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A Paycoin address that investors were told was for testing purposes and was supposed to have its coins burned, has since come to life, sending payments to various addresses and appear to have ended up at various exchanges.

Instead of traditional mining, Paycoin uses nodes called Prime Controllers and Orion Controllers, as well as traditional PoS wallet minting. The Prime Controllers are limited to 52 addresses and are awarded to the highest bidders every six months. The winning bidders become Prime Controllers and receive a much higher stake rate, of either 10% 20% 100% or 350%. The non winning bidders become Orion Controllers and receive the same 5% interest as regular staking, but don’t have to worry about coinage and are allowed to bid on Prime Controllers in the next round.

The address, was staking at a 350% interest rate compounded daily, causing it to quickly shoot up the Paycoin Rich list where is was eventually discovered by a Hashtalkforum user. [First three posts from that thread are missing] When the issue was brought up on the forums, a Paycoin developer, Joe Mordica, stated that the address was a part of a test because some Prime Controllers were not staking properly.

[blockquote style=”2″]This is our address that we are using to test staking with (as there have been some problems with the staking in the past week or so). You can see on the blockchain looking at the other addresses the staking hasn’t been working as expected so this is another node used for testing latest fixes. Thanks.[/blockquote]

Mordica, later said the coins created were to be burned. Burning is the process of sending coins to an address that no one knows the private key for. With no one able to access the coins, they are as good as destroyed.

Mordica has since been absent in the community, according to coinbrief.net. He hasn’t posted on the Hashtalk forum in 27 days and counting.

A few days ago, those coins started to get sent to various addresses. Some of those addresses eventually sent coins to known exchange addresses, including Bittrex, Cryptsy and PayBase. Each known transaction sent to the exchanges appear to be small, less than 100 XPY at a time.

When the issue of the coin movement was brought up on the Hashtalkforums, GAW and Paycoin/PayBase founder Josh Garza stated that there had been some sort of mistake and that they were looking into it. Several hours later, he appeared on the forum to give this explanation.

[blockquote style=”2″]A few weeks ago, a member of GAW was testing coins and told everyone those coins would be destroyed after the testing was done. Through a series of internal communication challenges, this was never completed. The internal issue has been resolved. Additionally, an unrelated issue of coins compounding has been surfaced a few weeks ago. Prime controllers should not be compounding coins. The stake rate should only be applied to the principle coins. This will be resolved as the source for Paycoin is updated in the future. I have asked the team to determine the additional coins that were made as a result of this compounding. My plan is to show the community that math, then have both sets of coins destroyed. We are committed to being transparent and upholding the highest standards with Paycoin. Please continue to keep an eye on the blockchain[.][/blockquote]

The quote did not explain why the coins were not burned immediately as promised, other than the communication issue, or why they appear to have moved to exchanges. Repeated requests for answers on the forum have gone unanswered. Questions asking why the test was done on the mainnet rather than the testnet also went unanswered. We reached out to Mr. Garza, who gave us this comment:

[blockquote style=”2″]Why is it that we have only heard from your publication when there is something interpreted as negative? Otherwise, we never hear from you guys?

I was just about to we [sic]write something about this to my 64k twitter followers.

Care to comment?”[/blockquote]

[Mr. Garza may have been referring to CoinTelegraph, another publication I write for.]

The extreme interest rate for the Prime Controllers is also a concern, albeit a lesser one that has been known for a few weeks at least. The Prime Controller percentage did seem to increase to 350 % in December, causing rapid inflation of Paycoin. The Paycoin whitepaper states that Prime Controllers will receive a 5 % stake of the coins held in an escrow account that holds the losing bids of the Prime Controller during the six month period that it runs. This was intended to connect demand and creation of Paycoin, as demand grows in theory so will the bids for Prime Controllers, resulting in more staking power and therefore more coin creation.

It has since been revealed that is not the system, but what exactly determines Prime Controller interest rates is not immediately clear.

Once coins enter an exchange address, the sheer volume of inputs and outputs makes it nearly impossible to track. The only option to fix the supply of coins would be for PayBase or GAW to burn an equal amount of coins elsewhere. That, of course, wouldn’t explain why they coins were moved in the first place, or who moved them.

This marks the latest in a string of controversies for the Paycoin and GAW Miners. There was the falling through of the PayBase enforced price floor for Paycoin (eventually replaced by a yet-to-be-launched “honor” system) then reports of an SEC investigation. There is also the aforementioned Prime Controller issue and significant amounts of censorship on the official hashtalk forums.

We have pressed Garza for further comment, who told us he had forwarded to his CMO. He had been active on the forums posts detailing the issues, so it is not clear why he couldn’t give a response himself. We will update this space if and when the CMO responds.

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Ian started writing product descriptions in 2011. He transitioned to journalism in 2012 and has been cited by media outlets large and small. He is a Co founder of Coinjournal.net and the author of the Bitcoin Guidebook.
A consistent procrastinator, when he isn’t writing he can usually be found doing something to avoid writing. To his own surprise, he managed to write a book, which you can purchase here: http://goo.gl/s0a4An and in local book stores.

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  • Toddimus

    FYI (I can't find the source) the reason why the prime controllers staked at a much higher percentage than initially posted in the whitepaper was because GAW wanted to add incentive to holding more prime controllers, and allowed them to stake at a higher percentage when they were 'piggy backed' on one another. Since GAW holds all the prime controllers, they all stake at the highest percentage. If someone were to somehow obtain 1 prime controller, it would stake at the lowest percentage (5% according to this article).

  • Toddimus

    https://hashtalk.org/topic/31703/test-compounding-coin-update
    Seems like the problem has been solved.

  • matt

    They were NEVER sent to any exchanges and since have been destroyed…. kindly remove or issue a new statement

    https://chainz.cryptoid.info/xpy/tx.dws?a5709810941a93fd8060c830dd0a725d2b11cf916e1e48b62f581b86b1f5f437.htm

    • Ian DeMartino

      working on a new article now. But I stand by this article's accuracy.

  • matt

    Haha accuracy? how is this article accurate? the blockchain is accurate and does not lie.. have you even clicked the link i provided to the blockchain? The excess coins never went to an exchange and now since have been destroyed. That is the accurate truth, simple.
    This says alot about your Journalistic integrity and how seriously you take your role in the up and coming financial revolution.
    You just proved to me (and others reading this article) that your just another FUD merchant peddling dusty old wares.
    Thanx for proving my point.

    • Ian DeMartino

      Not true at all, as you can see in my second article, the coins are easily traceable to exchanges.

      Again, I stand by my article. Paycoin sent coins to exchanges and the blockchain proves it.