Sunday, June 30, 2013

Gold in them bits: Inside the world’s most mysterious Bitcoin mining company

Butterfly Labs has taken millions of dollars worth of orders for its hardware.

Aurich Lawson
This is the first in a two-part series exploring Butterfly Labs and its lineup of dedicated Bitcoin-mining hardware. In part one, we look at the company and the experiences customers have had with it. In part two, to be published on June 29, we share our experiences running a Bitcoin miner for a couple weeks. Spoiler alert: we made money.
The more I dig into Bitcoin, the stranger it gets. There’s gray-market online gambling and Russian-operated futures markets—to say nothing of the virtual currency’s wild ride over the last several months. It’s full of characters with names like “artforz” and “Tycho,” supposedly two of the largest Bitcoin holders out there. Of course, like most things Bitcoin, it’s nearly impossible to know for sure.
While reporting on a Bitcoin-based gambling story earlier this year, I interviewed Bryan Micon, who works with a Bitcoin-based poker site called Seals With Clubs. (To continue the lack of information, Micon won’t say who owns the site.) Micon has taken it upon himself to investigate what he believes are Bitcoin-related scams—such as the ill-fated Bitcoin Savings and Trust online bank—and he makes public pronouncements about them.
His latest target is Butterfly Labs (BFL), a US-based company that makes ASIC-based Bitcoin miners. In other words, BFL builds little boxes with specialized chips that do nothing but compute hashes in the Bitcoin blockchain—a process which can lead to real money for the miners. BFL had some experience in the Bitcoin mining business; it had previously made and sold around 2,300 slower Field-Programmable Gate Array (FPGAs) miners from September 2011 to September 2012, earning at least $1.6 million in revenue. In June 2012, BFL started taking orders on the ASIC-based boxes, which ranged in price and capability from $276 for a 5 GH/s (gigahashes per second) unit to $22,484 for a 500 GH/s machine.
New orders for the next-generation machines flooded in. The privately held company won’t say how many orders it received, but if one site inviting customers to add their orders to a public list is to be believed, BFL has taken in at least 6,000 orders worth $7.8 million—and the actual numbers may be higher.
BFL initially estimated a ship date of late November 2012, but the deadline passed and the ASIC machines didn't appear. Customers got progressively more agitated. In January 2013, Micon wrote on the Bitcoin Forum, the go-to locale for Bitcoin-related discussion, that he "smelled a rat":
My personal best-guess as to what is going on in general at BFL is that they collected a massive amount (many millions when delimited in USD, exact figure unknown) of pre-orders, thought whatever sourcing they had contracted with could produce working ASIC chips, then there were many delays for many technical reasons likely costing BFL more money, so they responded by massively increasing advertising for more pre-orders. Many ads that are floating around Bitcointalk still say simply "xx Gh/s for $xxx Butterfly labs" when they are clearly not capable of shipping said product at this time. It is impossible to know the exact current state of the company, but it is my impression after my personal interactions with the company executives that they are stressed and lying to the public. They may have a hail-Mary play gambling community pre-order money on another run of chips, or they may have absolutely no product and are collecting as much as possible before they go belly-up, either legally with a chapter whatever bankruptcy or illegally by jumping on a plane with a thumbdrive full of BTC. 1 man's thoughts, 1 man's investigation. I smell a rat and I think this one may set the record for biggest btc community loss.
Soon after, Micon put his bitcoins where his mouth was, placing bets on the BFL's ability to deliver hardware:
At least one ASIC-based Butterfly Labs product will demonstrate 350 Mhash/Joule or more, at stock frequency/voltage, at room temperature, for a sustained period of time of at least 60 minutes, with appropriate current-measuring equipment on the device's power input(s). Power consumption shall be measured by adding up current from all the device's DC inputs (12V jack, USB cable, etc.) It will not be measured "at the wall." The purpose of this bet is to avoid wildly varying efficiencies of power adapters and computer hosts. This bet applies to all ASIC-based products that Butterfly Labs will deliver to the general public. This includes the "SuperComputer" family (Jalapeno, Single SC, Mini Rig SC), as well as possibly any unannounced product that the company will be shipping by June 30, 2013.
This statement is true if, for example, the Single SC achieves 40 Ghash/s at 114 Watt or less (40000/114 = 351 Mhash/Joule) as measured with a clamp meter on its 12V DC input and 5V (USB) input.
This statement is false if all Butterfly Labs products fail to achieve 350 Mhash/Joule, or if Butterfly Labs fails to deliver any product at all.
Finally, over a year after the first orders were placed, after hundreds of angry comments and reddit threads and tweets (example: “WTF is wrong with you? You can't deliver shit yet u take more $$? Stop fucking delaying Singles on purpose!!”), BFL shipped its first machines in early June 2013. (Ars received a review model of the 5 GH/s low-end "Jalapeño" machine a few weeks earlier in May 2013. Look for our full review soon.)
This month, BFL announced it was selling the bare ASIC chips (without the associated hardware) for $75 apiece. BFL is also crediting chips to customers "as a thank you to our customers for being patient with us" for all orders placed before April 1, 2013.
While BFL battles delays, its competitors—most notably a company called Avalon—have been shipping rival Bitcoin miners.

