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Bitfinex - Segwit2x Chain Split Tokens


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Segwit2x Chain Split Tokens October 05, 2017

In March 2017, Bitfinex introduced an innovative new token class called a Chain Split Token (CST). CSTs allow market participants to speculate on the future outcome of a potential cryptocurrency protocol change. In March, that potential forking event concerned Bitcoin Unlimited.

Now, we are launching a new pair of CSTs for another proposed consensus change: Segwit2x

Bitfinex is introducing new CSTs that will allow traders to speculate on the potential activation and mining of the Segwit2x consensus protocol. We are designating these CSTs as BT1 (Incumbent Bitcoin Blockchain) and BT2 (Bitcoin Segwit2x).

These CSTs will trade against BTC and USD pairs, initially, without financing capabilities. We will reevaluate that decision at a later date if and as there is sufficient liquidity.

Users will be able to create or destroy these new CSTs in any amount using the Token Manager located in the Order Type drop down menu of the sidebar order ticket. Upon creation, the BTC will be debited from your account and an equivalent amount of BT1 and BT2 will be credited. Users will also be able to reverse this process at any time, trading in equal numbers of BT1 and BT2 to extract BTC. Please refer to the Segwit2x CST Terms & Conditions for more information.

Motivation

One of the interesting characteristics of open-source projects is that developers are free to split the code into new projects if they want to take a project in a new direction. In open-source terms, this is called forking the project.

Bitcoin is an open-source project, and there is a scheduled change in the consensus protocol called Segwit2x, the specifications for which can be found in the Github repository https://github.com/btc1/bitcoin.

Because the value of a network grows exponentially as the size of the network grows, it is advantageous to have only one version of Bitcoin. For this reason, in the future, the dominant Bitcoin implementation will likely converge on either Segwit2x or remain on the incumbent version that uses the consensus protocol defined on the Github repository https://github.com/bitcoin/bitcoin.

At this time, the Bitcoin ecosystem, through node and miner signalling, is trying to decide which protocol consensus rules it wants to support. This has introduced uncertainty and speculation about the value of each respective blockchain and the future of the Bitcoin network. This uncertainty affects many of our users who trading using financing. CSTs will provide a pricing continuity through the Chain Split Event and, in particular, the order books for the BT2 trading pairs will become the order books for the B2X pairs.

We have reached out to consult, share ideas, and elicit feedback on this process. We welcome more and continued discussion and debate so that we can improve on these kinds of product offerings in the future.

We hope that this innovation brings some much-needed price discovery for the future of the Bitcoin ecosystem.

We're working hard to bring you the best platform possible. If we made any mistakes or if you have any suggestions we'd love to hear from you. support@bitfinex.com / @bitfinex

 

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Before trading or using the Token Manager with the Chain Split Tokens (CSTs) BT1 and BT2, please review the following information and accept the terms and conditions.

 

 

 

Chain Split Tokens (CST)

Bitfinex is proud to provide trading on Chain Split Tokens (CSTs). The first such product of its kind, CSTs allows Bitfinex customers to speculate on the value of incompatible ledger units associated with a potential forking event on blockchains.

Each CST has specific conditions which will cause the CSTs to be resolved, converted, or destoyed. Please review the contact carefully for each CST before agreeing to the terms and begining trading.

Token Manager

CSTs are created by splitting the source currency to two or more resulting "split tokens". This is achieved using the Token Manager. Access the token manager from the trading form in the page sidebar. Use the order type dropdown to select "Token Manager". Destroying split tokens by recombining them to reform their original source currency can also be achieved using the Token Manager.

Terms & Conditions

These terms and conditions (these “T+Cs”) govern your use and exchange of BT1 and BT2 Chain Split Tokens (as defined below) on the Site. You should read these T+Cs carefully. The Site’s Terms of Service continue to apply to all Site users; these T+Cs are in addition to, and supplement, and not in substitution of, the Terms of Service. The Terms of Service are available here. By using any CSTs on the Site in any manner from time to time, you agree to these T+Cs and, for the avoidance of any doubt, to the Terms of Service.

