To encourage efficient trading strategies and incentivise behaviours that improve the executable liquidity of the market, BitMEX will be gradually introducing a number of trading rules for the platform. These rules are specifically designed to improve the quality of the exchange offering for users and are the result of a large amount of research over the past few months. This concept is nothing new and indeed most traditional venues employ similar rules.
You can read more about the first Trading Rule to be introduced in our API Announcement on the Quote Fill Ratio Threshold. This rule aims to discourage the use of strategies that submit quotes to the market without the intent to trade and therefore further strengthen the quality of liquidity on the platform in addition to freeing resources for other market participants.
We believe the introduction of these rules to be a positive step forward for the industry and we are committed to continuing innovation in the space.
For many years now, BitMEX has been the most liquid market offering cryptocurrency derivatives. A key indicator of the quality of a market is the depth and size of the quotes in the order book: liquidity is often measured by price slippage for a given volume to execute. Sk3w.co offers a visual comparison of the price slippage across various cryptocurrency markets. In the sample below, the implied bid-offer spread for executing 1000 XBT worth of contracts on BitMEX’s XBTUSD market fluctuates around 0.5%. Compare this with other venues, where price slippage is roughly 10x higher, ranging from 3% to over 15%.
Since day 1, BitMEX has provided unprecedented access to the platform through our industry-leading API. Every action that can be performed on the BitMEX.com website, can also be performed via our API. In fact, the BitMEX.com web interface is just a client of our public API. This open approach has been a key contributor to BitMEX becoming the most liquid market in the industry.
Liquidity is only useful however if it is genuinely executable liquidity. In the month of June, fewer than 2% of active users on BitMEX accounted for over 60% of the order management requests processed, and less than 2% of the volume traded. Users fitting this behaviour profile are incredibly inefficient with their use of the API, submitting a disproportionately high number of orders per contracts traded.
There are a number of explanations for this kind of API usage. We often discover accounts that have signed up to an online automated trading service (or “bot”), entered their API keys, and then forgotten entirely about the account whilst it continues to place/amend/cancel thousands of orders every day. Other times, it could be a misconfigured trading system or client algo, which is quoting too wide and very rarely trades.
This kind of behaviour, whilst not currently against the rules, takes resources away from participants genuinely looking to trade on the platform. We believe that discouraging this kind of behaviour will further strengthen the liquidity of the market and provide a better overall experience for users.
In 2014, HDR Global Trading Limited (HDR) was founded in Mahé, Seychelles as a small, dedicated team of young entrepreneurs focused on a simple mission: to build a crypto trading platform geared toward experienced traders first. We focused on building the most responsive interface, featuring groundbreaking products, controlled by a complete and seamless API, with the tightest security. From those ideals, BitMEX was built.
The market has spoken: BitMEX has succeeded. We are proud to have built the most innovative, reliable, and secure cryptocurrency platform in the world.
As BitMEX grows, so the world grows with it. In 2013, only months before we began, Bitcoin had just crashed from its second major bull-run. The dreams and wallet balances of the greater crypto community crashed with it. A new set of priorities emerged, focusing on safety, security, and stability. Financial regulators started to pay more attention to Bitcoin, and rightly so. It was clear to all of us that new standards were needed for this new industry.
Since then, the cryptocurrency landscape has changed dramatically, and leaders such as BitMEX have been working with regulators to help shape the industry, creating the standards that will help it go mainstream.
The increased involvement of regulators with all the major players in the industry is not only to be expected, it is to be welcomed. It is the mission of good regulators to ensure that honest citizens are not being cheated. Regulators bear the burden of ensuring that risks are clearly communicated, products are fair, and taxes are collected. Through this process, we will see a new era of legitimacy for cryptocurrency exchanges: a future where market operation standards are clearly stated and maintained, where security is paramount, and where financial reserves are independently and frequently audited.
We believe fervently in these goals. And we understand that nothing is more sacred than the safety of your funds and the stability of the platform.
For this reason, we have decided to restrict access to BitMEX for users in the jurisdictions in which HDR-affiliated employees and offices are located. Seychelles, Hong Kong and Bermuda will be added to the list of jurisdictions already restricted from access to BitMEX. This change will have no financial impact on the business and will affect very few people. The BitMEX team will be reaching out to those who are affected.
