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Author Topic: Do you think there is a market for difficulty insurance? // Looking for partners  (Read 1168 times)
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fairlay
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September 08, 2014, 07:49:16 PM
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Imagine an insurance against rising difficulty.

When you do the calculation whether a miner will be profitable or not you should make an assumption about the future difficulty (most interesting is a time frame of 3 months). Wouldn't it be nice to insure yourself against the possibility of a higher difficulty?

The website we have in mind is very simple. First you choose an insurance amount (the amount you will be payed if the insurance condition is met). Lets say you choose 1 BTC. Now the site offers you prices for a specific difficulty at a specific time.
E.g. on 01.01.2015
> 75B 0.5 BTC
>100B 0.2 BTC
>125B 0.1 BTC
>150B 0.01 BTC

The people who run this site would have done some math and calculated the likelihood of these events. This way, they come up with these prices. However - the prices would be such that the odds for the people who run the site are better than the odds for the users. The people who rund this service want to make money with it and they take a risk. Consequently, a free market is a better backbone for such a site. In such a case different people place difficulty predictions which compete against each other to offer the best price.

Basically we have been running such a market place for 6 months: https://www.fairlay.com/event/category/bitcoin/difficulty/ In theory it is already possible to insure yourself against rising difficulty. However, our design was developed for all different kinds of predictions and is not especially targeted at the needs of the insurance users. It is counterintuitive to predict/bet on something that you don't want to happen, despite the fact that this is basically what all insurance policies do. A fire insurance is basically a bet that your house will burn down. If it happens you "win" money, if not you loose the money you have "placed".


Different participants will profit from an insurance site in different ways:

1. Miners who buy an insurance policy can hedge against the difficulty risk and get a more stable reward from their mining activity.
2. Miners who don't buy a insurance policies will get a realistic impression on the likelihood of the difficulty development -- because the price is not fixed, market movements are easy to discern.
3. Market makers who concern themselves with the analysis of difficulty growth can profit from the site by using their own expertise to offer prices that favor the. However, they still have to compete against others, ensuring fair prices for the users.
4. We as a marketplace take a 2% fee on the pay-out money.
5. Maybe you because we are looking for partner and would share the fees.

a) Do you think there is a market for mining insurance?
Under what conditions would you buy such an insurance policy?

b) We are looking for partners
All of our team members are very much into the crypto space. However, our mining experience is very limited. Back in September 2012 one of us bought a Single at BFL which came roughly one year later and was sold on in December 2013. And that is it. For this reason we are looking for someone who is really into mining/ profitability calculation and difficulty forecasts, ideally with a website on this topic.
Moreover, if you are interested in taking the other site of the insurance bet we can help you to set up a connection to our trading engine/ API.


If you are more interested in the topic some more reads on the topic:

www.fairlay.com - the Bitcoin prediction market - the future of reliable information
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September 08, 2014, 08:20:12 PM
 #2

Pretty good idea. It may work for some. I wonder if you could add the second part or type of insurance.

 BTC price.

I mine alt coins with https://simplemining.net...
I see BTC as the super highway and alt coins as taxis and trucks needed to move transactions.
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September 08, 2014, 09:14:52 PM
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Usually "insurance" has a fairly specific meaning, and is designed to protect the purchaser of the insurance from loss as a result of the defined. "Difficulty insurance" seems like a pretty much a non-starter to me, since it's almost certain to increase (i.e. it's a probable event).  Secondly, why would I have confidence that the issuer of the "insurance" could actually afford to pay the claim when the event happened?

This whole adventure sounds more like some of the crazy things that were done if the financial sector to "insure" folks against interest rate changes, or mortgage defaults.

Personally I wouldn't pay anything for it, since I don't believe it would be "real". Kinda like paying for insurance, and then finding out there is nothing to back a claim.
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September 09, 2014, 12:23:51 AM
 #4

Usually "insurance" has a fairly specific meaning, and is designed to protect the purchaser of the insurance from loss as a result of the defined. "Difficulty insurance" seems like a pretty much a non-starter to me, since it's almost certain to increase (i.e. it's a probable event).  Secondly, why would I have confidence that the issuer of the "insurance" could actually afford to pay the claim when the event happened?

