BitMEX Institute: The Bitcoin Foundation's unknown historical secrets

Abstract: In this article, we review the history of Bitcoin, with a focus on the Bitcoin Foundation, which was one of the most prominent organizations in the ecosystem. We started with the origins of the foundation and then examined its flaws in governance, transparency, and finance, which ultimately led to the Bitcoin Foundation losing its influence in the Bitcoin community.

Our conclusion is that because some people in the community have high expectations of foundation governance and transparency, an all-encompassing foundation can never be a good idea, and the ongoing scandal has destroyed the Bitcoin Foundation. Brands, so that their responsibilities are ultimately borne by other organizations.

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Screenshot of the 2013 Bitcoin Foundation official website

The origins of the Bitcoin Foundation

An article in July 2018, let us review the history of the 2011 MtGox scandal, and today's article brings us back to July 2012, when the Bitcoin Foundation was founded, and in its establishment At the time, the Foundation announced that there were seven founding members, but in fact there were only six, because the seventh person on the list, Satoshi Nakamoto, had already lost contact, and the six founding members were:

  1. Bitcoin developer Gavin Andresen;
  2. Peter Vessenes, CEO of CoinLab;
  3. BitInstant CEO Charles Shrem;
  4. MemoryDealers CEO Roger Ver;
  5. Patrick Murck, head of Engage Legal;
  6. Mark Karpeles, CEO of MtGox.com ("Mentougou Exchange");

(Source: GitHub )

The goal of the foundation has never been completely clear, and its original charter states as follows:

“The Foundation shall promote and protect the decentralization and privacy features of Bitcoin distributed digital currency and trading systems, as well as the personal choice and financial privacy of such systems. The Foundation shall further require that any of the Foundation’s objectives The distributed digital currency should be decentralized and private, and it supports personal choice and financial privacy."

(Source: GitHub )

Foundation's mission – June 2013

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(Source: The Bitcoin Foundation)

In practice, the role of the foundation seems to be as follows:

  1. Pay wages to Bitcoin developer Gavin Andresen;
  2. Arrange a bitcoin meeting;
  3. Give regulators Amway Bitcoin;

During the 2012-2013 period, the Bitcoin Foundation increased its popularity and attracted a large number of members from the Bitcoin community, including prominent developers, businesses and community members.

Foundation Individual Lifetime Membership Open List

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(Source: Bitcoin Foundation )

As of September 2013, the Bitcoin Foundation’s corporate membership list

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(Source: Bitcoin Foundation )

One of the main sources of funding for the Bitcoin Foundation is the membership fee. The initial membership fee is shown in the chart below, and as the price of Bitcoin increases, its membership fee in 2013 has been adjusted.

Initial membership fee schedule

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(Source: GitHub )

Many people believe that due to the existence of membership fees, the Bitcoin Foundation should have considerable financial resources to support its mission.

Approximate value of member contributions received by the Bitcoin Foundation in April 2013 (assuming initial rates)

  1. 2 Platinum Industry Members* 10,000 BTC = 20,000 BTC;
  2. 7 white banking members* 500BTC = 3,500 BTC;
  3. 175 individual lifetime members* 25BTC = 4,375 BTC;

Then, the Foundation received a total of 27,873 BTC;

(Source: BitMEX Research)

As we mentioned later in this report, the Bitcoin Foundation had approximately 8,000 BTC of funds at the end of 2012. Although there is still a lot of money, this balance is already lower than many expected. (Because the time for membership payment is not clear, the estimates mentioned above may be overestimated)

Foundation board

The governance structure of the Bitcoin Foundation is quite complex and has three types of members:

  1. Founder
  2. personal;
  3. the company;

The board of directors originally consisted of five members, one elected from the founding group, two selected from individual member groups, and two selected from the corporate membership group. The term of each board member is expected to be three years, and at the beginning of the foundation, five board members are the founders of the foundation, the only exception being Jon Matonis;

List of Board of Directors of previous Bitcoin Foundations (2012-2019)

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(Source: Bitcoin Foundation official website, BitMEX Research)

Critics can point to the fact that the governance structure gives the foundation's original founder too much power, and the new members of the organization should have equal opportunities to join the board as the founders.

Board election

The Bitcoin Foundation held its first board election in 2013, Meyer Malka won a seat on the industry board, and Elizabeth Ploshay won a personal board seat.

