2015年12月，新当选的两名董事会成员 Oliver 和 Jim 被其他董事会成员免职，理由是他们对基金会未来的最佳发展方式存在分歧。Oliver 和 Jim 近期在个人成员的竞争性选举中获得成功，积累了相当大的民主授权。与此同时，Elizabeth 和 Meyer 的两年任期已经届满，而 Brock 和 Bobby 是由行业而非个人选出的。因此，从个人成员的角度来看，Oliver 和 Jim 是仅有的两名负有重大使命的董事会成员，但他们却被免职。随后基金会违反章程，决定不再进行任何董事会选举。正如执行董事 Bruce Fenton 所说：
我们认为这种逻辑很难自圆其说，因为很多问题是由于董事会对个人成员明显缺乏责任感所导致的。Elizabeth Ploshey 是唯一一位由在董事会有效工作过一段时间的个人成员所选出的董事会成员。如果该基金会真的想重整旗鼓，本可以让 Oliver 和 Jim 复职，并允许进一步的选举来替换其他本应当离开的董事会成员。但是恰恰相反，基金会甚至决定与成员拉开距离，避免这种问责可能带来的挑战，结果也就失去了它剩余的全部的合法性。
Abstract: In this piece we look back at the history of Bitcoin, focusing in on “The Bitcoin Foundation”, once one of the most prominent organisations in the ecosystem. We look at Foundation’s origins and then examine its failings with respect to its governance, transparency and finances, which ultimately led to a total loss of legitimacy within the Bitcoin community. We conclude that an all-encompassing Foundation was never likely to have been a good idea given the high governance and transparency standards of some in the community, and that a constant stream of scandals damaged the Foundation’s brand to such an extent that its duties had to be carried out by other organisations.
(Screenshot of the Bitcoin Foundation’s website and logo in 2013)
The Foundation’s Origins
Following on from our July 2018 piece, which took us back to shenanigans and incompetence at MtGox in 2011, this second look at Bitcoin’s scandal-rich history takes us back to July 2012, when The Bitcoin Foundation was founded. The Foundation had seven founding members, or six if you exclude Satoshi, who was oddly included as a founding member.
Bitcoin Foundation Founding Members
Gavin Andresen, Bitcoin Developer
Peter Vessenes, CEO of CoinLab
Charles Shrem, CEO of BitInstant
Roger Ver, CEO of MemoryDealers
Patrick Murck, Principal at Engage Legal
Mark Karpeles, CEO of MtGox.com
Satoshi Nakamoto, author of the white paper “Bitcoin: A Peer-to-Peer Electronic Cash System”
The objective of the Foundation was never completely clear, with the original bylaws stating the following:
The Corporation shall promote and protect both the decentralized, distributed and private nature of the Bitcoin distributed-digital currency and transaction system as well as individual choice, participation and financial privacy when using such systems. The Corporation shall further require that any distributed-digital currency falling within the ambit of the Corporation’s purpose be decentralized, distributed and private and that it support individual choice, participation and financial privacy.
The Foundation was funded by membership fees – the initial membership fee schedule is provided below. However, the Bitcoin-denominated prices did start to decline in 2013 as the Bitcoin price appreciated.
It was believed by many that due to the membership subscription fees, the Foundation had considerable financial resources to spend on its mission.
Approximate lower bound of member contributions in April 2013 (Assuming initial fee rates)
2 Platinum Industry Members * 10,000 BTC = 20,000 BTC
7 Silver Industry Members * 500BTC = 3,500 BTC
175 Lifetime Members * 25BTC = 4,375 BTC
Total Resources = 27,873 BTC
(Source: BitMEX Research)
As we see later on in this report, the Foundation only had around 8,000 BTC at the end of 2012, still a nice warchest, but a lower balance than many had expected. It is possible our estimate above could be an overestimate, as the timing of member subscriptions is unclear.