The BitMEX platform is entering a new and exciting era. This conservative action is not taken reactively, but proactively. We want to ensure we lead the industry not just in innovation but also in standards.
We are extending the transparency of our systems so that our customers and stakeholders can better understand how BitMEX operates.
We are showing third-parties why we believe BitMEX is a safe place to trade; how our innovative contracts are structured; why we keep an Insurance Fund; how auto-deleveraging is orderly and fair; how we know all accounts are 100% backed; and why we believe BitMEX has one of the safest custody solutions in the world.
We are working on independent audits of our Insurance Fund, market making activities, and tradeable contract structure and we hope to share the results of these processes in the near future.
We believe success in the cryptocurrency space lies in the ability to think long-term, not short-term. And in that long-term view, we believe this course of action affords us the best opportunity to engage regulators in deep, thoughtful, and productive explorations of the risks and opportunities present in the cryptocurrency market.
BitMEX will not just be the most liquid, innovative place to trade. It will also be one where customers may rest assured – with independent affirmation – that accounts are solvent, settlements are honest, and all participants enjoy the same access and opportunity to Trade More.
Abstract: BitMEX Research has upgraded its lightning nodes to include watchtower functionality. The watchtower functionality is a mechanism for connecting to another friendly node, which monitors your lightning channels for you and prevents a dishonest counterparty from stealing your funds, even when you are offline. We successfully conducted an experiment, proving the watchtower concept actually works, at least in our case. It is encouraging that the watchtower concept, which has been around for years in theory, now actually works in practise.
On 29 June 2019, LND 0.7.0 (Go implementation of lightning) was released and this included the watchtower functionality. A watchtower is a third party lightning node, that can detect if a dishonest party attempts to steal funds and then broadcast a justice transaction, sending the funds back to the honest party, even when the honest node is offline.
There two modes of watchtower functionality
The client connects to a watchtower server. Whenever the lighting channel states change, data is sent over to the watchtower server with the latest channel state. In the event of a channel breach, the watchtower can broadcast a justice transaction, sending the funds to the honest node’s onchain wallet.
The watchtower server does not need to have any lighting channels or make any payments. The server connects to a lightning client and monitors the client’s lightning channels for them, on their behalf.
To connect the node to a watchtower server, one needs to add the following line to the lightning configuration file:
Where the public key and IP address is provided by the watchtower server.
To activate a watchtower server, one needs to add the following line to the lightning configuration file:
After this, one can run the command:
> lncli tower info
The watchtower server should then display the watchtower public key (different from the lightning node public key). This key is needed by the watchtower client. Due to potential denial of service threats, it is currently not advisable to publish the watchtower public key.
One can check if the watchtower is working by viewing the logs.
It is possible for a node to be both a watchtower server and client at the same time. If you run two nodes, each node can be the watchtower server of the other. BitMEX Research currently has three operating lightning nodes and the nodes all watch over each other in a loop configuration.
Successful test of the watchtower
On 30th July 2019, BitMEX Research successfully tested the watchtower system. Much like our previous piece on justice transactions, we tried to cheat ourselves, but this time used a watchtower. In an encouraging sign, the watchtower functionality correctly worked and the would-be thief was punished.
In order to do this test, we needed to run three nodes:
The dishonest node – BitMEXThief
The node using the watchtower service – BitMEXTowerClient (the user of the watchtower service)
The watchtower itself – BitMEXResearch
Manually constructing a watchtower justice transaction
(Source: BitMEX Research)
The eventual justice transaction, broadcast by our watchtower can be seen here.
All BitMEX Research lightning nodes are now protected by watchtowers. While a watchtower is a large improvement in security, in our view, a greater problem than dishonest channel breaches, is the risk of a lightning node’s memory becoming accidentally lost or destroyed – under such circumstances the node could lose the latest channel states. A watchtower does not fix that problem, although there have been improvements in this area, with Static Channel Backups (SCBs). Using SCBs, as long as no new channels were created post backup, all the funds should be safe.
A successful test of the watchtower does provide us with a greater degree of assurance about the robustness of the lightning network. It is encouraging that ideas such as watchtowers, which have been theoretically discussed for years, finally exist. However, when it comes to improving the robustness and reliability of the lightning network, there is still a long way to go.