Board of Directors Election – Industry seat (2013) winner Meyer Malka

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(Source: Bitcoin Foundation)

Board of Directors Election – Individual Pilgrimage (2013) Winner Elizabeth Ploshay

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(Source: Bitcoin Foundation)

In early 2014, two founding board members resigned, with Charles Schrem resigning on January 28, 2014. Two days before his resignation, Charles Schrem was arrested at JFK for money laundering and undocumented remittances, which ended in 2014. He was convicted in December and sentenced to two years in prison. The main reason why Charles was convicted of felony was that he knew he knew his client wanted to buy illegal drugs on the Silk Road platform via Bitcoin, but he continued to support him. Another founding board member, Mark Karpeles, announced his resignation on February 24, 2014, because his MtGox exchange collapsed.

Later, Brock Pierce and Bobby Lee were selected as new industry board members.

Board of Directors Election – Industry seat (2014) winners: Bobby Lee and Brock Pierce

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(Source: Bitcoin Foundation)

Brock Pierce's appointment as a board member proved to be controversial, and some claimed that the Foundation should conduct more scrutiny of Pierce before the selection of board members. The former child star was accused of involvement in child sexual abuse in the late 1990s. event. Although Pierce was only a teenager at the time, he was the co-founder of Internet video startup DEN, and the company was accused of holding several parties in places where sexual abuse may occur. These allegations led to the resignation of DEN co-founder and CEO Marc Collins-Rector and Pierce, allegedly fleeing to Spain. According to Reuters, court records show that Collins-Rector confessed to crimes related to child abuse, while Mr. Pierce paid $21,000 to settle a related civil lawsuit, while other allegations were denied by Mr. Pierce.

By the end of 2014, under pressure, the Bitcoin Foundation had made the following improvements to its governance:

  1. The term of office of the board of directors is reduced from 3 years to 2 years;
  2. The founding board seat was cancelled;
  3. The founder member class was deleted;

The financial status of the Bitcoin Foundation

The following table provides a basic analysis of the financial status of the Bitcoin Foundation, covering the period 2012-2014. The data is based on the IRS990 form provided by the organization, and the disclosure of the board's expenses appears to be fairly transparent. Most board members do not have other compensation options other than those received by executives. Paying Gavin's salary is one of the Foundation's main goals, which seems to be disclosed in a fairly clear and appropriate manner.

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(Source: IRS 990 Form, BitMEX Research)

There are two main criticisms of the foundation's financial situation at the time:

  1. In 2014, the expenditure of the Foundation increased significantly, making the organization's capital reserve close to zero;
  2. The Foundation’s bitcoin balance lacks transparency;

Regarding the first criticism, people’s concerns seem to make sense. In 2014, the foundation's payment expenses increased by 81%. In 2014, the net loss was obvious, and other expenses increased significantly. For other expenses of $1.3 million, we provide a list below, so readers can judge the extent of the excess. These expenditures are modest compared to the 2017/18 ICO bubble. However, some Foundation members obviously want their funds to be used more carefully. No matter how you look at this problem, the fact is that by the beginning of 2015, the Bitcoin Foundation almost exhausted its capital reserves, and to a certain extent, its financial management was not good.

2014 Foundation Other Expenditure Details

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(Source: Bitcoin Foundation IRS 990 Form)

The bitcoin balance of the Bitcoin Foundation lacks transparency and is another area of ​​concern. At the end of each year, the Foundation's IRS990 form will disclose the dollar value of its Bitcoin positions, realized Bitcoin gains, and unrealized Bitcoin gains. Based on this information, we calculate:

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(Source: IRS 990 Forms, BitMEX Research)

According to the information disclosed in the IRS990 form, we can see:

  1. Given the amount of Bitcoin donated by members, the Foundation’s bitcoin balance in 2012 appears to be quite low (see the 27,873 BTC figures mentioned earlier in this report);
  2. The Foundation disclosed that unrealized Bitcoin gains in 2013 were $5.2 million, but based on annual price changes and calculated year-end balances, we calculated unrealized gains of only $4.4 million;
  3. The Foundation disclosed that unrealized bitcoin losses in 2014 were $2 million, but based on annual price changes and calculated year-end balances, we calculated unrealized losses of only $600,000;
  4. The Foundation’s 2014 Bitcoin sales revenue was $569,728. Assuming all bitcoins were sold at the lowest price of the year, the sales revenue should be $1.2 million due to the 4600 BTC of bitcoin reduction.