This whole adventure sounds more like some of the crazy things that were done if the financial sector to "insure" folks against interest rate changes, or mortgage defaults.

Personally I wouldn't pay anything for it, since I don't believe it would be "real". Kinda like paying for insurance, and then finding out there is nothing to back a claim.

We're repeating 2012 again where people are selling insured items.

The US hasn't had a devastating earthquake since 1906.  When it happens you will see some big names companies like MetLife, AllState, Prudential, 21st Century etc fail or fail to pay claims for earthquake insurance.  Even when they charge $10K/yr they can't cover the loss of a a $600K home - not when an entire county gets destroyed. The insurance isn't worth the paper it's written on.
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September 09, 2014, 12:30:33 AM
 #5

Usually "insurance" has a fairly specific meaning, and is designed to protect the purchaser of the insurance from loss as a result of the defined. "Difficulty insurance" seems like a pretty much a non-starter to me, since it's almost certain to increase (i.e. it's a probable event). 

It would obviously not be an insurance policy against difficulty increase in general. Instead it should be against something that is unexpected. And the market will find out what the expected increase is.
You could compare it to a farmer who buys a insurance policy against stormy weather that would ruin his crops.

Secondly, why would I have confidence that the issuer of the "insurance" could actually afford to pay the claim when the event happened?

Actually they had to pay the potential payout upfront. This might be inconvenient but needs to be done to eliminate the counterparty risk. Obv. you have to trust the marketplace (in this case us). We are as transparent as possible. All prediction are send directly to a cold wallet. When it comes to the date of resolution we manually pay out the winners. In addition we publish all prediction data on our website and all payment activity can be seen on the blockchain: https://www.fairlay.com/anonymous/15ZmFPeM8EdfJ6LCuU5WFnMBYaYLrh4kma/
A decentralized solution would be better anyways but it does not exist yet. Even with solutions like Mastercoin/Counterparty/NXT you still need a trusted entity who determines the outcome. Solutions are discussed how to overcome this challenges but it might take still a lot more time until a product is ready. If you are interested in this topic: our co-Founder gave an presentation on it here: https://www.youtube.com/watch?

Pretty good idea. It may work for some. I wonder if you could add the second part or type of insurance.

 BTC price.
Thanks! The problem of price insurance is that the possibilities to insure yourself against Bitcoin price decrease with Bitcoin are limited. To make this clear: lets assume you want to insure yourself against a price of 0. If the price really goes to 0 (e.g. because someone finds a way to generate the private keys) it would not help you to "win a lot of Bitcoins". However - for smaller price movements it might be useful and we will think about it.

www.fairlay.com - the Bitcoin prediction market - the future of reliable information
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September 09, 2014, 12:38:07 AM
 #6

We're repeating 2012 again where people are selling insured items.

The US hasn't had a devastating earthquake since 1906.  When it happens you will see some big names companies like MetLife, AllState, Prudential, 21st Century etc fail or fail to pay claims for earthquake insurance.  Even when they charge $10K/yr they can't cover the loss of a a $600K home - not when an entire county gets destroyed. The insurance isn't worth the paper it's written on.

That is why we don't do fractional reserve. All payments and funds are visible on the blockchain. It has the downsite that extremely unlikely events can not "insured" with this method because no one would be willing to lock a lot of funds for a very small amount. The likelihood should probably be >5%. (That would mean that if the condition for the insurance policy is not met the insurer would get at least 5% interest on his money.)

www.fairlay.com - the Bitcoin prediction market - the future of reliable information
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September 10, 2014, 09:25:40 AM
 #7

One big problem I can see is that insurance only works for the individual disaster.

An accident of some sort, with low probability but high cost. The insurance paid by everyone insured is used to cover single events like an accident and the operating costs of the insurer. That works as long as the the expected accident costs to be covered are lower than the insurance premiums paid.

