[bisq-network/proposals] Repay victims of the April 2020 security incident using BTC trading fees (#209)

Tue Apr 14 06:49:42 UTC 2020

> _This is a Bisq Network proposal. Please familiarize yourself with the [submission and review process](https://docs.bisq.network/proposals.html)._

_What follows was originally posted at https://github.com/bisq-network/proposals/issues/205#issuecomment-612824408 and has been reposted here as its own proposal for clarity. This proposal supersedes #205, which has now been closed, but readers may still wish to review the comment thread there._

## Background
On the dates of March 28th and April 7th 2020, a total of 34.86 bitcoin were stolen from 6 Bisq traders attempting to buy BTC in exchange for XMR. The blog post at https://bisq.network/statement-security-vulnerability-april-2020 explains the nature of the theft, and the pull request at bisq-network/bisq#4134 fixed the flaw that made it possible.

## The DAO will repay victims for their losses
The DAO should and will repay victims for their losses because they were ultimately caused by an avoidable flaw in code written by DAO contributors.

## The DAO will not repay victims immediately
An ideal plan would immediately repay victims the full amount of BTC they lost in a one-time lump sum payment. This is not possible because the DAO does not have a reserve from which to draw these funds.

An alternative plan would be to immediately repay victims by issuing an amount of BSQ equivalent to the amount of BTC lost. This approach cannot work, however, because current BSQ market liquidity is insufficient to handle such a large increase in supply. Victims would be unable to liquidate their BSQ for BTC in the near term without severely depressing the BSQ price, resulting in a losing situation for victims, contributors and all other BSQ stakeholders alike.

## The DAO will repay victims over time
Because there is no way to repay victims immediately, repayment must occur over time as a function of actual trading fee revenues.

## The DAO will repay victims using trading fees paid in BTC
The simplest and most direct way to repay victims over time is in BTC using Bisq trading fees paid in BTC (as opposed to trading fees paid in BSQ). @chimp1984 has laid out in #205 how this can be implemented technically using Bisq's Filter mechanism.

Each victim will provide a bitcoin address to which repayments will be sent. In the proposed Filter-based implementation, one of these addresses will be randomly selected for each trade whose fees are paid in BTC, such that the victim directly and immediately receives that BTC.

A mechanism will be developed to track how much BTC has been received by each address over time, and when a given address has been fully repaid it will be removed from the filter such that no further payments are sent to it.

_Note that #206 is an alternative proposal to repay victims in BTC, though through the indirection of BSQ and a 'Special Refund Agent' who works in conjunction with the Bisq 'Burning Man' role. While this proposal could work, it is more complex, and I believe this approach to pay directly in BTC from trading fees to be superior, with the benefits outweighing the downsides (of 'abusing' the filter mechanism and of putting control over these addresses in maintainers' hands)._

## The DAO will repay victims the USD value of funds lost at time of theft
Because the value of BTC can fluctuate significantly over time, it is not possible for the DAO to promise to repay victims the exact amount of BTC they lost. Given a significant increase in the value of BTC, it could become effectively impossible for the DAO to complete repayment. Likewise, should the price of BTC significantly decrease, victims would be repaid much less than the original value of their BTC at time of theft.

Rather, the DAO will repay (in BTC, as described above) the USD value of the BTC lost at the time of theft, i.e. at the time the trade was taken. All affected trades were taken on either March 28th or April 7th 2020, when the average daily price was $6,223.50 and 7,309.78 respectively.

The repayment tracking mechanism mentioned above will be developed such that the USD value of each payment made to each address is calculated according to the average daily price on the day the payment was made. This means that the total amount of BTC paid to each address will differ from the original amount of BTC lost based on the BTC/USD value at the time of each payment.

## The DAO will repay victims as quickly as possible
The fastest way to repay victims according to the plan laid out above is to route them 100% of trading fees paid in BTC. More exact numbers need to be calculated, but current monthly revenues total between 20,000 and 30,000 USD worth of BTC and BSQ combined. BTC represents perhaps 40% of that figure, meaning that between 8,000 and 12,000 USD worth of BTC could be paid out to victims on a monthly basis. With a total of 235,831 USD worth of BTC having been lost, it would take between 20 and 30 months to repay victims at this rate. In any case, the amount of time repayment will take will be a function of both total trading volumes and the percentage of those trades that are paid for in BTC. Both numbers may change significantly over time.

As a protection to ensure that the DAO is able to continue operating, it will pay victims 100% of BTC trading fee revenues so long as that figure does not exceed 40% of total revenues.

## The DAO will adjust its budgets accordingly
With victim repayments coming directly from BTC trading fees, realized revenue will be that much lower and the DAO's internal budgeting will be adjusted to reflect this new reality. That is, we will "tighten our belt" accordingly so that we do not issue too much BSQ.

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