Enlarge / This is BFL's top-of-the-line Bitcoin miner, which sells for over $22,000.

The bet

But BFL has its defenders. One of them is Marc Bevand, a Southern Californian who took Micon's bet.
“I said [for 40 BTC] that they would not only release hardware and it would match 350 megahashes per watt,” the French engineer told Ars. “And [we have] a second bet [worth 100 BTC] with 150 megahashes per watt. As it turns out, we will both lose and win one bet if the numbers that we see from the current prototypes are realistic. Fortunately, I bet more money on the second one.”
Why is Bevand one of BFL’s biggest cheerleaders?
“I ordered 10 [Field-Programmable Gate Array, or FPGA] singles in June 2012,” he told Ars. “At the time, they were selling for $699 each. And I mined 300 to 500 bitcoins.”
Like a lot of people who claim to have substantial bitcoin holdings, Bevand says that he first began mining back in December 2010—when you reportedly could get 50 bitcoins in an hour on a regular laptop. According to, by March 2012 one bitcoin was worth less than $5; today, though, each is worth over $106. Bevand says he has made a significant amount of money with BFL hardware.
“In my view, the chance that [BFL] are scammers—that they’ve put so much engineering to scam people with ASICs and not deliver a product—is very small,” he added, explaining his own theory about what happened. “The price that they were selling FPGA hardware was very low. It contains two FPGAs whose market price is about $2,000.
"They sold the singles at $699," Bevand said. "People have theorized that they had a source from the gray market in China to get these chips for very cheap, and this is what allowed them to sell them at a low price. One of them must have had this source in China and met someone in the BTC community who understood the possible market for having a really cheap source of FPGA, so they decided to recruit an engineer. But who is it? Sonny?”

Origin story

Enlarge / This represents a small portion of Marc Bevand's Bitcoin mining rig.
Marc Bevand
Sonny Chris Vleisides, who pled guilty to one count of mail fraud in 2010 (PDF) for being involved in an international lottery scam, is an executive at BFL. Jeff Ownby, vice president of marketing and e-commerce at BFL, told Ars that Vleisides is the “lead product developer—he’s the guy who dreams up the projects," though he declined to provide more details beyond that. By Vleisides’ own account on a Bitcoin forum, he’s the president of a hosting company called—but it's not clear if he has a background in electrical engineering or hardware design.Vleisides doesn't own the company, though. According to incorporation documents filed in Wyoming, BF Labs Inc. has two listed directors: Chris Vleisides, a Kansas City photographer who takes photographs of the Kansas City Royals baseball team for a living, and an Iranian living in France named Nasser Ghosieri, who is also a “senior IT consultant” with Société Générale, a major French bank.
Chris Vleisides is reportedly Sonny Vleisides’ stepfather, but we were unable to confirm this with BFL and neither Vleisides responded to repeated requests for interviews. Ghosieri told Ars that the two Vleisides "aren't the same person," but when asked how exactly they were related, he said, "I hope you understand, these things are personal. I can't really answer them without strict authorization—simply because it's not related to me. Simple or complex, it's out of my territory."
Ghosieri also told Ars in a Skype interview that there are “under 10 owners,” but “I can’t really say what exact roles there are." And he could not or would not describe precisely what Chris and Sonny actually do for the company. “They are excellent at what they do, and they have certain knowledge that I don’t,” he said. “[They’re] analyzing products, bringing things to market.”
He knew that BFL rented office space from a local Kansas construction company named AL Huber, but he had never visited the site nor personally met any other member of the team. He said he wasn't certain how he originally met the Vleisides family, “but I think it was an OpenVPN forum.” He was, he said, impressed by their “honesty and directness.”
When Ars asked Ghosieri about Sonny Vleisides’ criminal record, he seemed to dismiss it.
“The convention of mail fraud, it’s governmental stuff,” he said. “It’s difficult to explain. Governments actually take action against people for different reasons. It’s not crime always. Certain things like mail fraud, money laundering—[they are] standard [ways] to attack someone. When the government attacks you, and if there’s a point where they’re wrong, there’s no way that they will back off. Backing off means that you would open the door against the government. So the way it works is you always have to agree to some minor thing just to make sure that the government doesn’t end up being wrong.”
Both Ownby and Ghosieri said that Butterfly Labs originally was founded in 2010 to manufacture FPGA hardware to conduct “stochastic analysis and Monte Carlo analysis” for banks, but the company soon pivoted toward selling Bitcoin miners.
BFL won't name any of its clients, but Ghosieri did say that the chips were designed by Chronicle Tech, based in Southern California, and that they were manufactured by GlobalFoundries. He blamed BFL’s delays on GlobalFoundries.
“We had no option to wait for them for a very long time, three months more than we had to,” he said. “In the end there was no other option. Timelines that we gave [to the public] were two months after the worst-case scenario [from GlobalFoundries]. We went for expedited fabrication—and whatever number these people gave us, let’s add two months to what they say. But what they say and what they do is very different.”
Chronicle Tech did not respond to repeated requests for comment; GlobalFoundries declined to comment.
Max Baker, a San Francisco Bay Area electrical engineer with extensive experience in FPGA and ASIC chip design, told Ars that because BFL's wafer size is at 65 nanometers, an experienced company shouldn't have these kinds of yield problems in manufacturing.
"There's more likely problems with their design," he said. "I'd say if you had all the manpower resources you need, and all the tool sets you need, and relationship with the foundry, you'd be lucky to spin an ASIC in 9 to 12 months. That's having everything lined up. If you have problems, it will take you longer. [If BFL is unfamiliar with those realities,] it would be easy to underestimate the tools that are required in order to get it done."