Although there are allegations of corruption, we do not believe that these disclosures can actually punish such crimes. The Bitcoin Foundation may accept and consume Bitcoin throughout the period and is therefore less likely to obtain an exact financial record of Bitcoin sales. And the Foundation does have some degree of freedom in its calculation methods. Therefore, in our opinion, these documents alone do not indicate that the Foundation has misconduct. However, we can say that the filing does not clearly explain the changes in the Bitcoin balance, and the Board's explanation may be helpful.

Some members clearly expect greater transparency and want to ask the board about funding issues, but they have never had such an opportunity. The following is a comment from Bitcoin commentator Andreas Antonpoulous, which reflects the views of many people in the community at the time.

"You said they have money, where are the funds? Who is controlling the funds? When was the last audit? Are they really solvable? Or are all these funds disappearing into a big black hole? Remember Who has been leading the foundation, who is today’s leader, and what they have done, I will say that if the foundation is at a certain time at a time of huge corruption or theft of funds (or something like that), I won't be surprised. This is inevitable because these things don't happen because of technical mistakes, but because of leadership failures, and the Bitcoin Foundation is a good definition of leadership failure."

(Source: Andreas Antonopoulos – March 2014 – Let's Talk Bitcoin Episode 95 )

The Bitcoin Foundation is involved in the MtGox scandal

To make matters worse, there are people who accuse the Bitcoin Foundation of being associated with the MtGox bankruptcy:

  1. Mark Karpeles, CEO of MtGoX, is the founder and founding board member of the Bitcoin Foundation, which is itself a Platinum member of the Foundation;
  2. Foundation founder Roger Ver assured the MtGox client that the platform had solvency before the MtGox exchange collapsed;
  3. The original chairman of the Foundation, Peter Vessenes (many believe that he owns a portion of MtGox's stake) is involved in various legal disputes related to MtGox due to a failed business partnership. In 2013, Peter's company Coinlab sued MtGox for $75 million in claims. As of August 2019, Peter claimed $16 billion (about 16 trillion yen) from MtGox, and this amount is enough to effectively prevent MtGox creditors from allocating the remaining assets, which is also a source of frustration for MtGox creditors.

Andreas compared the situation of the Bitcoin Foundation with MtGox:

“The problem directly led to the complete failure of the leadership. A completely closed, isolated, arrogant, sheltered, and poorly communicative leader, some of whom are Karpeles himself, but the board also has two legacy figures, they It's exactly the same as the leadership. The foundation is the foundation of Gox, and I'm surprised that it didn't explode after the Gox scandal because there are many important conflicts in that environment."

However, the link between MtGox and the foundation may be unfair. After all, the ecosystem is small and MtGox was the main exchange at the time, so some degree of association is inevitable.

Amsterdam Conference (May 2014)

In May 2014, the Bitcoin Foundation arranged the largest industry conference to date. This is the first meeting we have attended, with the familiar features of many industry conferences that people participated in in 2017/18. Unrealistic expectations for the underlying technology, expensive catering and countless booths representing new businesses. Although the fare for this meeting was as high as $800, it seemed to have caused a net loss of about $250,000 from the Foundation.

The conference is divided into two parts, one is the commercial part of the main exhibition hall, the other is the Bitcoin Foundation Annual Meeting (and the Technology Tracking Conference), the Foundation members can enter for free, and the technical seminar is at the Foundation Member Meeting. After that.

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(Source: Eventbrite)

Reporter Ryan Selkis (now Messari founder and CEO) is a life member of the foundation. At the annual meeting, he raised several challenging questions for Foundation members, asking the Foundation to increase transparency. . In response to his challenging question, a board member said:

“We can spend a lot of time, be as transparent as possible, or we can spend a lot of time at the board level to ensure that we have resources that make Bitcoin bigger. This is possible, but now, to be honest The environment we are in is not well-known for Bitcoin. As a board member, my priority is to make Bitcoin bigger."

(Source: Bitcoin Foundation 2014 Annual Meeting )

From this response, we can clearly see that for whatever reason, some board members choose not to deal with the transparency and governance issues of the foundation, which makes some Foundation members feel frustrated and more convinced that the board has misconduct .