The Foundation Board
The governance structure of the Foundation was quite complex and arcane. There were three classes of members:
The board initially consisted of five members, one nominated by the founders, two nominated by individuals and two nominated by corporate members. The term of each appointee was expected to be 3 years. At the start of the Foundation, all five board members were appointed by the founders and all board members were founders, with the exception of Jon Matonis.
Bitcoin Foundation Board Members (2012 to 2019)
(Source: Bitcoin Foundation Website, BitMEX Research)
Critics can point to the fact that the governance structure gave too much power to the initial founders and that new members of the organisation should have been able to join as equals to the founders.
The first board elections took place in 2013, with Meyer Malka winning the Industry seat and Elizabeth Ploshay winning the vote amongst individual members.
Board Election – Industry Seat (2013) – Winners: Meyer Malka
At the start of 2014, the holders of the two founding industry seats resigned. Charles Shrem resigned on 28 January 2014, two days after his arrest at JFK airport for money laundering and unlicensed money transmitter related offences. Charlie was eventually convicted and sentenced to two years in prison in December 2014. The main substance of Mr Shrem’s felony appears to be that he continued to provide customer support to a user of his BitInstant Bitcoin purchasing service, despite him allegedly knowing the customer wanted Bitcoin for the purposes of purchasing illegal drugs on the Silk Road e-commerce platform (Or that the customer wanted to supply the Bitcoin to somebody else, who wanted to purchase illegal drugs, one extra layer removed). Mark Karpeles, the holder of the other industry seat, resigned on 24 February 2014, following the failure and insolvency of the MtGox Bitcoin exchange, where Mark was CEO.
Brock Pierce and Bobby Lee were then elected as the two replacement industry appointed board members.
Board Election – Industry Seats (2014) – Winners: Bobby Lee & Brock Pierce
The appointment of Brock Pierce to the board proved controversial, with some claiming the Foundation should have done more vetting before allowing Mr Pierce to stand. The allegation against the former child actor, who featured in the “Mighty Ducks” and Disney’s “First Kid” was related to his alleged involvement in the sexual exploitation of children in the late 1990s. Although only a teenager at the time, Mr Pierce was an executive and co-founder at the internet video startup, Digital Entertainment Network (DEN), which was accused of hosting several parties where sexual abuse may have taken place. The allegations resulted in co-founder and CEO Marc Collins-Rector, along with Mr Pierce, resigning from DEN and supposedly fleeing to Spain. Mr Collins-Rector evetually plead guilty to child abuse related offences and according to Reuters, court record show that Mr Pierce paid US$21,000 to settle a related civil suit, while other cliams were dropped, the article also states that Mr Pierce denies the allegations.
Towards the end of 2014, in the face of considerable pressure, the Foundation made the following improvements to its governance:
Board member terms were reduced to 2 from 3 years
The founder board seat was eliminated
The founder member class was removed
The Foundation’s Finances
The below table provides a basic analysis of the Foundation’s finances, in the period where most of the member dues were depleted (2012 to 2014). The data is based on the organisation’s IRS990 forms. With respect to the pay of the board, the disclosure seems reasonably strong. Most board members received no remuneration other than those acting as executives. Paying Gavin was one of the main aims of the organisation and Gavin’s pay appears to be disclosed in a reasonably clear and appropriate manner.
Jon Matonis (Contractor)
Other pay costs
Total pay costs
Disclosed Bitcoin figures
Bitcoin (US$ value at year end)
BTC sales proceeds
Realised Bitcoin gains/(losses)
Unrealised Bitcoin gains/(losses)
(Source: IRS 990 Forms, BitMEX Research)
The main criticisms related to the Foundation’s finances at the time appear twofold:
There was a sharp increase in spend in 2014, depleting the organisation’s reserves to near zero
There was a lack of transparency with regards to the Foundation’s Bitcoin balance
As for the first criticism, concerns did seem somewhat justified. In 2014 pay costs increased by 81%, the 2014 conference made a significant net loss and other costs increased significantly. As for the $1.3m in other costs, we have provided a breakdown below, therefore readers can judge the extent of the excesses. Compared to the excesses of the ICO bubble in 2017/18, where the total sum of the costs below perhaps represent a fraction of just one marketing party for the most egregious ICOs, the spend is moderate. However, some Foundation members clearly expected their funds to be spent more prudently. The main issue appears to be that expectations were not clearly set out in advance. Whatever your view, the fact is that by the start of 2015, the Foundation had almost run out of financial reserves and to that extent, its finances were mismanaged.