These T+Cs may be amended, changed, or updated by Bitfinex at any time and without prior notice to you. You should check back often to confirm that your copy and understanding of these T+Cs is current and correct. Your non-termination or continued use of any Services after the effective date of any amendments, changes, or updates constitutes your acceptance of these Terms of Service, as modified by such amendments, changes, or updates.

The use of, ownership of, and trading in any Chain Split Token (as defined below) is void where prohibited by applicable law.

  1. 1.Definitions: In these T+Cs, the following words have the following meanings unless otherwise indicated:
    1. 1.1“BT1” means a CST representing the Incumbent Bitcoin Blockchain;
    2. 1.2“BT2” means a CST representing Segwit2x consensus protocol;
    3. 1.3“B2X” means a Digital Token converted from BT2s at or after Contract Settlement, as set out in these T&Cs;
    4. 1.4“Chain Split Event” means a fork in the Incumbent Bitcoin Blockchain that produces a viable and alternative blockchain based on—and that may only be used exclusively based on—the consensus protocol of Segwit2x. Segwit2x is scheduled to occur at Block Height 494784 and will be deemed to occur at the moment in time that a new, viable, and exclusive blockchain based on the Segwit2x consensus protocol comes into existence;
    5. 1.5 the “Contract Period” starts on October 5, 2017, and ends at 11:59:59 pm UTC on December 31, 2017;
    6. 1.6“Contract Settlement” means the earlier of 11:59:59 pm UTC on December 31, 2017, or immediately following a Chain Split Event, as defined in these T+Cs;
    7. 1.7“CST” means a Chain Split Token, which are Digital Tokens designed to facilitate trading on the value of ledger units exclusively associated with a potential, contingent, and non-guaranteed forking event on the Bitcoin blockchain;
    8. 1.8“Incumbent Blockchain” means the currently existing Bitcoin blockchain that is exclusively used based on the consensus protocol as set out from time to time in the repository https://github.com/bitcoin/bitcoin;
    9. 1.9“Segwit2x” means the anticipated Bitcoin blockchain that will be exclusively used based on the consensus protocol as set out from time to time in the repository https://github.com/btc1/bitcoin; and,
    10. 1.10“T+Cs” means these terms and conditions governing the use and exchange of Segwit2x CSTs on the Site.

    Other terms not expressly defined in these T+Cs have the meanings set out in the Terms of Service.

