'll update the article to include PureMining.

Nefario
The article now lists PureMining with a generic "Mining" title - but it's worth noting that this bond is quite different from most mining assets, and in fact in some sense antithetical to them. One of my long-term goals is to commoditize mining - as mining is, after all, a commodity - and to move away from the infungible "Please invest in my mining farm!" model. Rather, people and companies who wish to mine, should employ basic instruments according to their needs:

1. If they are willing to take the risk but in need of immediate cash for the purchase, borrow X BTC and commit to repay Y BTC at a later time (this would require some form of reputation and/or accountability). Borrowing USD can also work, and in all cases hedging against BTC/USD volatility should be considered.

2. If they have funds but don't want to have a stake in the long-term prospects of mining, sell short a generic mining bond, offering BTC as collateral. (There could be markets which allow negative mining bond balances and automatically deduct BTC coupons)

3. If they have some or all of the required funds and want to take some or all of the risk, do some combination of the above or similar instruments.

This of course does not preclude public investment in companies which mine (with or without additional activities), but the existence of an efficient global market for speculating on the generic, idealized profitability of mining, can help focus such investments on advantages specific to the company, by investors who are in a position to evaluate them.


All that said, for the time being the bond merely acts as an alternative to investing in mining companies, which streamlines typical costs into the valuation.

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February 25, 2012, 05:16:07 PM
 #13

First coupon, for block 168335, has been paid. Should have been 0.0015883564 BTC per bond, except I misunderstood how payment works in GLBSE, so bondholders can enjoy the larger amount of 0.01443959 BTC per bond.

In other news, bonds are now offered at 0.4 BTC per MH/s.

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February 29, 2012, 05:50:39 PM
 #14

To avoid any confusion, I do not currently have a policy of making a post about every coupon paid, only about any news and such. Scheduled payment history is available at http://bitcoinpuremining.com/ ; blocks marked as paid are indeed paid, otherwise they are listed as "Pending" (in theory a technical error could cause wrong stats to be displayed, but I make an effort to maintain accuracy). So far coupons have been paid for blocks 168335, 168671 and 169007.

I've paid a bonus 0.1 BTC per bond. Because of the recent price drop from 0.5 BTC to 0.4 BTC, I don't want early adopters to be penalized for their support. This guarantees that people who bought at 0.5 BTC are not worse off than people who buy now.

Note that I reserve the right to change the price at which bonds are offered without any compensation given to existing bondholders.

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February 29, 2012, 07:44:44 PM
 #15

I've paid a bonus 0.1 BTC per bond. Because of the recent price drop from 0.5 BTC to 0.4 BTC, I don't want early adopters to be penalized for their support. This guarantees that people who bought at 0.5 BTC are not worse off than people who buy now.
I sold because you dropped the price to .4
Worst combo possible. You should have written earlier.
nvmnd. done with pure mining
There are no doubt many things I should have done differently. As I said this is still a proof of concept, the only thing I am committing to come hell or high water is to abide by the contract, anything else is prone to my newbie mistakes. I will appreciate if you bear with me and let me learn from my mistakes - and compensate for any losses caused by them - instead of writing me or the asset off.

So let's look at some of my recent decisions.

1. Offering at an initial price of 0.5 BTC.
This is arguably too high. As I said this seemed to me a fair price considering the alternatives, but I may have been mistaken in my evaluation.

2. Lowering to 0.4 BTC.
This seems like a reasonable thing to do given that there was little demand at the higher price. Please tell me if you think this is wrong.

3. Not offering a compensation before lowering the price.
No excuses, I just didn't think of it at the time.

4. Offering compensation after the fact.
I didn't think of the possibility that early adopters would have sold, and it still makes little sense to me. If you bought it at 0.5 BTC, it means that you value a guarantee to be paid the equivalent of 1 MH/s as more than 0.5 BTC. Why would you want to shortly after sell it at 0.4 BTC?
Under this assumption, compensation after the fact would have been more or less equivalent to compensation in advance. And as I said, I think some form of compensation is fair because early adopters shouldn't be penalized for my overpricing.

5. Not trying to find early adopters and paying them directly.
That would have been cumbersome and there's no way for them to prove they were indeed early adopters.

6. Not announcing the compensation in advance.
That would have just invited freeriders who would then buy the shares and receive compensation, for an effective price of 0.3 BTC.


I would like to clarify that I am not committing to anything but what is stated in the contract, and potential buyers should base their decision first and foremost on the contract. The future traded price at GLBSE, which could be affected by my decisions, should be secondary. But if anyone else feels they have been wronged by my decisions, please let me know and I will try to set things straight.

Also be aware that it is entirely possible that the issuing price will decrease further in the future, and that I will handle it better that time (again, I'm not guaranteeing that there will be compensation to current bondholders).

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March 02, 2012, 10:46:47 AM
 #16

Coupon payment summary for February 2012:

Code:
Block number Timestamp        Timestamp (Unix) Elapsed time Difficulty Block reward Coupon    Status
169007    Feb 29 2012 05:40:07  1330494007          179455    1376302.26789 50        0.0015179305 Paid
168671    Feb 27 2012 03:49:12  1330314552          180878    1376302.26789 50        0.0015299670 Paid
168335    Feb 25 2012 01:34:34  1330133674          187781    1376302.26789 50        0.0015883564 Paid

In addition, 0.0015423250 BTC coupon for block 169343 was paid today.