2014 breakdown of other spend
Other professional services
Professional event expenses
Payments to affiliates
Total other spend
(Source: Bitcoin Foundation IRS 990 form)
The lack of transparency with respect to the Foundation’s Bitcoin balance is another area of concern. At the end of each year the IRS990 form disclosed the USD value of the Bitcoin holding, the realised Bitcoin gains and the unrealised Bitcoin gains. Based on this information we calculated the following:
BitMEX Research BTC calculations
Bitcoin price at year end
Implied BTC balance at year end
Change in BTC balance
Implied sales price
Realised Bitcoin gains/(losses)
Unrealised BTC gains/(losses)
Lowest Bitcoin price figures
Lowest Bitcoin price in the year
Implied BTC sales proceeds
Realised Bitcoin gains/(losses)
(Source: IRS 990 Forms, BitMEX Research)
The disclosures in the IRS990 forms lead us to the following apparent Bitcoin related discrepancies:
The Foundations closing bitcoin balance in 2012 seems reasonably low given the volume of Bitcoin donations (See the c.28,000 BTC figure earlier in this report)
The Foundation disclosed an unrealised Bitcoin gain in 2013 of $5.2m, however based on the annual price movement and the calculated year end balance, we calculated an unrealised gain of only $4.4m
The Foundation disclosed an unrealised Bitcoin loss in 2014 of $2.0m, however based on the annual price movement and the calculated year end balance, we calculated an unrealised loss of only $0.6m
The Foundation disclosed Bitcoin sales proceeds of $569,728 in 2014, while even assuming all Bitcoin were sold at the lowest traded price in the year, given the large reduction in the Bitcoin balance of 4,600 coins, sales proceeds should have been $1.2m
Although there were accusations of embezzlement, we do not consider these disclosures to indicate any such crime. The Foundation was probably receiving Bitcoin and spending Bitcoin throughout the period, therefore clear financial record of Bitcoin sales are not likely to be available. At the same time, rules related to the reporting of realised and unrealised gains with respect to financial assets are not strict for this type of organisation and the Foundation does have a degree of discretion with respect to the calculation methodology. Therefore, the filings themselves do not indicate wrongdoing in our view. However, what we can say is that filings do not clearly explain what happened to the Bitcoin balance and an explanation from the board could be helpful.
Some members clearly expected greater transparency and wanted to question the board about the funds, but they were never given such an opportunity. The following quote from Bitcoin commentator Andreas Antonpoulous (who at the time was a Foundation committee chairman), reflected the views of many in the community at the time.
You say they are funded. Where are those funds? Who controls those funds? When were the last audited? Are they actually solvent? Or have all of those funds disappeared into a big black hole? Just remember who was in the leadership until recently, who is in the leadership today and what their track record of ethics has been and I would suggest that I would not be surprised at all if the Foundation implodes in a giant embezzlement problem sometime down the line or funds get stolen, within quotes or without quotes, or something like that. It’s bound to happen because these things don’t happen due to technical failures of bad actors, they happen due to failures of leadership The Foundation is the very definition of a failure of leadership.