Abstract: In our third look at the lightning network, we examine lightning channel closure scenarios and the incentives to punish dishonest parties and prevent them from stealing funds. This punishment mechanism is called a “Justice Transaction”. We explain how to arbitrarily construct a “Justice” scenario and present data on the prevalence of this type of transaction on the Bitcoin network. We have potentially identified 241 Justice transactions, representing 2.22 Bitcoin in value, since the lightning network launched at the end of 2017.
Following on from our January 2018 discussion of the motivation behind the lightning network and our March 2019 analysis of lightning network routing fee economics, this third piece on the lightning network looks at channel closures and the incentives designed to prevent dishonest lightning nodes from stealing funds, by broadcasting an earlier channel state.
It should be noted that, by design, when a thief attempts to steal funds on the lightning network, if caught, they do not only lose the money they tried to steal, they lose all the funds in the relevant channel. This “punishment” is expected to act as a deterrent and is sometimes called “justice”.
The four lightning channel closure scenarios
Opening lightning channels is, generally speaking, more simple than closing them, there is only one way to open a lightning channel, cooperatively with interactive communication between the parties. On the other hand, when evaluating channel closures, one needs to consider four different scenarios, as outlined in the decision tree below (See figure 1).
A non-cooperative non-breach closure occurs when an honest node initiates the closure, without directly communicating with the node on the other side of the channel.
Funds are distributed to each party’s onchain wallet based on the latest channel state.
These two different economic scenarios, are represented by one technical onchain scenario.
This scenario requires two onchain transactions.
Firstly the funds are redeemed using a 2 of 2 multi-signature witness and sent to two outputs. The node which did not initiate the closure is allocated funds based on what the channel closing party says is attributable to them, while another pot of funds is sent to an output which can be redeemed by using either an OP_IF or an OP_ELSE script.
In a second transaction, the funds sent to the OP_IF script, are claimed by the party that initiated the channel closure, using the OP_ELSE branch of Bitcoin script.
A non-cooperative breach non-justice closure occurs when a dishonest node initiates the channel closure, by broadcasting an earlier channel state, attempting to steal funds from the node on the other side of the channel.
The non closing node does not check the network within the locktime period, normally 24 hours and does not broadcast a justice transaction. Therefore the theft is successful.
Funds are distributed to each party’s wallet based on an earlier channel state, such that the non closing party losses funds and the dishonest channel closing party successfully steals funds.
A non-cooperative breach justice closure occurs when a dishonest node initiates the channel closure, without directly communicating with the node on the other side of the channel.
The non closing node does check the network within the locktime period, and creates a justice transaction, such that the attempted theft fails.
The would-be thief is punished and all the funds go to the honest non closing party.
In the justice scenario, two onchain transactions are also required.
In the first transaction, the funds are redeemed using a 2 of 2 multi-signature witness and sent to two outputs. The node which did not initiate the closure is allocated funds based on what the channel closing party says is attributable to them, while another pot of funds is sent to an output which can be redeemed by using either an OP_IF or an OP_ELSE script.
In a second transaction, the honest node, that did not initiate the closure claims all the funds sent to the OP_IF script, using the OP_IF branch.
This is the most revealing of the three channel closure types and provides the lowest level of privacy.
In the below arbitrary scenario, we manually created a justice transaction, using the following steps:
1. Spin up a new lightning network node (LND), with the alias “BitMEXThief” and open a channel, worth US$50 (400,000 Satoshis) with the BitMEXResearch lightning node 2. Switch off the BitMEXThief node and back up the .lnd directory 3. Restart the BitMEXThief node and make a lightning payment of US$25 (200,000 satoshis) to BitMEXResearch. The channel is now balanced, US$25 in both directions 4. Switch off the BitMEXThief node again 5. Switch off the BitMEXResearch lightning node (to prevent it broadcasting the latest channel state to the thief node) 6. Restore the BitMEXThief node back to its state prior to the channel re-balancing, the state in step 2 7. On the restored BitMEXThief node, attempt to close the channel from its earlier state and claim the full US$50 (400,000 satoshis) to the BitMEXThief node’s onchain wallet 8. Restart the BitMEXResearch node. The node then automatically detects the attempted theft and broadcasts the “justice transaction”, sending the full US$50 (less fees) to its onchain wallet. The would be thief was punished, by losing all the funds inside the channel. Note that the thief attempted to steal US$25, but ended up losing the full US$50.