Now the trouble is that if difficulty rises, it rises for everyone. That's eg similar to a situation where a house insurer has to face claims due to flood affecting all of the houses insured. Now typically this is a catastrophy, and the insurer would not be able to pay - that's why he usually is required to be insured himself (Eg in Europe the "Muenchner Rueckversicherung" insures insurance companies for this class of disaster).
That means for your business idea, that in case of a big difficulty increase you will have to payout to everyone insured, which in turn means you cannot on average payout more than what people have paid you. You can up your payout a little bit if you also allow people to be "insured" against lower difficulty increase than expected - but that only makes your shop a betting outlet, with low payout multipliers. Which is of course a problem because you will find less people to participate in your scheme.

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September 10, 2014, 05:30:01 PM
 #8

One big problem I can see is that insurance only works for the individual disaster.

An accident of some sort, with low probability but high cost. The insurance paid by everyone insured is used to cover single events like an accident and the operating costs of the insurer. That works as long as the the expected accident costs to be covered are lower than the insurance premiums paid.

Now the trouble is that if difficulty rises, it rises for everyone. That's eg similar to a situation where a house insurer has to face claims due to flood affecting all of the houses insured. Now typically this is a catastrophy, and the insurer would not be able to pay - that's why he usually is required to be insured himself (Eg in Europe the "Muenchner Rueckversicherung" insures insurance companies for this class of disaster).
That means for your business idea, that in case of a big difficulty increase you will have to payout to everyone insured, which in turn means you cannot on average payout more than what people have paid you. You can up your payout a little bit if you also allow people to be "insured" against lower difficulty increase than expected - but that only makes your shop a betting outlet, with low payout multipliers. Which is of course a problem because you will find less people to participate in your scheme.

There's a flaw on your reasoning, insurances actually have the money for catastrophes, the thing is they have "reserves" depending on different situations,
for starters it would go like this:

Insurance opens:

1-People gets the insurance
2-insurance company invest the money to win at least some interest( in a period of time) on the money that they recollected <- where is this "insurance"company invest the money?
3-Those investments have to be ready to be made liquid in case of an event.
4-Each individual will pay fees monthly and that will assure that you actually cover his lost in the future.

To avoid looses in case that btc price drop, means that the insurance company should reserve the money with a stable currency like US dollar or Europe EURO or British Pounds.

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September 10, 2014, 05:33:43 PM
 #9

Now the trouble is that if difficulty rises, it rises for everyone. That's eg similar to a situation where a house insurer has to face claims due to flood affecting all of the houses insured. Now typically this is a catastrophy, and the insurer would not be able to pay - that's why he usually is required to be insured himself (Eg in Europe the "Muenchner Rueckversicherung" insures insurance companies for this class of disaster).

You are 100% right. It would make no sense if only miner would pay into this "insurance contract". Miners can insure them selfs against rising difficulty because they suffer from it. On the other site of the contract should be people that profit from a higher difficulty. Basically this are all Bitcoinuser who do not mine for themselves because they profit from a higher security.
It could be also people how do it instead of mining. If people are at the point to decide wether to invest in mining or not the most important task is to make a educated guess about difficulty development. If they came up with a number as a prediction (like 75B at the end of the year) - they can - instead of buying a miner - just place the money in this insurance contract.

All could benefit from such a behaviour (all except asic producer) We wrote a blogpost on this topic: http://blog.fairlay.com/2014/06/7-reasons-why-you-should-predict-on-the-difficulty-instead-of-buying-an-miner/

www.fairlay.com - the Bitcoin prediction market - the future of reliable information
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September 10, 2014, 05:58:08 PM
 #10

One big problem I can see is that insurance only works for the individual disaster.

An accident of some sort, with low probability but high cost. The insurance paid by everyone insured is used to cover single events like an accident and the operating costs of the insurer. That works as long as the the expected accident costs to be covered are lower than the insurance premiums paid.