To make matters worse, there were also accounations of the Foundation’s entanglement in the MtGox insolvency:
The MtGoX CEO, Mark Karpeles, was a founder and founding board member of the Foundation, while the company itself was a platinum member of the Foundation
Founding member, Roger Ver, famously assured MtGox customers of the solvency of the platform shortly before the exchange failed
The Foundation’s founding chairman, Peter Vessenes (who may have believed he was entitled to some MtGox equity), has been involved in various legal disputes with MtGox dating back to 2013 as a result of a failed business partnership. Peter’s company Coinlab sued MtGox for US$75m in 2013. As of August 2019, Peter now claims a remarkable total of US$16bn (Y1.6 trillion) from MtGox, an amount large enough to effectively block distributions to MtGox clients, and a large source of frustration to creditors to this day.
Andreas compared the Foundation’s situation to MtGox as follows:
Its problems go directly back to a complete failure of leadership. A completely closed, insular, arrogant, sheltered, uncommunicative leadership. Part of which was Karpeles himself, but there are another couple of relics left on that board, who pursue the exact same approach with their leadership. The Foundation is the Gox of Foundations. I am surprised it didn’t blow up in the wake of the Gox scandal, because there were a lot of significant conflicts within that environment.
However, perhaps it is unfair to make much of the association between MtGox and the Foundation, afterall, the ecosystem was small and MtGox was the dominant exchange, therefore a degree of association was inevitable to some extent.
The Amsterdam Conference (May 2014)
In May 2014 the Bitcoin Foundation arranged what was, up until this point, the largest conference in the space. It was the first conference (at least one which we attended), with characteristics familiar to many in the 2017/18 era. Unabated enthusiasm, unrealistic expectations about the underlying technology, expensive catering and countless booths representing new businesses with plans that appeared to make little commercial sense. As the figures above indicate, despite the expensive ticket prices of up to $800, the conference appears to have generated a net loss of around US$250,000.
The conference was split into two sections, a commercial section in the main exhibition hall, and the Bitcoin Foundation annual meeting (or technical track), which was down the hallway in a hotel conference room, entry to which was free for Foundation members. The technical discussions were followed by the Foundation members’ meeting
Journalist Ryan Selkis (now founder & CEO of Messari), was one of the key lifetime members at the event trying to hold the Foundation to account. At the annual meeting he asked several challenging questions to the Foundation board members, asking for greater transparency. Up until this point much of the debate and complaints had taken place on online web forums and this real world interaction marked a significant and novel change. In response to his challenges, one board member said the following:
We can spend a lot of our time trying to be transparent as much as we can and higher resources can be transparent or we can spend a lot of time in the board level making sure that we [have the] resources to make bitcoin bigger. It’s possible but right now, honestly, we’re in an environment where bitcoin is not well perceived. You asked for prioritise at least from my side as a board member, it’s more about [making bitcoin bigger]
It was clear from this response that, for whatever reason, some board members had chosen not to tackle the transparency and governance concerns, leaving some members feeling frustrated and more convinced of wrongdoing on the part of the board.
The Blockchain Election (February 2015)
Given the issues that the Foundation had faced and the concerns in the community about transparency, governance and the purpose of the Foundation, this was a relatively important set of elections. There was a large number of candidates and a reasonably good quality debate among the candidates, for example a dedicated Let’s Talk Bitcoin podcast on the election.