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March 03, 2012, 07:33:03 PM
 #17

Well, it appears that the streamlined, deterministic nature of this bond isn't attracting that much interest. So I'd like to press further the advantage of the offering in terms of pure performance numbers. Re-evaluating my strategy of utilizing BFL products, it seems safe to offer bonds at a new, low price of 0.28 BTC. Since I'm still only issuing a small number of shares, I'm willing to take the risk that I'm wrong.

Once again I do not want early adopters (and current bidders) to be worse off than buyers at the new price. Given that there already are bids at 0.35 BTC, my exact order of operations was:

1. Pay a bonus 0.05 BTC per bond.
2. Issue at 0.35 BTC.
3. Pay a bonus 0.07 BTC per bond.
4. Issue at 0.28 BTC.

ROI projections for the new price:

Issue price - 0.28 BTC
Difficulty - 1496979 (recently increased by 9%)
Block reward - 50 BTC
Daily return - 672 uBTC (0.24% ROI) = 86400 * 50 * 10^6 / (2^32 * 1496979)
Weekly ROI - 1.68% (linear, non-compounded) = 7 * 0.24%
Monthly ROI - 7.32% (linear, non-compounded) = 30.5 * 0.24%
Annual ROI - 138% (compunded weekly) = 1.0168 ^ (365/7) - 1

This means that, if the current network parameters remain unchanged, the investment will more than double in a year. Of course, the parameters will not remain unchanged, so this will not be fully realized.

I will mention again that I am making a personal commitment to do whatever it takes to abide by the contract, regardless of the success of any mining operations I may have.

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March 03, 2012, 08:27:50 PM
 #18

Well, it appears that the streamlined, deterministic nature of this bond isn't attracting that much interest. So I'd like to press further the advantage of the offering in terms of pure performance numbers. Re-evaluating my strategy of utilizing BFL products, it seems safe to offer bonds at a new, low price of 0.28 BTC. Since I'm still only issuing a small number of shares, I'm willing to take the risk that I'm wrong.

Once again I do not want early adopters (and current bidders) to be worse off than buyers at the new price. Given that there already are bids at 0.35 BTC, my exact order of operations was:

1. Pay a bonus 0.05 BTC per bond.
2. Issue at 0.35 BTC.
3. Pay a bonus 0.07 BTC per bond.
4. Issue at 0.28 BTC.

ROI projections for the new price:

Issue price - 0.28 BTC
Difficulty - 1496979 (recently increased by 9%)
Block reward - 50 BTC
Daily return - 672 uBTC (0.24% ROI) = 86400 * 50 * 10^6 / (2^32 * 1496979)
Weekly ROI - 1.68% (linear, non-compounded) = 7 * 0.24%
Monthly ROI - 7.32% (linear, non-compounded) = 30.5 * 0.24%
Annual ROI - 138% (compunded weekly) = 1.0168 ^ (365/7) - 1

This means that, if the current network parameters remain unchanged, the investment will more than double in a year. Of course, the parameters will not remain unchanged, so this will not be fully realized.

I will mention again that I am making a personal commitment to do whatever it takes to abide by the contract, regardless of the success of any mining operations I may have.
Thank you very much for the way you dealt with this, I was the person with the bids on 0.35 and I am very happy with the way you dealt with it. As I did not loose anything and got my shares at the price I wanted to Smiley So far you have been running this very professionally
//DeaDTerra
Meni Rosenfeld
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March 03, 2012, 08:42:43 PM
 #19

Well, it appears that the streamlined, deterministic nature of this bond isn't attracting that much interest. So I'd like to press further the advantage of the offering in terms of pure performance numbers. Re-evaluating my strategy of utilizing BFL products, it seems safe to offer bonds at a new, low price of 0.28 BTC. Since I'm still only issuing a small number of shares, I'm willing to take the risk that I'm wrong.

Once again I do not want early adopters (and current bidders) to be worse off than buyers at the new price. Given that there already are bids at 0.35 BTC, my exact order of operations was:

1. Pay a bonus 0.05 BTC per bond.
2. Issue at 0.35 BTC.
3. Pay a bonus 0.07 BTC per bond.
4. Issue at 0.28 BTC.
Thank you very much for the way you dealt with this, I was the person with the bids on 0.35 and I am very happy with the way you dealt with it. As I did not loose anything and got my shares at the price I wanted to Smiley So far you have been running this very professionally
//DeaDTerra
Thank you for your support. I'm still learning.

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Nefario
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March 03, 2012, 09:10:16 PM
 #20

The demo version of GLBSE2.0 has been updated.

Since this is going to be the system you guys will be using it very soon please go over to http://dev.glbse.com and give it a try.

Create a new share, sell them (create a fake account to test buying them), create some new motions, pay dividends and play around in general.

2.0 is a big step away from the current system, and it's important that you're ready for the change over.

Here's the release notes
https://bitcointalk.org/index.php?topic=60489.msg781561#msg781561

PGP key id at pgp.mit.edu 0xA68F4B7C

To get help and support for GLBSE please email support@glbse.com
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