Butterfly Labs loses a bet

Despite their frustrations, many customers are still holding out for their BFL hardware.
“The wait sucks hardcore and their timing estimates would drive any other company out of business, but they did ship FPGA miners, so I know they're not a complete phantom company,” wrote Eric Hodgerson, a frustrated BFL customer, in an e-mail to Ars. “If I had to do it over, I would have bought one BFL miner and one Avalon miner to hedge.”
“You also have to remember that there were 6-7 months of people buying pre-orders before this crazy price run-up [of bitcoins] this year," Hodgerson wrote. "When I ordered back in December, I thought I'd supplement my income some and have a nice conversation piece, not that I'd be paying all my bills with it. For me, that still remains true. When I see where my place is in line relative to the entire pile of orders and on top of the price increase for new miners from BFL, all I can think is that I need to HOLD FAST. I don't know WHEN I'm going to get them, but I do know that I WILL get them.”
As for Micon and Bevand’s bet, Micon lost the 150 megahashes per joule consumption bet—but he will win the 350 megahash per joule bet. Between the wins and losses, he will lose about 100 bitcoins (worth around $10,000 at present exchange rates).
“Looks like I'm going to lose, but the basis of my betting is still sound—BFL is an irresponsible company that continues to take in maximum pre-orders with questionable fulfillment ability,” Micon wrote Ars, noting that he ended up with multiple related bets, not just the two with Bevand.
BFL also lost a bet. Back in October 2012, BFL announced:
We are so confident in our power consumption that we are offering up 1,000 BTC to charity if we miss our power consumption targets by more than 10 percent. We are offering our devices at 1 watt consumed per gigahash. If our power targets end up consuming more than 1.1W of power per gigahash, we will donate 1,000 BTC to charity! How is that for confidence in our power usage?
BFL didn’t make that target, and as such, it said it donated 1,000 BTC to the Bitcoin Development Fund (BDF). However, the BDF appears to have been created in May 2013 and provides no documentation that it is, in fact, a bona fide charity or nonprofit organization. Its website lists no actual people, street addresses, or phone numbers.
In fact, it turns out that BDF was actually started by Butterfly Labs' own employees—a fact disclosed nowhere on the BDF site. When Ars reached out to the only e-mail address listed on the site, the response that came back was from Jeff Ownby, the BFL vice president.
"We initially set up this site for the purpose of distributing the 1,000 BTC that BFL committed to donate," Ownby told Ars. "We set it up like this because we think there is an opportunity to involve other BTC businesses in helping fund projects and charities in the future. We haven't gotten that far. If you're looking for something official, it's not there yet. But even if someone donates to the fund, you can see every transaction in the blockchain. It's completely transparent. Take a look at the outgoing transactions. Sean's Outpost received enough BTC to fund 7,000 meals for homeless people in Pensacola. We are evaluating BTC projects and charities every day for inclusion. There are just not that many charities that take BTC."
Jason King, of Sean's Outpost, a homeless outreach group currently seeking its official charitable status based in Pensacola, Florida, told Ars that his group had received 75 BTC (roughly $8,000) from the BDL, which constitutes "roughly half of our total donations to date." King also said that his group only accepts donations in Bitcoin for now—but he added that he would not turn down cash donations, either.
"The only people that have been willing to donate have been in Bitcoin," he added.
King also described himself as a "Bitcoin proponent," but he definitely has questions about Bitcoin-related businesses, acknowledging shady elements in the community. He also said that other than receiving the donation, Sean's Outpost had no relationship with BFL.
"BFL could have spent 75 BTC on hookers and blow, but they chose to send it to homeless outreach," King said. "If that was just a PR stunt, I can’t control [that]. What I can control is how I spend that money and use it to spend on people who are less fortunate than I am."
None of this has satisfied critics like Micon, however. Even though BFL is finally shipping at least a few miners, Micon still believes that "they took pre-order money to gamble they could make the chip. A full mismanagement of expectations from the get-go coupled with bold-faced lies about shipping times leads to the collective uproar you see now... Almost every one of their customers feels cheated at this stage.”
Ars managed to get its hands on one of BFL's Bitcoin miners. Tune in tomorrow for our hands-on experiences with the device.
Cyrus Farivar / Cyrus is the Senior Business Editor at Ars Technica, and is also a radio producer and author. His book, The Internet of Elsewhere, was published in April 2011.

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