The Foundation decided to conduct the 2015 individual board seat elections on the blockchain. As the chair of the election committee, Brain Goss said:
I believe in the concept of using the block chain for storage of compact proofs/hashes (as the market dictates), and I’m a big believer in transparent voting that any one can verify
However, the blockchain voting process did not run smoothly and the following issues arose:
The first round of voting took place using the Helios voting system. However, no candidate achieved more than 50% of the vote, as required by the by-laws, therefore a second round was required. The Foundation then made the odd decision to switch the voting platform to Swarm between the voting rounds, a decision met with widespread opposition. Despite initially starting the final round voting process on Swarm, during voting the Foundation then decided to switch back to Helios, invalidating the Swarm votes
The decision to reduce the number of candidates to four after the first round of voting appeared arbitrary
Registering to vote was widely regarded as a cumbersome and complex process and some candidates complained
(Source: Email received as part of the Swarm voting process)
Board Election – Individual Seats First Round (2015)
(Source: Helios voting system records)
Board Election – Individual Seats Final Round (2015) – Winners: Oliver Janssens & Jim Harper
After the voting controversy, Patrick Murk told Bitcoin Magazine:
This clearly struck a nerve with folks that think blockchain technology should only be used for transferring Bitcoin and not other [applications] like voting. [It] sparked a debate on how people use the blockchain
Removal of Directors & The End Of Board Elections (December 2015)
In December 2015, the two newly elected board members, Oliver and Jim, were removed by the other board members, due to a disagreement over the best way forward for the Foundation. Oliver and Jim had recently succeeded in competitive elections from individual members, giving them a considerable democratic mandate. At the same time the two year election terms of Elizabeth and Meyer had already expired, while Brock and Bobby had been elected by the industry and not individuals. Therefore, from the point of view of the individual members, Oliver and Jim were the only two board members with a significant mandate and they had been removed. In a violation of the by-laws, the Foundation then decided not to conduct any further board elections. As the executive director Bruce Fenton put it:
I used to believe that public, open elections were a great thing. I’m not as convinced now…. We unfortunately don’t have the time or resources for more process.
In our view, this logic seemed difficult to justify, given many of the problems were caused by the boards apparent lack of accountability to individual members, with Elizabeth Ploshey being the only board member elected by individual members who served on the board for any meaningful amount of time. If the Foundation did want to revive itself, it could have reinstated Oliver and Jim and allowed further elections to replace the other board members who could have left. Instead, the Foundation decided to distance itself even further from members, avoiding the challenges this accountability would have imposed, and consequently the Foundation appeared to lose any remaining legitimacy it had left.
After this point, between 2015 and 2019, four new board members were appointed from the pool of candidates that were defeated in the previous elections, except this time appointments were made by the board rather than members.
The Foundation still exists today, with Brock as Chairman and Bobby as Vice chairman, although their elected terms have long since expired and no more elections are in sight. The Foundation has no significant financial resources and is largely irrelevant. The activities the Foundation used to conduct are now carried out by others, for example Coin Centre does some regulator lobbying, and Bitcoin development is funded by other organisations such as Chaincode Labs, Blockstream, MIT’s DCI and other industry players. In many ways the conclusion to this piece writes itself. Bitcoin never needed a Foundation, it is stronger without one, and any all-encompassing Foundation like this was always doomed to fail.
The outrage at the lack of transparency at the Foundation exposes some of the key divergences in expectations and culture between members of the Bitcoin (now cryptocurrency) community. Some Bitcoiners, especially those involved since the early days of the Foundation, were often highly conspiratorial, paranoid and expected radically high levels of transparency, accountability and financial prudence. The Foundation seems to have misjudged these expectations, lost the backing of the community and ultimately failed. However, compared to the excesses of the coin offering era, which picked up from around 2014 onwards, peaking at the start of 2018, the financial accountability and transparency of the Bitcoin Foundation was almost impeccable, relatively speaking. Some members of the cryptocurrency community (not all newer ones), had radically different expectations, focusing more on what they perceived as game-changing technology, changing the world and getting super rich, rather than governance. Even in this new climate, irreparable damage to the Foundation’s brand had been done and it never again found its place.
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.
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.
(注：图表代表以下债券 ETF 的市值总和: 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)
对比新的 ETF 结构和传统空间
下方图 2 中，我们将创新的新型 Libra ETF 和传统的 ETF ——贝莱德旗下的 iShares Core US Aggregate Bond ETF (AGG) 进行了分析和比较。我们的分析表明，尽管 Libra 产品是新产品，但许多相关信息，如持股透明度和资产净值公布的频率，尚未得到公布。
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.