The following post on the Bitcointalk announcement for Futereum summarises well a frequently asked question about the world’s first Blockchain-based ETH future:
Hey futereum, I think I got how this works, but what will happen if people will stop buying\”mining” let’s say at level 8 and will not finish 10 levels in 12\36\whatsoever ? Do you have any math of why it is still profitable to buy on higher levels? Thanks
Let’s start by dialling back to Sophia Chilton’s excellent summary of FUTR last weekend:
FUTR is an Ether-based derivative utility token. This means that everything about it – its functionality, its value, its core utility – is derived from Ether. When someone buys FUTR tokens, they send ETH to a smart contract address. Immediately, the smart contract address returns FUTR. This process is one the team calls “Proof-of-Ether mining”. There are different mining levels which indicate how much FUTR you get for every ETH you send to the smart contract address. For now, it’s 114 FUTR. next level, which is 999,000 FUTR away, it will be 89 FUTR/ ETH; and so on down by a fraction of about 0.69 or so per level.
At the end of 13 months, provided all the levels are completed (if they are not then at the end of 37 months) you are able to switch back your FUTR with the ETH stored in the smart contract. For providing the technology and future product releases which will give FUTR additional utility, The Futereum Foundation takes a 15% cut of the ETH received. FUTR will be available for purchase on exchange in February; for now it is available for purchase only via going to the foundation website.
What is really being asked in the question above of course, is – is it always economically viable to mine FUTR? The answer to that question is, for someone, yes it is. As long as the smart contract holds Ether, it is always a viable trade for someone to mine FUTR and this is what is so smart about the product – that there will always be a customer for FUTR as long as there remain buyers and users of ETH.
For a moment, imagine that you run a crypto asset management company. Let’s say that you purchase all of Level 8 – 10, and you don’t swap. At the present price of $1400/ETH, that would cost in the region of $400 million and in return you would lay claim to 940,000 FUTR. This represents 14% of all the ETH in the smart contract, which amounts to 69,845 ETH.
Now, suppose that after everyone swapped you then purchased an additional $90 million of FUTR for the same cost per ETH. You now have 4.8 million FUTR. After that, you let it ride out the next three levels while another 1.9 million FUTR were mined. There is now a total supply of 6.7 million FUTR, of which you own 69.5%. In the smart contract is 500,067.16 ETH, since there are the last 3 levels that were mined and remain un-swapped last time round, for which you own the FUTR, and there is the the current Level 1-7 that has been mined, the first 4 Levels of which were mined by your asset management company.
At this point, ETH jumps up to $3,400. This puts a FUTR’s smart contract at about a $1.7 billion valuation intrinsically, which works out at around $250 per FUTR if you divide it back. The average purchase price for all the tokens that you have paid is $229, so intrinsically your bet is in profit. However, you also own over half the supply of FUTR at a point in time (Level 8) when mining cost/difficulty is just increasing. Because of the late-stage level difficulty increase (in which a miner gets just 5 FUTR/ETH) coupled with the rising ETH price, the leap is quite large in the cost to mine FUTR here, representing a nearly four-fold increase to $680 from $175 the month before.
Clearly, there would be a bottleneck in market demand for on-exchange FUTR that were priced below the current-round (or possibly even next-round if ETH was rising fast enough) prices. This is because while expensive to mine, many traders would want to purchase FUTR as both a speculative ETH asset and a hedge/diversification over ETH on the back of such a spike in the ETH price. In such an instance, assuming you controlled over half the supply, your asset management company would be able to alight of half the purchase of FUTR you had made at about a 35% discount to mining cost (ensuring plenty of demand) and this would completely cover the cost of the trade. The remaining 1.5 million – 2 million FUTR that you held at a next-Level mining cost value of over $1000 each would be pure profit.
This trade requires huge amounts of capital to execute. But for a fund or syndicate of funds, $500 million is not an awfully large amount of money, if the net result is like to be that you make at least that much the following year and substantially diversify (hedge) your potential downside exposure on an ETH long trade by holding a majority share in FUTR supply. This type of trade is in fact the very object trade of an asset management company, and the function used to express it is known as the alpha coefficient.
The question from Bitcointalk about the economic feasibility or advantage of mining the later FUTR levels smartly asked us to question the mathematics of the equation. The reason why someone would mine the later levels, if not for the sake of realizing present-round profitability on the trade, would be then to harness a control over next-round supply by the time the difficulty level of the mining of FUTR was kicking in again. Timed with a spike in the price of ETH – even if that did entail a bit of a wait – the profitability of the trade versus the comparatively small risk taken would be too unbeatable to resist!
Editor’s Note: Emily Bianchi is a member of the Futereum Foundation Board of Directors.