Now the trouble is that if difficulty rises, it rises for everyone. That's eg similar to a situation where a house insurer has to face claims due to flood affecting all of the houses insured. Now typically this is a catastrophy, and the insurer would not be able to pay - that's why he usually is required to be insured himself (Eg in Europe the "Muenchner Rueckversicherung" insures insurance companies for this class of disaster).
That means for your business idea, that in case of a big difficulty increase you will have to payout to everyone insured, which in turn means you cannot on average payout more than what people have paid you. You can up your payout a little bit if you also allow people to be "insured" against lower difficulty increase than expected - but that only makes your shop a betting outlet, with low payout multipliers. Which is of course a problem because you will find less people to participate in your scheme.

There's a flaw on your reasoning, insurances actually have the money for catastrophes, the thing is they have "reserves" depending on different situations,
for starters it would go like this:

Insurance opens:

1-People gets the insurance
2-insurance company invest the money to win at least some interest( in a period of time) on the money that they recollected <- where is this "insurance"company invest the money?
3-Those investments have to be ready to be made liquid in case of an event.
4-Each individual will pay fees monthly and that will assure that you actually cover his lost in the future.

To avoid looses in case that btc price drop, means that the insurance company should reserve the money with a stable currency like US dollar or Europe EURO or British Pounds.

So you advise insurances to gamble with its subscribers money? Because if you don't and they just invest into traditional investment vehicles, they can probably expect 4-8% return on investment per year in dollars without exaggerated risk. But then they are exposed to a rise in price of bitcoin, which probably no one believing in the future of bitcoin is willing to take.
So that leaves investments in bitcoin projects/securities that pay out bitcoin - only those are an order of magnitude riskier, there is usually little recourse if one of them fails to pay out/back and there is almost no bitcoin venture that you can invest in that will guarantee you liquidity of your funds.

That basically means that such an insurance scheme cannot invest the received bitcoins if they are an honest company.


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September 10, 2014, 06:03:32 PM
 #11

Now the trouble is that if difficulty rises, it rises for everyone. That's eg similar to a situation where a house insurer has to face claims due to flood affecting all of the houses insured. Now typically this is a catastrophy, and the insurer would not be able to pay - that's why he usually is required to be insured himself (Eg in Europe the "Muenchner Rueckversicherung" insures insurance companies for this class of disaster).

You are 100% right. It would make no sense if only miner would pay into this "insurance contract". Miners can insure them selfs against rising difficulty because they suffer from it. On the other site of the contract should be people that profit from a higher difficulty. Basically this are all Bitcoinuser who do not mine for themselves because they profit from a higher security.
It could be also people how do it instead of mining. If people are at the point to decide wether to invest in mining or not the most important task is to make a educated guess about difficulty development. If they came up with a number as a prediction (like 75B at the end of the year) - they can - instead of buying a miner - just place the money in this insurance contract.

All could benefit from such a behaviour (all except asic producer) We wrote a blogpost on this topic: http://blog.fairlay.com/2014/06/7-reasons-why-you-should-predict-on-the-difficulty-instead-of-buying-an-miner/

You could also call betting on red "insurance against red coming up next".

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September 10, 2014, 06:13:21 PM
 #12

Now the trouble is that if difficulty rises, it rises for everyone. That's eg similar to a situation where a house insurer has to face claims due to flood affecting all of the houses insured. Now typically this is a catastrophy, and the insurer would not be able to pay - that's why he usually is required to be insured himself (Eg in Europe the "Muenchner Rueckversicherung" insures insurance companies for this class of disaster).

You are 100% right. It would make no sense if only miner would pay into this "insurance contract". Miners can insure them selfs against rising difficulty because they suffer from it. On the other site of the contract should be people that profit from a higher difficulty. Basically this are all Bitcoinuser who do not mine for themselves because they profit from a higher security.
It could be also people how do it instead of mining. If people are at the point to decide wether to invest in mining or not the most important task is to make a educated guess about difficulty development. If they came up with a number as a prediction (like 75B at the end of the year) - they can - instead of buying a miner - just place the money in this insurance contract.