Blockchain election (February 2015)

In view of the problems faced by the Bitcoin Foundation and the community's concerns about the transparency, governance and purpose of the Foundation, this election in 2015 was considered important. There are many candidates for the campaign, and there are also quality debates, such as the specially prepared content for the Let's Talk Bitcoin podcast.

The Foundation decided to conduct a 2015 individual board member election through the blockchain. The then election committee chairman, Brain Goss, said:

“I believe in using the blockchain to store the proof/hash concept, and I am convinced that this transparent voting method that anyone can verify.”

(Source: Bitcoin Foundation Forum)

However, this blockchain voting process did not go smoothly, and the following problems occurred:

  1. The first round of voting was conducted using the Helios voting system. However, according to the regulations, no candidate can get more than 50% of the votes, so the Foundation conducted a second round of voting. The foundation then made a strange decision to convert the voting platform to Swarm, a decision that was widely opposed. Although the initial round of the initial voting process was initiated on Swarm, during the voting process, the Foundation decided to switch back to the Helios platform, which made the voting on the Swarm platform obsolete;
  2. After the first round of voting, the decision of the Foundation to reduce the number of candidates to four appears to be arbitrary;
  3. Some candidates complain that registration voting is generally considered a cumbersome and complicated process;

Board of Directors Election – First Round of Individual Seats (2015)

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(Source: Helios voting system records)

Board of Directors Election – Second Round of Individual Seats (2015), Winners: Oliver Janssens and Jim Harper

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(Source: Bitcoin Foundation)

After the voting dispute broke out, Patrick Murk told Bitcoin magazine:

“Obviously, for those who think blockchain technology should only be applied to bitcoin transfers, not to other [apps] like voting, this incident makes them nervous. This raises questions about how people use zones. Blockchain debate."

(Source: Bitcoin Magazine)

Director's recall and the end of the board election (December 2015)

In December 2015, two newly elected board members, Oliver and Jim, were dismissed by other board members, allegedly related to differences in the foundation's best direction. Oliver and Jim campaigned through individual membership groups, which gave them considerable democratic empowerment. At the same time, the board of directors of Elizabeth and Meyer has expired, while Brock and Bobby are members of the industry board, not individual board members. Therefore, from the perspective of individual members, Oliver and Jim are the only two board members with significant authority, so they were removed. Because the Foundation violated the Bylaws, it ultimately decided not to conduct further board elections, as Foundation Executive Director Bruce Fenton said:

“I used to think that open elections were a great thing. I am not so sure now…. Unfortunately, we don’t have the time and resources to do more.”

(Source: Bitcoin Foundation forum )

In our view, this logic seems difficult to justify, because many problems are caused by the apparent lack of accountability of individual members of the board. If the Foundation really wants to save itself, it could have restored Oliver and Jim's board membership and allowed for further elections so that other board members might not end. However, the Foundation decided to stay away from membership and avoid the challenges posed by such accountability, so the Foundation seems to have lost its remaining legitimacy.

Since then, between 2015 and 2019, the Bitcoin Foundation has selected four new board members from the last election, but these appointments were made by the board of directors, not the foundation. member.

to sum up

Today, the Bitcoin Foundation still exists. Brock is the chairman of the Foundation and Bobby is the vice chairman. Although they have already expired, it is clear that there are no elections. The foundation has no significant financial resources and is basically irrelevant. The activities carried out by the Foundation are now handled by others, such as the Coin Centre for regulatory lobbying and the development of Bitcoin by other organizations such as Chaincode Labs, Blockstream, the MIT Digital Money Program (DCI) and other industry players. The conclusions of this article represent the author himself in many ways. Bitcoin never needs a foundation, no foundation makes it stronger, and any foundation like this is doomed to failure.

The lack of transparency in the Bitcoin Foundation has exposed some of the key differences between the expectations and cultures of Bitcoin (now cryptocurrency) community members. Some Bitcoin enthusiasts, especially those who participated in the foundation of the Foundation, often have high expectations for transparency, accountability and financial situation, and the Foundation seems to have misjudged these expectations and then lost the community. Support eventually leads to its failure. However, the financial responsibility and transparency of the Bitcoin Foundation is almost impeccable compared to the chaos of the ICO era (2014-2018). Some members of the cryptocurrency community (not all new members) have very different expectations. They are more concerned with what they think of changing the rules of the game, as well as changing the world and becoming super rich rather than focusing on governance. Even in this new climate, the damage of the Bitcoin Foundation brand is irreparable, and it can no longer find its own glory.