  2. 2.Exchange & Trade: You may exchange bitcoins for BT1 and BT2 using the Site’s token manager platform until immediately before the Chain Split Event. The rate available for exchange is 1 BT1 + 1 BT2 for each bitcoin. You may also redeem bitcoins using the Site’s token manager platform until immediately before Contract Settlement. The rate available for redemptions is 1 bitcoin for 1 BT1 + 1 BT2. You may trade CSTs on the Site during the Contract Period in four market pairs: BT1/USD, BT1/BTC, BT2/USD, and BT2/BTC.
  3. 3.Settlement—Generally & BT1s: At Contract Settlement, CSTs shall be converted on a 1:1 basis to Digital Tokens on their respective blockchains at Contract Settlement. In the case of BT1, the blockchain shall be defined by the consensus rules used on the Incumbent Blockchain, currently designated with the ticker symbol BTC. If no Incumbent Blockchain exists pursuant to these T+Cs, BT1 tokens shall be deemed to have a value equal to zero and shall be removed from the platform. All open orders for any BT1 trading pair will be canceled at Contract Settlement.
  4. 4.Settlement—BT2s: In the case of BT2, Segwit2x shall be deemed to exist only if a blockchain has diverged incompatibly from the Incumbent Blockchain. Any settlements of BT2 shall be to B2X. If no Segwit2x blockchain exists pursuant to these T+Cs, BT2 tokens shall be deemed to have a value equal to zero and shall be removed from the platform. All open orders for any BT2 trading pair will be converted into open orders for corresponding B2X trading pairs to ensure pricing continuity and minimize disruption for users trading BTC pairs on leverage prior to the Chain Split Event.
  5. 5.Delayed Settlement: Important: Settlement of BT1 into BTC and BT2 into B2X may be delayed in Bitfinex’s sole and absolute discretion. If either of the blockchains associated with BT1 and BT2 is destroyed, reorganized, or experiences a technical malfunction, in any manner and by any party or source, before settlements have been completed, those tokens shall be deemed to have a value equal to zero and shall be removed by Bitfinex. Furthermore, there is a risk that, after the Contract Settlement, either blockchain may be unstable, abandoned or destroyed. This may happen even after multiple confirmed blocks. Among other limitations, Bitfinex assumes no liability or responsibility for any Losses attributable to this or any other circumstances.
  6. 6.One Chain: In the unlikely event that only one blockchain exists, and it is compatible with the consensus rules of both the Incumbent Blockchain and Segwit2x, then a determination may be made, in the sole and absolute discretion of Bitfinex, as to whether that blockchain is more compatible with the consensus rules of the Incumbent Blockchain or with Segwit2x effective on October 5, 2017. In the event that the blockchain after any fork is more compatible with the October 5, 2017, Incumbent Blockchain, then only BT1 tokens will be convertible, and BT2 tokens shall be deemed to have a value equal to zero. In the event that the blockchain after any fork is more compatible with the October 5, 2017, Segwit2x rules, then only BT2 tokens will be convertible, and BT1 tokens shall be deemed to have a value equal to zero.
  7. 7.No Representations & Warranties by Bitfinex: Bitfinex makes no representations, warranties, or guarantees to you of any kind. All CSTs, all software, and all blockchains are offered strictly on an as-is, where-is basis and, without limiting the generality of the foregoing, are offered or made available to you without any representation as to merchantability or fitness for any particular purpose.
  8. 8.Limitation of Liability & Release: Important: Bitfinex assumes no liability or responsibility for and shall have no liability or responsibility for any Losses directly or indirectly arising out of or related to your use of or trading in one or more CSTs, Digital Tokens, or B2X, or your use of any one or more blockchains, including but not limited to Segwit2x after Contract Settlement. You hereby agree to release the Associates from liability for any and all Losses, and you shall indemnify and save and hold the Associates harmless from and against all Losses. The foregoing limitations of liability shall apply whether the alleged liability or Losses are based on contract, negligence, tort, unjust enrichment, strict liability, or any other basis, even if the Associates have been advised of or should have known of the possibility of such losses and damages, and without regard to the success or effectiveness of any other remedies.
  9. 9.Post-Contract Settlement: After Contract Settlement, Bitfinex may or may not list B2X, if existing, on the Site, in its sole and absolute discretion.
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Statement Regarding Upcoming Segwit2x Hard Fork October 06, 2017

 

As the Bitcoin ecosystem approaches what appears to be an impending hard fork, it is important to clearly state Bitfinex’s policies on hard forks.

 

First, we want to make it clear that Bitfinex does not intend to advocate for or against any particular hard fork. Miners have the prerogative to commit their hashing power to whatever projects they choose, including alternative and incompatible protocol implementations. However, our first obligation is to our customers, who often demand tokens on each chain in the event of a hard fork that lacks clear community consensus. At this time, we do not believe that there is sufficient consensus to identify a clear winner in the Segwit2x hard fork. Accordingly, our customers will have access to tokens on both chains.

 

We have a responsibility to foster, maintain, and support orderly markets that trade continuously 24/7/365. With a hard fork that lacks clear community consensus, we cannot suspend operations and wait for a winner to emerge. Leveraged trading requires that our markets operate continuously. On operational requirements alone, we must designate such forks as new assets.

