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.
