Community Feedback Needed On New Product: Bitcoin Exchange Default Swaps

BitMEX is committed to offering innovative Bitcoin derivative products. Due to the recent exchange hackings and employee departures, and the many defaults in the past, the community is rightfully fearful of exchange closures and the loss of customer funds.

We are pleased to announce the world’s first Bitcoin Exchange Default Swap (EDS).

The EDS allows traders who need protection from default to buy this protection on a fair marketplace, while allowing other traders the chance to earn a interest rate on their deposits.

The ideal EDS product offers comprehensive protection to buyers of the swap from all types of exchange loss, while offering sellers an interest rate high enough to make it worthwhile and popular to trade.

To help us build the ideal product, we want the community’s help. What is your ideal structure? Do you need this protection, and if so, what terms would fit your needs? If not, what terms would make it attractive to you as a protection seller to earn an interest rate?

The BitMEX engine is capable of trading nearly any type of product; the specifications of the contract need not conform to any structure to fit our engine. We want the Bitcoin EDS to be an attractive product to both buyers and sellers.

We have posted our initial EDS contract specifications below. You can leave feedback here, or directly on the document.

The product will begin trading in the second quarter.


Objective

The BitMEX Exchange Default Swap (EDS) is meant to allow traders to option of buying or selling insurance against leading Bitcoin exchanges being hacked or ceasing operations. Each EDS contract will be for a single Bitcoin exchange.

The exchanges to be listed at launch:

  • Bitfinex
  • Bitstamp
  • OKCoin

Product Mechanics

Insurance Buyers (Buyers) pay a market determined Bitcoin amount to Insurance Sellers (Sellers) to insure a certain amount of Bitcoin. If a default event occurs, the buyers receive the insured Bitcoin notional amount.

Default Events

The following events qualify as default:

  • A publically announced hack, loss, or theft of customer Bitcoins.
  • The publically announced closure of the exchange at a future date within 6 months.

The default event trigger is based on the announcement of a hack or closure, not the effective date of the incident.

A public announcement is considered an announcement made by the exchange in question on their website, blog, official email, or verified statement to media outlets.

If a default event is declared, trading will halt and buyers will be paid the full contract notional.

It is at BitMEX’s discretion whether to declare a default event.

Contract Structure

Each EDS contract will have a notional amount of 1 Bitcoin.

The contract will be quoted as a percentage of the Bitcoin contract notional payable as a Bitcoin insurance premium from buyer to the seller over the duration of the swap.

Each EDS contract will trade for one calendar month.

The insurance premium will be paid to the seller each day at a specified time. For each EDS contract the Seller writes, he must place 1 Bitcoin in escrow with BitMEX to cover his obligation to the buyer if a default event occurs.

BitMEX will host a market for the amount of insurance premium to be paid. Traders may speculate on the probability of default through buying and selling the insurance premium.