The above experiment occurred successfully, providing some assurance that Lightning does actually work and if you try to steal, you will be punished.
Network Justice transaction data
After conducting our own justice transaction, we looked at the characteristics of this transaction (Inputs redeemed using the OP_IF branch) and searched for other justice transactions on the Bitcoin blockchain. We identified 241 transactions, which appear to be justice channel closures, dating back as far as December 2017. Mr. Alex Bosworth, from Lightning Labs, has created a tool to identify justice transactions, which may be more robust than our more basic search methodology.
Figure 3 – Number of justice transactions – monthly
(Source: BitMEX Research)
(Note: There is a possibility the data includes false positives)
Figure 4 – Value redeemed in justice transactions – monthly (BTC)
(Source: BitMEX Research)
(Note: There is a possibility the data includes false positives)
The justice transactions we identified had transaction inputs totaling 2.22 BTC, with the monthly total peaking at around 0.67BTC in February 2019, as figure 4 above illustrates. This does not necessarily mean thieves tried and failed to steal 2.22 BTC, as the dis-honest nodes may have punished thieves by a amount larger than the value they tried to steal (we do not know the latest channel state). The 2.22 BTC represents the total funds claimed by honest non channel closing nodes, part of this value is funds originally owned by the dis-honest nodes and part of the value will be the value they tried to steal.
It is also possible that many of the 241 justice transactions do not indicate genuine dishonestly, for instance it could be users testing the system, where the same user owns both lightning nodes in question. For example BitMEX Research is responsible for 5 of the 241 justice transactions, when there was no victim, as BitMEX owned all the nodes and funds.
241 justice transactions, with a value of just over 2 BTC is reasonably small relative to the size of the lightning network. The lightning network statistics website 1ml.com, indicates that there are currently 940 BTC locked up in 32,951 channels. The total number of justice transactions in the last 18 months is therefore only 0.7% of the current number of lightning channels.
In order for the lightning network to succeed as a robust, reliable and scalable payment system, the justice mechanism needs to be effective in deterring and preventing theft. As for the optimal justice rate, this is hard to determine, if it is too high and it shows that successful thefts may be too prevalent and the threat of justice may not be sufficient. If it is too low, it may mean nobody is attempting theft, thereby increasing the risk that users do not monitor their channels. This may lead to increases in the risk of large systemic channel thefts in the future.
For now, at least according to the data we have analysed, there appears to be a reasonable degree of justice on the burgeoning lightning network.
Effective 14 July 2019 at 21:00 UTC, BitMEX will temporarily remove Kraken from its indices in response to Kraken’s scheduled downtime. This scheduled downtime is expected to last for 3-8 hours and will affect the 7 BitMEX indices as detailed in the table below. Kraken will be reintroduced once trading has resumed. We will announce their reintroduction 12 hours in advance.
All traders should be aware that the price of these indices may fluctuate substantially, and should exercise caution when trading these indices.
Following on from our 28 May 2019 announcement of a donation to the MIT Digital Currency initiative, we are delighted to announce a US$60,000 grant to Bitcoin Core contributor, Michael Ford (AKA fanquake). Michael has been a Bitcoin contributor since 2012 and has recently beenadded to the list of maintainers for the Bitcoin Core software project.
HDR Global Trading Limited (which owns and operates the BitMEX cryptocurrency trading platform) is proud to support Bitcoin development and engineering, aimed at improving Bitcoin’s robustness, scalability and privacy. The grant is non exclusive and requires Michael to work on Bitcoin Core. We are pleased to be Michael’s first financial supporter during his time as a Bitcoin Core maintainer.