 

As the proposed consensus protocol Segwit2x project appears likely to activate, we have elected to designate the Segwit2x fork as B2X, for now. The incumbent implementation (based on the existing Bitcoin consensus protocol) will continue to trade as BTC even if the B2X chain has more hashing power.

We are doing this for practical and operational reasons. Political considerations are irrelevant here. While we cannot change or re-assign ticker symbols, we can change the label or description associated with that ticker symbol. For the time being, BTC will continue to be labeled as “Bitcoin,” and B2X will be labeled as “B2X.” This will remain the case unless and until such time that market forces suggest an alternative, more appropriate, labeling scheme for one or both chains.

 

The lack of strong two-way replay protection in Segwit2x means that we must take steps to protect customer funds. At the moment of the fork, all deposits and withdrawals for both BTC and B2X will be halted until we are able to: 1. ‘taint’ our customers’ bitcoins to ensure withdrawals cannot be replayed on both chains; and, 2. ensure that we can properly credit deposits in the event a transaction is replayed on both chains. We expect this process to require at least 24 hours, and potentially significantly longer. If the the event happens, announcements will be made throughout the process to keep everyone up to date.

 

Margin

In the event of a hard fork that results in a chain split, Bitfinex is also faced with the challenge of resolving peer-to-peer financing issues. Because we have sufficient time to plan for this event we have elected to handle the accounting of peer-to-peer financed trading similar to how stock spinoffs, dividends, and distributions are handled in equity markets.

Specifically, in the case of a hard fork event, lenders will receive both BTC and B2X. Anyone that is short BTC/USD or long any BTC trading pair (ETH/BTC, LTC/BTC, etc.) will owe B2X to the lender, effectively making the user short B2X. An exception is being made where BTC is borrowed but is not in use as financing collateral. In that case, B2X will accrue to the lender. Users that are financed long BTC/USD or short any BTC trading pair will receive B2X.

 

This methodology is complex and operationally challenging, but we believe it to be, in this case, the most economically correct and fair approach for Bitfinex and our customers. Furthermore, we believe it is the only approach that will keep the BTC lending market functioning throughout a hard fork event.

Imagine a situation where lenders do not receive B2X. They would be incentivised to stop lending if a hard fork appears imminent. Consequently, lending liquidity could completely disappear, and Bitfinex would be obliged to begin partial liquidations of financed positions when BTC loans expire and cannot be renewed.

We believe that such a hypothetical outcome should be avoided. Our plan should prevent the negative consequences of this scenario and seems likely to allow the funding market to continue to operate.

 

It’s important for borrowers to understand that while their P&Ls may climb during a hard fork event, they will have offsetting B2X liabilities that will be applied to their accounts, though perhaps not immediately. At the moment that Bitfinex detects a B2X block that is incompatible with the existing Incumbent Bitcoin blockchain, we will immediately halt processing of any and all BTC deposits and withdrawals for all users, and freeze all movements for all currencies for any borrower of BTC.

 

This freeze will last until the B2X accounting can be adequately prepared and addressed. We expect the process to be quick and automated, but we cannot guarantee that it will be immediate. BTC borrowers can hedge or estimate this liability with newly listed Chain Split Token (CSTs). Depending on CST price discovery, we may also increase margin requirements as the Chain Split Event approaches. This should help users protect themselves from liquidations that might occur during potential large swings in the combined value of BTC and B2X in the aftermath of the Chain Split Event. Please note that the order book for the BT2 CST will become the order book for B2X after the fork, providing price continuity and avoiding temporary, but potentially large, swings in overall account equity.

 

More details on the specific procedures will be forthcoming, but we feel that it is important to address the economic implications as soon as possible, so that our customers can plan accordingly. Bitfinex staff will be available on Whalepool Teamspeak and Bitcoin Mumble servers from time to time to answer customer questions. We will also be building a FAQ document to clarify edge cases and other nuances as needed.

 

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