27 December 2014 - Filed under Decentralization
For Bitcoin, currency is just the beginning, necessary to bootstrap the system, build mining infrastructure, secure the blockchain, and discourage spam. Recently there has been much talk of smart contracts, smart property, digital assets, and escrow, all of which benefit from the existence of a decentralized global ledger. That talk has been turned into action with a collection of projects with names like Mastercoin, Sidechains, Ethereum and Counterparty. Having researched each of these, I have decided to focus on Counterparty because I think it has the best mix of working code, current use cases and future possibilities. What follows is an overview of the various enhancements and capabilities Counterparty brings to Bitcoin today.
1. Fractional Ownership
In recent years, crowdfunding has enabled tons of folks to go from an idea or rough prototype to build at least a small business. The next frontier in the crowd-space is crowdequity where hundreds or thousands of investors buy a piece of a new enterprise. Counterparty makes crowdequity simple to setup and administer. Create a token and sell it via a token-vending service to grant ownership to shareholders. Later, you can pay dividends in XCP with a single click or hold a shareholder vote by issuing voting tokens to your shareholders.
Note that in the United States, there are restrictions on the number and accreditation of shareholders that may own a business. Hopefully this will change once the SEC finishes Section III of the JOBS Act. Overstock.com is also working on a platform called Medici that will use Counterparty to represent shares of public companies.
2. Bets & Prediction markets
Counterparty’s decentralized exchange (DEx) enables users to do trustless trade between native tokens like XCP and FLDC as well as with bitcoin. Similarly, Counterparty’s betting and contracts-for-difference features enable users to do trustless betting with XCP on virtually any event. These work by attaching a bet to data published by a third party in a broadcast transaction. By promising to report accurately about a future event (whether it be sporting, political, or economic) the broadcaster can collect a small fee while the bets themselves are offered, matched, and settled directly between users by the protocol. In this case there is no “house”; the closest thing is the broadcaster themselves who earn fees for their reporting.
One issue with this system is the possibility that an oracle may misreport an event outcome. In this case, bets can be corrected with later payments, or left as evidence of fraud. While building and trusting online reputation systems is an immense challenge there are ways to increase the cost to an oracle of going rogue, for example proof-of-burn, requiring significant investment in a related web presence or community, or by obtaining a surety bond.
You can play a fairly slow, but fully escrowed game of Rock Paper Scissors or [Rock Paper Scissors Lizard Spock](http://en.wikipedia.org/wiki/Rock-paper-scissors-lizard-Spock) with Counterparty.
4. Alternate Token Distribution Schemes
Bitcoin acheives security by rewarding miners for their work. At the same time, mining distributes the coins that will forever be traded in the system. With Counterparty, transactional security is provided by the Bitcoin network freeing token distribution schedules to better for an issuer’s needs.
Let’s Talk Bitcoin distributes LTBcoin according to a published schedule of diminishing issuance and is used as payment to reward certain behaviors in the community. It is accepted by the site for advertising slots and if you create a podcast or blog post, listen to a podcast, or even comment in the forums you earn a share of the week’s LTBcoin. Instead of mining for security, LTBcoins are earned by building content and community.
Another example is [FoldingCoin](http://davidsterry.com/blog/), a project started in mid-2014 where members of Stanford’s Folding@Home project can be paid a portion of daily FLDC distributions. With daily distribution fixed at 500,000 FLDC, a folder who contributes 1% of the FoldingCoin points earns 5000 FLDC. The points tallies are posted along with member addresses and Folding@Home usernames, making payouts transparent. There is a proposal in that system to change the distribution schedule to more closely match the halving rewards of Bitcoin. At the time of writing, this proposal is under a proof-of-stake vote by FLDC holders to decide on its enactment.
Creative, dependable token distribution provides an investor with the option to support not just an individual developer but a platform and an economy based on the token. If you think either of the above projects are doing valuable work or that the value of their tokens may increase, you can buy some to hold or redistribute towards advancement of their respective platforms.
5. Access Control
Advancements such as OAUTH and smart cards are growing in adoption, but what we use today largely depends upon shared secrets. Passwords and PINs have worked for decades but with the growing incidence of hacks on online services, retail and even banks, they are starting to show their limitations. Counterparty tokens can be used for access control and can marry different architectures to provide granular and dynamic access.
By using what’s called Token Controlled Viewpoint (TCV), each account on a service can be cryptographically associated with any number of Bitcoin addresses. Once linked, the inventory of tokens can enable your account to access and interact with certain services. This has been developed in the Let’s Talk Bitoin community where early members of the site received a token called EARLY that as entitles them to access the Founders Forum. Anyone can create an exclusive forum on their platform for a small fee. More imporantly, anyone can create their own forum (look up Tokenly for a head start) and with counterpartyd and a bit of code attach their own roles and responsibilities to holders of tokens.
With Counterparty you can acheive simple and inexpensive digital scarcity. Just create an asset, issue units of the asset and lock it. From then, there will never be another satoshi of that asset in the Counterparty universe. Use cases include collectibles (more on that below), currencies, points, shares, awards and medals – anything for which scarcity adds value.
That being said, Counterparty reserves 63-bits for token quantities which translates to 9.223372037×10¹⁸ units. Even if you make an asset divisible (to 8 decimal places), you can still have more than 92 billion finely divisible units in existence. So though you can have scarcity, you can also have amounts of points floating around that get people excited, like the several million points often awarded in a video game.
7. Proofs-of-existence and records of prediction
The broadcast feature need not be connected to a future event or bet. You could also use the system to encode that you are going to become captain of your football team in the next 12 months or that you will lose 10 pounds in 6. Being encoded in the Bitcoin block chain, the security of the system is strong enough that you could encode a prediction and proceed to reference it in legal documents in jurisdictions all around the world.
Counterparty also enables the separation of custody and ownership; trade from shipping; physical possession vs. the right to sell. Any pawn broker or secure storage facility can issue a digital asset representing an item or collection of items they hold. Rare coins, gold, silver, art, and collectibles are all candidates that may make sense to be traded in this way. The custodian merely needs to provide inventory reports and the name of the Counterparty asset that goes with each item or collection.
Trade is taken care of either on the DEx or off-chain with no custodial intervention necessary. The custodian can charge storage fees denominated in local currency and payable in BTC or XCP. If the storage fees go unpaid, the shop can liquidate the item and split the proceeds with the owner at some predetermined rate. Perhaps this would be a premium feature that customers will look for in the storage facilities in the future.
As you can see, there are many interesting use cases for Counterparty which wouldn’t be possible without the constant, excellent work of the Counterparty development team but also of the Bitcoin developers, miners, and everyone who has helped us all get to this point. To get started with Counterparty, visit https://counterparty.io.
Some pretty good discussion was generated by this article on Reddit at http://www.reddit.com/r/Bitcoin/comments/2qjlr1/8_ways_to_counterparty_new_features_counterparty/
2014-12-27 » David Sterry