All could benefit from such a behaviour (all except asic producer) We wrote a blogpost on this topic: http://blog.fairlay.com/2014/06/7-reasons-why-you-should-predict-on-the-difficulty-instead-of-buying-an-miner/

You could also call betting on red "insurance against red coming up next".

Well, you could also call a life insurance a bet on your death. From a mathematical point of view a insurance and a bet are very similar if not even the same. It only the purpose of placing the money that makes the difference. But in our opinion it is nothing wrong with mixing this up. Be believe the best prices for bets/insurance/derivatives or whatever you call them are achieved on a free market. Some might be participating as gambler, some speculate, some invest and some could use it as a insurance.




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September 10, 2014, 07:02:17 PM
 #13

Now the trouble is that if difficulty rises, it rises for everyone. That's eg similar to a situation where a house insurer has to face claims due to flood affecting all of the houses insured. Now typically this is a catastrophy, and the insurer would not be able to pay - that's why he usually is required to be insured himself (Eg in Europe the "Muenchner Rueckversicherung" insures insurance companies for this class of disaster).

You are 100% right. It would make no sense if only miner would pay into this "insurance contract". Miners can insure them selfs against rising difficulty because they suffer from it. On the other site of the contract should be people that profit from a higher difficulty. Basically this are all Bitcoinuser who do not mine for themselves because they profit from a higher security.
It could be also people how do it instead of mining. If people are at the point to decide wether to invest in mining or not the most important task is to make a educated guess about difficulty development. If they came up with a number as a prediction (like 75B at the end of the year) - they can - instead of buying a miner - just place the money in this insurance contract.

All could benefit from such a behaviour (all except asic producer) We wrote a blogpost on this topic: http://blog.fairlay.com/2014/06/7-reasons-why-you-should-predict-on-the-difficulty-instead-of-buying-an-miner/

You could also call betting on red "insurance against red coming up next".

Well, you could also call a life insurance a bet on your death. From a mathematical point of view a insurance and a bet are very similar if not even the same. It only the purpose of placing the money that makes the difference. But in our opinion it is nothing wrong with mixing this up. Be believe the best prices for bets/insurance/derivatives or whatever you call them are achieved on a free market. Some might be participating as gambler, some speculate, some invest and some could use it as a insurance.


You are right, that you only have to find people betting against a certain difficulty rise. And that would be the money for the miners in case it rises above the threshold (or variable payout). Maybe it's useful to "buy" theoretical mining contracts, say 100GH/s @ average diff increase of 20% for 6 months. You then can calculate exactly the expected BTC you could mine. Your site pays out the difference to the actual difference. Eg the difficulty rises by 25%, after one month you pay the holder of the contract an equal amount of BTC that 5% of 100GH/s for current diff would mine. If difficulty falls you draw from his margin account, if margin is 0 you end the contract. This is essentially a futures contract (which are used to insure against an uncertain future).








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September 10, 2014, 07:14:23 PM
 #14

Now the trouble is that if difficulty rises, it rises for everyone. That's eg similar to a situation where a house insurer has to face claims due to flood affecting all of the houses insured. Now typically this is a catastrophy, and the insurer would not be able to pay - that's why he usually is required to be insured himself (Eg in Europe the "Muenchner Rueckversicherung" insures insurance companies for this class of disaster).

You are 100% right. It would make no sense if only miner would pay into this "insurance contract". Miners can insure them selfs against rising difficulty because they suffer from it. On the other site of the contract should be people that profit from a higher difficulty. Basically this are all Bitcoinuser who do not mine for themselves because they profit from a higher security.
It could be also people how do it instead of mining. If people are at the point to decide wether to invest in mining or not the most important task is to make a educated guess about difficulty development. If they came up with a number as a prediction (like 75B at the end of the year) - they can - instead of buying a miner - just place the money in this insurance contract.

