Digital Asset Delivery

The Bitnomial Settlement Facility web application should be used when market participants either

1. have a long position, in order to receive bitcoin; or
2. have a short position, in order to deliver bitcoin.

Bitcoin preliminaries

There are a few concepts and terms that relate specifically to bitcoin which users need to understand in order to fully grasp the delivery process. See here for some introductory material.

• Addresses are short alphanumeric strings which are used by bitcoin wallets to route funds to the intended recipient(s) when forming transactions. When Alice transfers bitcoin to Bob, she first gets an address from Bob then instructs her wallet to send some bitcoin to this address. Bob uses his wallet to generate an address. When he checks on his bitcoins, they are distributed among his addresses.
• UTXOs (unspent transaction outputs) are the native form of bitcoin in the network. The available bitcoin is distributed among the current UTXOs. There is no standard denomination for a UTXO; it can hold any amount of bitcoin. Each UTXO has an associated address. So it is common to talk about bitcoin being stored at some address. When users follow best practices, their UTXOs will be associated with distinct addresses. There is a helpful analogy between UTXOs and coins, where in bitcoin a coin can have any face value.
• Transactions represent the transfer of value in the bitcoin network. Every value transfer is associated with a transaction. A transaction spends a collection of UTXOs, and creates a new set. The sum of the newly created UTXO values must be less than or equal to the sum of those being spent, with the difference making up the transaction fee. Transactions include cryptographic data for each UTXO being spent which proves that the owner of the UTXO agrees to the structure of the transaction.
• Blocks are batches of transactions. The bitcoin network produces one block every ten minutes on average. However, the time between blocks varies, according to a well known statistical distribution. Bitcoin blocks typically contain between 1000 and 3000 transactions. The blocks are ordered into a sequence, and it makes sense to think about the height of a block. This is the offset of the block from the beginning of the sequence.
• The transaction lifecycle starts with the bitcoin network nodes broadcasting the transaction to each other. After some period of time, the transaction is included in a block. The number of confirmations of a transaction is the number of blocks produced by the network since the block where the transaction appeared. The finality of a transaction is proportional to the number of confirmations it has.
• A block explorer is a visualization tool that makes it easy for users to navigate the blocks and transactions included in the bitcoin blockchain. One popular choice is blockstream.info.

Making delivery

Participants who are short bitcoin will need to make delivery. Their organization must arrange for a transfer of bitcoin to the settlement facility wallet, to facilitate transfer to one or more long participants. The process for making delivery has two steps.

1. The participant must register a return address. This bitcoin address will be used to return bitcoin in the case that the participant delivers more bitcoin than they owe.
2. As soon as the participant submits a return address, the settlement facility displays a delivery address. The participant should enter this address into their wallet and transfer the appropriate amount of bitcoin.

The settlement facility dashboard displays the deliveries made, including the deliver-to addresses and associated return addresses. Bitnomial considers transactions to be sufficiently final after six confirmations, so transactions with fewer than six confirmations will be displayed as "pending". As a convenience, the settlement facility links to each delivery transaction in a block explorer.

During the course of the delivery process, until final settlement, the delivered bitcoin is held securely by the settlement facility system. After final settlement, all bitcoin is distributed to the long bitcoin participants and to short participants who over-delivered, as appropriate.

Taking delivery

Participants who are long bitcoin will need to take delivery. Their organization must operate a wallet (or work with a third party wallet/custody provider). The participant should obtain a new address where they can store bitcoin and submit it to the settlement facility website. At final settlement, the settlement facility transfers bitcoin to the address submitted earlier in the delivery process.