Sam Reed, CTO and co-founder of HDR Global Trading Limited, made the following remark about the grant:
HDR Global Trading Limited, like all other companies in the cryptocurrency space, relies heavily on the (mostly-volunteer) work of coders dedicated to the mission and ideals of Bitcoin. This work is difficult, demanding, and often thankless. We believe it is the duty of corporations to give back to the projects from which they benefit – and from which their very business model stems. Without the millions of free man-hours from dedicated OSS developers powering everything from our operating systems, to our web servers, to our ops tools and Bitcoin itself, the BitMEX trading platform could not have been built. We don’t forget this gift. Therefore, HDR considers this grant, provided on a no-strings-attached basis, to be only a small part of an ongoing commitment to bolstering Bitcoin and other OSS projects for the benefit of all.
The event horizon has passed. With Libra, Facebook begins its foray into the digital asset industry. Before I begin my analysis, let’s get one thing straight; Libra is not decentralised nor censorship resistant. Libra is not a cryptocurrency. Libra will destroy all stablecoins, but who gives a fuck. I shed no tears for all those projects that somehow believed there was value in a an unheard-of sponsor creating a fiat money market fund that rode on a blockchain.
Libra could lay commercial banks and central banks low. It might reduce their usefulness to a dumb regulated warehouse for digital fiat money. And that is exactly what should happen to these institutions in a digital age.
Why Do Commercial Banks Exist?
Banks came about during a time of great danger for members of the human society. In feudal Europe you most likely worked dawn-till-dusk on the farm. Any meagre savings you or your feudal lord amassed were constantly under siege. Given that money was physical in nature, if you or your lord left the protection of the town, theft was likely.
Safety of assets has been the most important value proposition for traditional banks. They could store physical assets and records safely in their vaults. Therefore, governments and wealthy individuals stored money and assets with banks. Banks were and are engaged in a massive confidence game. That is why bank building edifices portray a certain fortified grandeur. In a generation, your assets will still be there, intact and ready for use.
Through their partnership with the government, banks obtain a license to issue credit and expand the money supply. They also rely on the legalised violence of the government to enforce contracts. Don’t pay the bank back, they will confiscate the encumbered asset. Should you defy the courts, a government goon will happily press boot to neck, and ensure your compliance.
In the last decade, human civilisation’s money and assets quickly transitioned from analogue to digital representations. Money and representations of ownership travel electronically rather than on the back of a horse. If assets and money are now digital, do we need institutions that provide physical rather than digital security?
As we have seen, commercial banks are terrible at securing digital information. Pick your large too-big-to-fail bank, and there will be a story about the “leakage” (euphemism for “we have no fucking clue how to safeguard your digital property”) of customer data.
Whoever has the customer, has the value
Previously banks held the most valuable information about customers. They had your whole financial history, and information about where you lived and what you bought.
In the past ten years, social media companies through voluntary actions of their users, amassed the most amount of personal information in human history. We share every detail of our lives on Facebook, Instagram, Google, Twitter, WeChat, LINE, Kakao Talk etc. We send billions of messages on centralised chat programs controlled by those same institutions as well. They now own the customer.
The modern consumer technology companies own billions of the wealthiest customers’ data. Previous to now, these companies made money on advertising and selling a product. But as with all businesses, once you are successful capturing customers, you start offering financial services.
Facebook has almost 2 billion daily active users. It makes complete sense to own the financial existence of their chattel. That is Libra.
Libra is a stablecoin backed by a basket of fiat currencies. The fiat currencies sit in a dumb regulated commercial bank. Libra allows a privileged few the ability to create and redeem Libra at its Net Asset Value (NAV). Libra rides on a blockchain where certain parties operate permissioned nodes. These parties included VC firms, technology companies, retail merchants, cryptocurrency exchanges, and most importantly commercial banks and credit card processors.
Libra may invest into short term government bonds, or into anything the Foundation board allows. The income earned is not passed onto the pleb Libra users, but the node operators and Libra investment token investors. The Foundation is the governing body of the Libra ecosystem. The members are selected based on the industries they represent, and their economic investment into the ecosystem.
Libra does not connect real-world identities to addresses. However, you can bet that converting assets into Libra will encounter KYC. And let’s be clear, any request from a government agency to freeze a transaction will be met with compliance. Therefore, do not use Libra to buy your mood-altering substance(s) of choice.