All could benefit from such a behaviour (all except asic producer) We wrote a blogpost on this topic: http://blog.fairlay.com/2014/06/7-reasons-why-you-should-predict-on-the-difficulty-instead-of-buying-an-miner/

You could also call betting on red "insurance against red coming up next".

Well, you could also call a life insurance a bet on your death. From a mathematical point of view a insurance and a bet are very similar if not even the same. It only the purpose of placing the money that makes the difference. But in our opinion it is nothing wrong with mixing this up. Be believe the best prices for bets/insurance/derivatives or whatever you call them are achieved on a free market. Some might be participating as gambler, some speculate, some invest and some could use it as a insurance.


You are right, that you only have to find people betting against a certain difficulty rise. And that would be the money for the miners in case it rises above the threshold (or variable payout). Maybe it's useful to "buy" theoretical mining contracts, say 100GH/s @ average diff increase of 20% for 6 months. You then can calculate exactly the expected BTC you could mine. Your site pays out the difference to the actual difference. Eg the difficulty rises by 25%, after one month you pay the holder of the contract an equal amount of BTC that 5% of 100GH/s for current diff would mine. If difficulty falls you draw from his margin account, if margin is 0 you end the contract. This is essentially a futures contract (which are used to insure against an uncertain future).


This kind of future contract you described would be probably the best way to go. However - from our experience so far, it is very important to keep stuff simple and comprehensible. If we decide to build it, it would be a really simple thing. You choose a premium and then you get different prices for different difficulty conditions. All you have to do now is send BTC to the asserted address. If the difficulty condition mets you get the premium. Thats all.

There needs to be another place/site where people can take the other site. First this would be our existing prediction market fairlay: https://www.fairlay.com/event/category/bitcoin/difficulty/



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September 11, 2014, 01:56:07 PM
 #15

One big problem I can see is that insurance only works for the individual disaster.

An accident of some sort, with low probability but high cost. The insurance paid by everyone insured is used to cover single events like an accident and the operating costs of the insurer. That works as long as the the expected accident costs to be covered are lower than the insurance premiums paid.

Now the trouble is that if difficulty rises, it rises for everyone. That's eg similar to a situation where a house insurer has to face claims due to flood affecting all of the houses insured. Now typically this is a catastrophy, and the insurer would not be able to pay - that's why he usually is required to be insured himself (Eg in Europe the "Muenchner Rueckversicherung" insures insurance companies for this class of disaster).
That means for your business idea, that in case of a big difficulty increase you will have to payout to everyone insured, which in turn means you cannot on average payout more than what people have paid you. You can up your payout a little bit if you also allow people to be "insured" against lower difficulty increase than expected - but that only makes your shop a betting outlet, with low payout multipliers. Which is of course a problem because you will find less people to participate in your scheme.

There's a flaw on your reasoning, insurances actually have the money for catastrophes, the thing is they have "reserves" depending on different situations,
for starters it would go like this:

Insurance opens:

1-People gets the insurance
2-insurance company invest the money to win at least some interest( in a period of time) on the money that they recollected <- where is this "insurance"company invest the money?
3-Those investments have to be ready to be made liquid in case of an event.
4-Each individual will pay fees monthly and that will assure that you actually cover his lost in the future.

To avoid looses in case that btc price drop, means that the insurance company should reserve the money with a stable currency like US dollar or Europe EURO or British Pounds.

So you advise insurances to gamble with its subscribers money? Because if you don't and they just invest into traditional investment vehicles, they can probably expect 4-8% return on investment per year in dollars without exaggerated risk. But then they are exposed to a rise in price of bitcoin, which probably no one believing in the future of bitcoin is willing to take.
So that leaves investments in bitcoin projects/securities that pay out bitcoin - only those are an order of magnitude riskier, there is usually little recourse if one of them fails to pay out/back and there is almost no bitcoin venture that you can invest in that will guarantee you liquidity of your funds.

That basically means that such an insurance scheme cannot invest the received bitcoins if they are an honest company.



I explained how it works on real life... gambling is another thing but on real life insurance company MUST invest the money so they can pay in the future.

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