RIP Counterparty? It was a Good Idea Either Way
Bitcoin represents approximately 35% of total cryptocurrency market capitalization, the other 65% contributed by 100s of alternative coins, with varying degrees of security and value, both in terms of capital and technical contribution. The bitcoin blockchain has successfully fended off numerous hacking attacks over its 6+ years of existence, and has demonstrated in definitive fashion its strength and security in a very tough marketplace. It is the uncontested champion, and it is very difficult to see any real contenders.
However, bitcoin is rather limited in its features – it records transactions and allows transfer of its currency, bitcoin. Counterparty is a platform which effectively expands the bitcoin protocol to include a number of new and innovative features – so-called bitcoin 2.0 – without compromising the core bitcoin code. However, with the rise of lightning, Counterparty might have exceeded its useful life.
What it does
Counterparty is an open source platform built on top of bitcoin that aims, in the words of lead developer Adam Krellenstein, to “democratize finance in the same way the internet democratized creation and sharing of information”. It allows users, both companies or individuals, to issue financial instruments called tokens that can be traded on the exchange and secured using the bitcoin blockchain. This facilitates a new kind of crypto-IPO process in which companies are able to raise funds and distribute dividends to investors through the exchange without the need for third party intervention, regulatory or otherwise. It levels the playing field, allowing anyone with a good idea and proof of execution the ability to go straight to the market for funds, without the need for a team of lawyers, accountants and a fat bank account. The jury is still out on whether this technology will play a positive or negative role – will it end up being abused by two-bit con artists to grab the money of naive investors, or will it allow for the public dissemination of real grassroot innovation? Either way, it is a real intriguing innovation.
So how exactly does this process work? Companies are able to create tokens, which are utilized for three purposes. First, they are issued as “shares” to investors. For instance, Storj.io, a peer-to-peer file storage solution started by whiz kid Shawn Wilkinson, sold 35 million of a total 500 million coins called SJCP (StorjcoinX) on the counterparty exchange in an initial public offering. Storj.io raised 910 bitcoins, or approximately $500,000 at that time, providing seed capital to invest in marketing and development. It was offered directly to the crypto community without the need for any intervention, utilizing the free service offered by Counterparty.
Second, SJCP is used as the currency with which users of storj.io buy and sell storage space. As demand for the service grows, cost of the limited coin will naturally increase as well, or so one would think. Storj, who makes money by charging fees on SJCP transactions, has aligned interests with the stockholders as both must see SJCP coin appreciate in value to increase earnings.
Third, tokens can be used to pay dividends in XCP, BTC, or any other user-created asset.
Of course, there are alternative user created assets that perform any number of functions. For instance, a company could generate a voting coin and distribute one to each employee. Two addresses, one for yes, the other for no provides an anonymous, verifiable, and logistically efficient democratic voting process.
What is XCP used for?
XCP is used within the platform to perform any function, such as creating new assets, putting funds in escrow, and calling back callable assets, like XCP-denominated bonds. These actions and others require burning a bit of XCP, which introduces slight deflationary pressure on the remaining XCP. The burning rate is adjusted to the remaining XCP so it will never run out – however, should CounterParty emerge as one of the crypto heavyweights, XCP holders will benefit from a continuously diminishing coin supply.
Bitcoin enhancer or parasite?
Counterparty hashes and passes transactions to bitcoin transaction blocks, where they are mined and added to the blockchain along with all the other bitcoin transactions. In doing so, they provide Counterparty users with a level of stability and security consummate with direct usage of bitcoin, while offering a host of services that bitcoin was not designed to provide. Miner fees are paid by counterparty users, who must store a small amount of bitcoin in their counterparty wallets in order to transact on the network.
Counterparty built its protocol layers and exploited the bitcoin network without the explicit consent of the bitcoin core developers or the mining community, but was widely lauded by the general bitcoin community a represented on bitcoin talk. Counterparty was seen as being among the first technology companies to enter the bitcoin 2.0 space, offering non-financial transaction applications for the bitcoin blockchain, leveraging the technology in new and innovative ways.
On March 19th 2014, Bitcoin released version 0.9.0 of the client, which included an OP_RETURN function, allowing the inclusion of message data within bitcoin transactions, something that wasn’t previously allowed explicitly. When the OP_Return function was released, it emerged that the allowed message space had been reduced from 80 bytes – enough to include large hash – to 40, which made the OP_Return function unusable for many types of Counterparty transactions. A public spat ensued between bitcoin and Counterparty on the subject.
Counterparty had based their design with the assumption of an 80 byte Op_Return function, as had been announced in the official bitcoin foundation blog. While waiting for the OP_Return release, Counterparty implemented a work-around “hack” using CheckMultiSig to store transaction messages. While this did the trick, it was using CheckMultiSig for unintended purposes, which could have possibly have indeterminable negative consequences.