Impact on Consumers
Many of Facebook’s users reside in places with low financial services penetration. Imagine a world where a Filipina helper can purchase goods sold in Europe with Libra. She most likely does not have great banking services where she works as an overseas foreign worker. Therefore, purchasing goods from foreign countries over the internet is difficult. With Libra, there is no issue.
The merchant in Europe receives payment in a basket of fiat currencies they already deal with. This transaction can happen completely inside of one of Facebook’s social media properties like Instagram or Whatsapp.
Facebook or a new financial services company it creates, can issue loans at the point of sale denominated in Libra. A user can opt-in to allow Facebook to use all its data on the individual to compute a credit score. Using that credit score, Facebook will lend Libra at a rate to purchase goods from merchants selling on the Facebook platform. Voila, the poorest members of our global society can experience the joys of purchasing mass-produced Chinese knick-knacks on credit. Welcome to Pax Americana!
Impact on Commercial Banks
Commercial banks make money lending. They use retail deposits to make these loans. Unfortunately, in this digital age, they no longer have the best information set about these retail depositors. The social media companies do.
Therefore, the Facebook, Google, and Alibaba’s of the world can originate a loan cheaper and offer a lower interest rate than a commercial bank. Libra and the plethora of copycats to come, allow technology companies to use a digital fiat representation in their ecosystems to extend credit and offer all of the most profitable banking products at a much lower cost. These global tech behemoths have billions of free cash flow on their balance sheets to lend.
Commercial banks can become node operators or regulated warehouses for the reserve assets of the stablecoin in question. There is still economic value in both of these verticals, but consumer technology companies will now sell the most profitable financial products themselves.
Any bank should be on notice, Libra and its clones are existential threats to their business models. Many will cheer as banks’ profit centers are eviscerated. But maybe society is trading one devil for another.
Impact on Central Banks
Commercial banks are not needed at their current largesse in a digital economy. With Libra, Facebook is assuming the role of a central bank. The Libra reserve is managed by a third-party foundation. The reserve managers choose the fiat currency weights, and how funds are invested. Sounds a lot like the job scorecard of a central bank governor.
Consumer tech companies can now issue, from their own balance sheet, credit directly to consumers. The only difference with this model is that they, for now, are not able to actually create money like commercial banks. This is the flow:
1. Take retained fiat earnings, and exchange for Libra with an authorised primary dealer. 2. Lend Libra to your customer in exchange for a good or service you offer. 3. Obtain Libra + interest in Libra back from your customer. 4. Sell Libra in exchange for fiat with an authorised primary dealer.
The money supply does not expand. That is the one major divergence from how a central bank issues credit into an economy. Central banks’ lending in most cases increases the aggregate supply of money.
Why trust a few crusty old men and women to manage the monetary health of the global economy. Let’s trust Zuck!
I have no love lost for US Representative Maxine Waters’ idiotic statements and actions on the US House Financial Services Committee. But her and other government officials’ outbursts of concern are not driven by altruistic feelings towards their subjects, but rather a fear of the upending of the financial services industry that lines their pockets and keeps them in office. The speed at which government officials rushed to admonish Libra tells you there is some potential positive value to human society embedded in the project.
Libra and Financial Privacy
It is amusing to see how many people rushed to complain about the potential loss of financial freedom Libra could represent. This fear is misplaced, financial privacy is already non-existent, nor will it ever exist in a digital fiat money system. Whether it be Facebook, The Fed, or The PBOC, centralised electronic fiat money is coming – cash will be outlawed.
The great thing about the launch of Libra is that it forces those concerned about the loss of financial privacy to explore alternatives. Bitcoin and other cryptocurrencies will benefit as curious plebs contemplate how secure financial privacy in this new digital age.
Libra and the conversations it sparked, is the best news for Bitcoin. Two billion people will now embrace and potentially be frightened of a corporate overlord controlling their financial wellbeing. Curiosity is the best food for the Bitcoin bull market.
Through their investments in augmented and virtual reality, it appears that Facebook wishes to create a completely new digital world. Libra could be the financial mana that powers this virtual existence. Let’s hope that while we are vegetating in our haptic pods, our physical shells don’t get Zucked too hard. Please Zuck me gently, and Zuck me long time.
