Note: Parts of this post are directly from the BTCST whitepaper. To view the entire whitepaper, visit: https://www.1-b.tc/static/BTCST_Whitepaper.pdf
BTCST claims mining rewards from the Bitcoin network centrally and distributes rewards to holders de-centrally. The project has partnered with a reputable mining pool to claim mining rewards from the Bitcoin network. Namely, the project will direct all mining power collateralizing the token to the partnering mining pool in exchange for daily mining rewards as calculated and allocated by the pool. Centralization of this step is necessary to ensure feasibility and accountability: the mining pool will act as both a service provider and as an auditor that monitors mining power sufficiency. As it is customary, the project expects up to 10% of annual mining power downtime.
Once daily mining rewards arrive, a portion will be sold on the open market to cover the project’s daily energy and operational costs. The formula for determining the project’s daily costs, with the industry-standard power usage efficiency loss set at 3%, is:
Energy cost is currently at USD 0.058 / kWh. The execution price and amount of the daily sale will be audited and published by the mining pool. Remaining mining rewards attributable to mining power representatively staked in the project’s DeFi yield farming dApp will be sent by the project and the mining pool jointly to the dApp and then pooled there.
Holders stake BTCSTs in the dApp to yield farm Bitcoin. Namely, every BTCST staked continuously for a day (Singapore time) will increase the amount of Bitcoin that a staking holder is entitled to withdraw from the dApp by an amount equal to Bitcoin minable by 0.1 TeraHash of mining power on that specific day.
Namely, a holder of BTCST stakes 10 BTCST in the project dApp for a full day on day 1 (Singapore time). On day 2, the staking holder will be entitled to withdraw Bitcoin, as wrapped by the applicable blockchain, in an amount minable by 0.1 TeraHash of mining power on day 1. As with direct mining, the precise amount of Bitcoin minable by 0.1 TeraHash of mining power will vary daily as a result of changing network hashrate, difficulty, and Bitcoin price relative to energy costs.
The amount of Bitcoin the staking holder is entitled to withdraw will increase and accumulate in the dApp for each continuous day (Singapore time) of staking. Calculation and allocation of Bitcoin rewards are performed transparently by the dApp. The staking holder may withdraw mined Bitcoin at any time. The dApp supports both partial and complete withdrawals of Bitcoin rewards.
The example below explains mining rewards distribution in further details:
Liquidity premium protection
We expect the price of BTCST to command a liquidity premium as compared to mining power without tokenization. To protect this premium against undue sell pressure, material issuances of BTCSTs must be approved by the project’s
The project may freely issue on any given day BTCSTs representing up to 5 PH/s of mining power. For a daily issuance of BTCSTs representing more than 5 PH/s, the issuance must be unanimously approved by the project’s governance board, which includes a seat occupied by the partnering mining pool.
In addition, and similar to how Grayscale Bitcoin Trust operates, newly issued
BTCSTs are subject to a 25-week lock period. BTCSTs issued to the project itself are subject to the same lock period. The release schedule for locked tokens is linear and weekly. For example, if 1000 locked BTCSTs are issued and locked on January 1, forty BTCSTs will be released from lock on January 8 and every week thereafter until the 175th day after January 1.
Locked BTCSTs can be staked in the dApp and generate mining rewards for their owners. During staking, linear release continues to run as usual and the unique release schedule of each locked BTCST follows the token as it is staked into or unstaked from the dApp. The last-in-first-out method determines which BTCSTs are returned to a staking holder upon un-staking for the purpose of determining remaining release schedules.
Leveraged Bitcoin token; Market-Making
Each BTCST is collateralized by real mining power. Therefore, its fair market value can be determined by the discounted cashflow model. The price of BTCST in secondary trading should track that of Bitcoin and the token should be able to function as a leveraged Bitcoin token in an efficient market. Furthermore, because BTCST does not depend upon financial derivatives, it is by design free from liquidation risk.
The project team will serve as BTCST’s main market-maker. Unlike tokens where the intrinsic values of are hard to ascertain, BTCST has not only an intuitive valuation model but also an over-the-counter market for the underlying assets. The project team therefore has clear methodologies and incentives to bring the market price of BTCST towards equilibrium.