Part 2: Paycoin ‘Burns’ Some Coins, Remains Evasive

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Paycoin has responded to the “Test wallet” controversy by burning a significant amount of coins. The amount of coins burned was less than the amount the test wallet was shown to have sent by the blockchain. Additionally, the coins were burned in a curious way, by sending 1XPY to another account with a large transaction fee rather than a sending the coins to a wallet without a private key. Questions on how this happened or why Prime Controllers appear to be staking at such high rates remain unanswered.

GAW and Paybase CEO Josh Garza posted a transaction onto the hashtalk forums as a way of proving that the coins mentioned in our article on Thursday have been destroyed. According to the blockchain, the transaction included a 113,344 XPY fee. According to members of the hashtalk forum, that should be enough to destroy those coins. Most cryptocurrencies redistribute fees to miners. The Paycoin whitepaper also says that fees will be distributed to miners. This would be a problem for two reasons: It wouldn’t take the coins out of circulation and would therefore artificially inflate the number of coins on the market and second, there would be no guarantee that the miner who would receive the significantly large reward isn’t owned by members of GAW and Paycoin.

There are unconfirmed accusations, even from the GAW faithful, that say GAW controls all or most Prime Controller addresses.

The hashtalk users state that the code to move transaction transaction fees to miners had not yet been implemented, so the coins are as good as burned. We have contacted Mr. Garza, asking why the coins were destroyed in this unconventional method and if he could point us in the right direction in the code that showcases that they have been destroyed. He has not replied as of yet, several hours after multiple emails. We are looking over the code to determine exactly what happens to Paycoin fees, but coding is not this writer’s expertise. Chainz.cryptoid.com’s Paycoin block explorer seems to indicate that 113,344 XPY were “destroyed” in that block.

Additionally, there is this bit of code and a comment in the Paycoin source code

// paycoin: fees are not collected by miners as in bitcoin
// paycoin: fees are destroyed to compensate the entire network
if (fDebug && GetBoolArg(“-printcreation”))
printf(“ConnectBlock() : destroy=%s nFees=%”PRI64d”n”, FormatMoney(nFees).c_str(), nFees);

We are told that this code doesn’t indicate what happens to the fees either way, and would instead be useful for testing purposes. Still, the comments are an interesting point on GAW’s side.

Regardless of if the coins were properly burned, the amount burned is still significantly less than what was held in the test wallet. Over 73,600 XPY sits between the amount the test wallet held and the amount burned in the transaction posted by Garza. In addition, the wallet was receiving a 350% compounded interest that compounded up to four times a day, resulting in an over 3100% annual interest rate for that prime controller. Other Prime Controllers are receiving similar interest rates. The Github code confirms that the rate is possible, but basic economics make that rate untenable. It is not clear why Prime Controllers can apparently receive that much interest or what causes them to stake at the various levels.

It is possible that the 73,600 + XPY still remaining is the amount the GAW team determined would have been staked under normal conditions. However, as it was a “test” account and shouldn’t have been a prime controller in the first place, it is unclear exactly why any of the coins should be saved.

Garza promised to “show the math” but has not as of press time.

We asked Mr. Garza about the Prime Controller staking rates, but have not received a reply on that particular issue. Many members of the hashtalk forum have also asked about staking rates. We could not find a clear answer on the forums about this issue. The code does appear to allow Prime Controllers to be set at 10, 20, 100 or 350% staking rates. But it is unclear what determines who gets what. A commenter suggested that the amount grows based on how many stakers a particular user holds. So, in theory, while one staker would receive 10%, adding X amount more could push it up to the 20% level and so on until a 350% staking rate is reached. Regardless of if this is how it is done, the 350% compounded rate doesn’t appear in any public documentation outside of the Github code. 52 potential prime addresses receiving 350% compounded interest would have a significant impact on the total number of XPY in circulation and their value.

It is also worth pointing out that, the coins burned are not necessarily the coins burned by GAW. While coins are indistinguishable from each other (as they are just numbers in an account) the accounts that potentially received coins from the test wallet would still have those coins. XPY from the test wallet was sent to addresses that later sent XPY to exchanges after several transactions. While the burning of coins should successfully return the amount of coins back to the correct level (not counting any separate problems with Prime Staking) there is no way to force a coin return once coins are sent out. Therefore, if someone besides GAW and Garza were the true culprits behind the test wallet issue, that person likely made a profit on this event.

Repeated requests for details on why the test wallet was not burned a month ago they were first noticed by the community, have gone unanswered. Repeated inquiries into exactly how the Prime Controllers are supposed to work and how they are working at the present time have gone unanswered. Finally, questions as to why tests were run on the Mainnet and not the Testnet have also gone unanswered.

We have also reached out to Joe Mordica, the Paycoin developer who originally stated the coins would be destroyed. He confirmed that he “stepped down” from GAW and Paycoin on January 20th but declined to comment otherwise.

It is clear Prime Controllers aren’t working as described in the White paper or in Paycoin’s advertising material. Paycoin’s invest page lists Prime Controllers as receiving a 10% APY interest rate. While the rate is listed as “current” there is no mention of any specific alternative rates, much less one as high as 350% or of the piggy back explanation mentioned above.

The saga of Paycoin continues and we will keep you updated as necessary.