On 27 June 2019, we set a new record for crypto: >$1B open interest on XBTUSD, >$13B traded on XBTUSD, >$16B on all BitMEX products. Yet, Nouriel Roubini still believes that cryptocurrencies are a farce. Watch him face-to-face next week in Taipei’s Asia Blockchain Summit vs our CEO, Arthur Hayes.
Abstract: In a bold move, social networking giant Facebook, has challenged the traditional finance and ETF industry, with its “Libra coin”, or as we call it the “Libra ETF”. We note that there are many unanswered questions about Libra, which may lack transparency, when compared to traditional ETFs. Another key disadvantage of Libra is that unlike with legacy ETFs, investment income is not distributed to unit holders. We conclude that although Libra has significant disadvantages when compared to traditional ETF products, Facebook’s wide consumer reach with platforms such as Whatsapp and Instagram could give Libra a key commercial advantage.
(Facebook vs Blackrock – The battle for the ETFs)
The structure of Libra is analogous to the popular Exchange Traded Fund (ETF) model, where unit holders are entitled to the financial returns of a basket of financial assets. The units are tradable on exchanges and a select group of authorised participants are able to create and redeem units using the underlying assets.
As we pointed out in our February 2019 piece, the ETF industry has enjoyed considerable growth in the last decade or so, in particular in the area of fixed income (See figure 1 below). In June 2019, in a bombshell moment for the ETF industry and challenge for the established players such as Blackrock and Vanguard, social media and internet conglomerate Facebook, entered the game. In a direct challenge to Blackrocks’s “iShares Core U.S. Aggregate Bond ETF” (AGG), Facebook announced plans to launch a new ETF, the “Libra ETF”, also focused on fixed income and government bonds.
Figure 1 – Size of the Top Bond ETFs Targeting US Investors – US$ Billion
(Source: BitMEX Research, Bloomberg)
(Note: The chart represents the sum of the market capitalisations of the following bond ETFs: iShares Core U.S. Aggregate Bond ETF, Vanguard Total Bond Market ETF, iShares iBoxx $ Investment Grade Corporate Bond ETF, Vanguard Short-Term Corporate Bond ETF, Vanguard Short-Term Bond ETF, Vanguard Intermediate-Term Corporate Bond ETF, iShares J.P. Morgan USD Emerging Markets Bond ETF, Vanguard Total International Bond ETF, iShares MBS Bond ETF, iShares iBoxx $ High Yield Corporate Bond ETF, PIMCO Enhanced Short Maturity Strategy Fund, Vanguard Intermediate-Term Bond ETF, iShares Short-Term Corporate Bond ETF, SPDR Barclays High Yield Bond ETF, iShares Short Maturity Bond ETF)
Comparing the new ETF structure with the traditional space
In figure 2 below, we have analysed and compared the new innovative Libra ETF to a traditional ETF, Blackrock’s iShares Core US Aggregate Bond ETF (AGG). Our analysis shows that, although the Libra product is new, much of the relevant information, such as transparency of the holdings and frequency of the publication of the NAV, has not yet been disclosed.
The analysis also highlights that Libra may suffer from unnecessary complexity with respect to portfolio management. The fund appears to be managed by the Libra Association, which consists of many entities in multiple industries across the globe. These same entities are responsible for issuing the ETF and the list of companies is set to expand further. At the same time, the investment mandate is unclear. In contrast Blackrock’s fixed income ETF product has a clear investment mandate, to track the Bloomberg Barclays U.S. Aggregate Bond Index, which is managed independently of the ETF issuer.
Perhaps the most significant disadvantage of the Libra product, is that unit holders do not appear to be entitled to receive the investment income. This contrasts unfavourably with Blackrock’s product, which focuses on an almost identical asset class and has an investment yield of around 2.6%. Defenders of Libra could point out that the expenses need to be covered from somewhere and that the Libra’s expense fee is not yet disclosed. However, the ETF industry is already highly competitive, with Blackrock charging an expense fee of just 0.05%. This expense fee is far lower than the expected investment yield of the product, at around 2.6% and therefore the Libra ETF may not be price competitive, a key potential disadvantage for potential investors.
