Invented by Matthew Trudeau, Joseph McGlawn, Thomas Chippas, Cboe Digital Intermediate Holdings LLC
The Cboe Digital Intermediate Holdings LLC invention works as follows
A financial trading system allows the creation and trading of cryptographic-based financial instruments based on the difficulty of the underlying cryptocurrency using physical delivery.” Cryptographic difficulty-based instruments are based upon an expected value, which includes the predetermined reward for each block of cryptocurrency. They also include a hashrate and a financial instrument length that is predetermined, as well as the nonce value and current difficulty level of the underlying currency. This value may change with the fluctuation of the difficulty level. The clearinghouse settlement calculates the daily variation margin of valuation of the financial instruments and provides physical delivery of underlying cryptocurrency in order to satisfy the variation.Background for Electronic trading and settlement system for blockchain-integrated cryptographic difficulty-based financial instruments
The present invention is a trading system for cryptocurrency. The present invention is more specifically a cryptocurrency-trading system that includes the physical delivery of cryptocurrency.
A cryptocurrency is an electronic asset that can be used to store value or as a medium of exchange. It uses a decentralized system for recording transactions. The decentralized-network that cryptocurrencies operate on are generally blockchain-based technologies. A blockchain is an immutable series of transactions, a block chain, that’s shared by a network of users. It’s also sometimes called a distributed ledger. Public or private distributed ledgers are available. In a private distributed ledger, all transactions are validated by network participants that know each other and can trust one another. Access to the network is controlled by central parties. Public distributed ledgers are those where there is no restriction on who can join the network to validate transactions and in general, no one person or entity is in charge. “Miners are the people who validate transactions on public ledgers. They compete against each other to validate transactions for compensation.
In order to validate and confirm transactions amongst network participants, the system must reach consensus before adding a block of transactions or group of transactions to the chain. Participants must agree to a set of rules that will allow them to reach consensus. Proof-of Work (PoW) is one of the many consensus mechanisms that exist today.
Nodes are computers that run a blockchain software on a network. In the PoW-model, nodes compete to add blocks to the blockchain. They do this by solving a mathematical puzzle and receiving a reward for their efforts. Mining is the process that rewards newly created cryptocurrency. This ensures that the blockchain is synchronized and secure across all participants of the network.
The mining process has evolved and now requires specialized computer hardware that can compute guesses of the solution in large volumes, at high speeds. These machines attempt to solve a mathematical problem by applying a cryptographic algorithm to a set of transactions. There are many hashing algorithms that are used in blockchains, including SHA-256 for Bitcoin, scrypt for Litecoin and Equihash for Ethereum. It is important to keep the network stable and fast by limiting the average time taken to embed a block in the blockchain software.
Mining nodes or miners independently select and group transaction to form a Block. The block is summarized by a block header, which includes the following data:
Version: Software/Protocol version number
Previous block Hash”: Refers to the previous block in the chain.
Merkle Root: The hash of the transactions in the candidate blocks
Timestamp : block creation time
Difficulty Target: A variable threshold value that a block hash should be below
Nonce”: Variable changed to obtain an acceptable hash value
The challenge to adding one of these block to the blockchain involves solving the proof of work algorithm, which requires finding a hash of the header data of the block with a value that is lower than the target difficulty level. The nonce is the only constant component of header data. The miner changes the nonce incrementally and passes the header data of the block through the hash function, until the hash value is below the target difficulty. At this point, the miner can demonstrate their ‘work’. Based on the proof-of-work, other nodes can accept the block and add it to the chain. The nonce, for instance, in Bitcoin is a field of 32 bits and can include any number between 0 to 4,294,967.295″.
Miners must face many uncertainties in order to run their nodes profitably. The success of mining, however, is not deterministic but probabilistic. The actual reward could be higher or lower than expected. The reward is deterministic but the odds of winning it are like a lottery. Over time, these should tend to converge towards a standard distribution. The fiat-converted value at which a reward for a cryptocurrency is valued may be higher or lower than the current or expected price as prices fluctuate. Third, network hashrate (or the measure of online processing power) can vary depending on the number nodes that come on or leave the network.
All of the variables are interrelated and create a feedback system that impacts the chances of mining a particular block, the value and time of block confirmation, and therefore future difficulty targets.
There are many factors that miners consider when determining their profit. The costs of mining are fairly clear, since they include both capital expenditures, such as the equipment and space needed to house it, and operating expenses, such as electricity, staffing, etc. That must be paid in fiat currency. Miners are faced with a number of uncertainties regarding their future expected fiat income. Two important uncertainties are: the amount of crypto they produce and the price they can sell it at.
One or more embodiments of the invention provide a trading system for financial instruments that allows the creation and trading of cryptographic-based financial products using the physical delivery of the cryptocurrency. The cryptographic difficulty based financial instruments are based upon an expected value, which includes the predetermined reward for each block of cryptocurrency. They also include a quantity of hashrate and a financial instrument length. The trading system calculates the daily variation margin of valuation of the financial instruments and delivers the underlying cryptocurrency in order to satisfy the variation.
As described above, there are many uncertainties for miners regarding their future expected fiat income, including: 1) how much cryptocurrency they will ultimately produce and 2) at what price they can sell it once they have obtained. Mining can be seen as a way to produce cryptocurrency. “Miners, like traditional commodity producers, may value a system of risk management to integrate into their operations in order to address these risks.
One embodiment of the invention is a computer-implemented system that facilitates an exchange of cryptocurrency and its delivery based on a published estimated difficulty level versus a real observed difficulty for a PoW blockchain.
The embodiment of the invention described in the patent is a centrally cleared, exchange-traded system. Terms such as trading platform and exchange refer to a marketplace where commodities, derivatives and securities are traded. This includes, but is not limited to, exempt boards, designated contract markets and designated clearing organizations. Securities exchanges, swap-execution facilities, electronic communication networks and so on.
The present invention can be used for all PoW cryptocurrencies, including but not limited Bitcoin, Ethereum Bitcoin Cash, and Litecoin. It can also be applied to all cryptocurrencies that have a concept for generating more cryptocurrency by mining or a similar process.