Crypto Mining Swap Index Using Time-Weighted Difficulty Averages
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Solution Overview
Problem
Existing systems for transacting swaps and futures based on cryptocurrency mining indices suffer from high tracking errors and require frequent rebalancing due to unpredictable adjustments in mining difficulty, leading to increased counterparty settlement risk.
Innovation Solution
Implementing time-weighted index averages to calculate and settle swaps and futures, using a time-weighted average (Dwa) of multiple instances of mining difficulty (Dx to Dy) over multiple time periods (Px to Py), reducing the need for constant rebalancing and minimizing tracking errors to less than 0.1%.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Measurement precision
If traditional index calculations are used to track Bitcoin mining difficulty, then the index can be computed simply, but tracking error increases and constant rebalancing is required
Solution Approach 1:
The patent applies preliminary action by pre-calculating and storing difficulty values at each block height before they are needed for index computation. This allows the time-weighted index to be computed efficiently without requiring complex real-time calculations or constant rebalancing operations, thereby reducing tracking error while maintaining computational simplicity.
2Measurement precision
If frequent rebalancing is performed to maintain index accuracy, then tracking precision improves, but transaction costs and operational complexity increase
Solution Approach 1:
The patent implements periodic action by updating the index only at specific block heights rather than continuously or with frequent rebalancing. This periodic update mechanism maintains sufficient index accuracy for hedging purposes while dramatically reducing the time and resources spent on rebalancing operations.
Solution Approach 2:
By pre-computing difficulty values and preparing index updates in advance at each block height, the system eliminates the need for time-consuming rebalancing operations, achieving both accuracy and efficiency.
3Productivity
If simple index tracking is used, then transaction speed is fast, but tracking error increases leading to settlement risk
Solution Approach 1:
The patent resolves this contradiction by pre-calculating difficulty values and index updates at each block height before transactions occur. This preliminary preparation enables fast transaction processing while ensuring high tracking accuracy, thereby reducing settlement risk without sacrificing productivity.
Data Source
AI summary
Apparatus, systems and methods improve efficiency in transacting a swap or other futures based financial instrument, by using time-weighted index averages to decrease counterparty settlement risk. In preferred embodiments related to Bitcoin and several other cryptocurrencies, the swaps are based upon a time-weighted index average (Dwa) of multiple instances of difficulty (Dx to Dy) of mining the cryptocurrency over multiple time periods (Px to Py) where both Ds and Ps are available from the decentralized public blockchain. Traders can use these time-weighted index averages in conjunction with the anticipated values of Ds and Ps for the remainder of the duration of the index, to calculate the index value at any given time.