Figure 2 – Libra ETF vs iShares Core U.S. Aggregate Bond ETF (AGG) – Detailed Comparison
iShares Core U.S. Aggregate Bond ETF (AGG)
The Libra Association/Facebook
Bank deposits and government securities in currencies from stable and reputable central banks
Fixed income – Investment grade government and corporate bonds
Bloomberg Barclays U.S. Aggregate Bond Index
The Libra Association, based in Switzerland will manage the reserve. The investment mandate is not currently disclosed. The current members are as follows:
PayU (Naspers’ fintech arm)
Union Square Ventures
Creative Destruction Lab,
Women’s World Banking
James Mauro and Scott Radell, with a clear constrained mandate to track the index
Use of investment income
Unit holders are not entitled to investment incomeInvestment income will:
first go to support the operating expenses of the association — to fund investments in the growth and development of the ecosystem, grants to nonprofit and multilateral organizations, engineering research, etc. Once that is covered, part of the remaining returns will go to pay dividends to early investors in the Libra Investment Token for their initial contribution
Attributable to ETF unit holders
The Libra Association
will encourage the listing of Libra on multiple regulated electronic exchanges throughout the world
Creation/redemption basket size
Authorized Participants (entities able to create and redeem units)
Authorized resellers, not currently disclosed
Information about holdings and Net Asset value (NAV)
We have also analysed the two alternatives from a technical perspective. As figure 3 below indicates, the key difference is that control of Libra tokens may in part be managed by digital signatures. As long as no whitelist of addresses is implemented, this may provide some advantages:
A limited amount of censorship resistance
Relatively easy integration with cryptocurrency exchanges
However, as we mentioned in our Tether report in February 2018, history has shown that these characteristics can cause platforms to ultimately face a choice between implementing KYC or face being shut down by the authorities. Facebook has already censored politically controversial figures on its main platform, therefore it may appear likely the extent to which Libra ETF units are managed by public private key cryptography is significantly constrained or eventually becomes phased out.
Figure 3 – Technical and cryptographic considerations
iShares Core U.S. Aggregate Bond ETF (AGG)
Not applicable (An ETF does not require a consensus system)
Not relevant (Grouping records of ETF transactions into a chain of blocks linked together by hashing, is inconsequential for ETFs)
Control of units based on digital signature
The Libra Blockchain is pseudonymous and allows users to hold one or more addresses that are not linked to their real-world identity
Despite the key disadvantage, namely that Libra unit holders are not entitled to the investment income, many industry analysts are carefully examining the impact Libra could have on the traditional ETF industry and existing electronic payment systems.
While our comparison to ETFs is a bit tongue and cheek, it does highlight that the structure of the product has similar attributes to existing financial products. We therefore think it is an appropriate comparison, and if Libra wants to be competitive, it should emulate some of the governance and fee characteristics of traditional ETFs.
However, Libra could attract clients due to integration with platforms such as Facebook, Whatsapp and Instagram. If Libra does retain the property of allowing coins to be controlled by private keys, this is an interesting development and the coin is likely to gain share from tokens such as Tether. However, in our view, in the long run, it is likely Libra either disables this feature or makes it technically difficult, such that only a tiny minority of users have these “non-custodial” wallets. If that happens, Libra is nothing more than a high fee ETF.
During this period we continued to process order instructions and the trading engine was unaffected.
Due to this issue, data in a subset of data mirrors which service user REST API requests was left in an incomplete state. A side-effect of this was that some users observed stale open orders on the BitMEX website for orders which were already cancelled for a period of 90 minutes whilst data was being restored. Any API users that may be missing updates for this period can now backfill data via the REST API.
If you are experiencing order cancellation issues via the website, please refresh your web browser. We apologise for any inconvenience this interruption may have caused. If you have any further questions please contact Support via our contact form: https://www.bitmex.com/app/support/contact.
At 21:09:00 UTC 25 June, we released an update to our API layer that inadvertently started to count WebSocket subscriptions to certain tables against the request rate limit that had otherwise been exempt. This update may have impacted customers who heavily utilise the WebSocket API. Once the issue was identified at 00:19 UTC 26 June, we immediately rolled back the update to bring systems back to normal.
We apologise for any inconvenience this may have caused. To read more about which subscriptions are exempt from the request rate limiter, see our previous blog post for details.