Bitcoin, Counterparty argued, had an interest to be supportive of Counterparty and companies like it in order to maintain relevance. Counterparty creates a useful structure on top of the blockchain that serves to capture the additional potential for bitcoin not currently being exploited by the core network. This is in the interest of bitcoin – if they discourage Counterparty, it opens the door for alternatives like BitShares and NXT to fill the void.
Bitcoin core developers saw things differently. In the words of Jeff Garzik:
“It is called a free ride…Rather than engage the existing community, Mastercoin and Counterparty simply flipped an “on” switch and started using bitcoin P2P nodes as unwanted data stores. An unspent transaction output was never meant to be used as arbitrary data storage. The fact that it can be abused as such does not make it right, or remotely efficient, or the best solution.”
While annoyed that the devs had not been directly engaged by Counterparty, Mr. Garzik was mostly concerned that the bitcoin blockchain was being used to store unwanted messaging, which served to bloat the network and might have had other unintended consequences.
In the end, it seems bitcoin will increase OP_Return storage to 80 bytes in the next version of the bitcoin core, which is scheduled for release in March 2015, a full year after the initial spat with Counterparty.
Counterparty introduced a novel and controversial method for distributing its coin XCP, which they called “proof of burn”. All the XCP that will ever exist, 2.8 million to be exact, were given out proportionally to those who appreciated the value of Counterparty and were willing to destroy bitcoin in exchange. Participating users simply sent bitcoin to a made up public address, which obviously had no private key. Users can check, if they wish, the public address to see that the burned coins are, indeed, still burned – CounterpartyXXXXXXXXXXXXXXX
Why would this be done? Why not use the bitcoins instead to further Counterparty through development and marketing?
For the developers, the most important consideration in launching their technology was legitimacy. All coin was demonstrably distributed to investors, both insiders and outsiders alike, with no special advantage granted the former group. This resulted in a demonstrably decentralized ownership structure, and put to bed any potential questions concerning dishonest coin grabbing by insiders before they could even be asked.
Counterparty has successfully launched a simple and intuitive product that does most of what alternative networks – specifically bitshares – mean to do, while leveraging the strength and security of the bitcoin network.
Overstock and Medici
The strategy seems to be paying dividends. In October of 2014, a joint venture with e-commerce giant Overstock was announced, in which Counterparty developers will create a platform called “Medici” on top of the Counterparty protocol. Medici, “a tip of the hat” to the Renaissance-era Italian banking and accounting family, is meant to be a new stock market platform upon which Overstock and other businesses will be able to issue “crypto securities”. Overstock has enlisted law firm Perkins Coie to help with securing the approval of the SEC and federal regulators to regulate the exchange. If Overstock would be able to gain the approval from the SEC for launching a cryptosecurities exchange, it would represent a huge step forward for the entire crypro community.
Overstock chose to work with Counterparty over competitors such as BitShares and Ethereum due to the security offered by the blockchain.
Counterparty recreates Ethereum’s Smart Contract Platform
A limitation to Counterparty has been the need of its core developers to hard-code smart contracts – computer programs that facilitate, verify and enforce the terms of a contract – directly into the client, rather than allowing users to write their own smart contracts which can be executed whenever and however desired. This is the gap that Ethereum, led by whiz designer Vitalik Buterin, means to fill with an entirely new blockchain and network.
Counterparty Contracts, released in November 2014, grabbed the open source Ethereum code and replicated it on the CounterParty platform. The functionality was tested, and contract execution passed 100% of tests. If the platform does what they say it does, it would basically serve to render Ethereum, BitShares, and most bitcoin alternatives, irrelevant. Why trade on alternative networks with a fraction of the security and liquidity of bitcoin, when you can do the same thing on the blockchain?
This was, in the tweet words of Jeff Garzik, “a coup! Grabs the good stuff – Ethereum tech – Ditches the bad stuff – Wonky economics, new chain.” Ethereum took the development like a champ, applauding an innovation that strengthened bitcoin in the short term. They maintained that Ethereum, when released, provided a long term solution, a feature free decentralized application program which could be used by developers to build on it anything they want. As an example, Vitalik Buterin built the entire Counterparty platform in 340 lines of code on the Ethereum platform. Ethereum Co-Founder disputed that the Counterparty protocol was the optimal method of running their advanced technology. He compared the approach to running netflix on an email protocol – “you could maybe do it, but why would you want to? And certainly, the User Experience would be awful.”
However, while Mr. Buterin might be the superior developer, what he will be unable to replicate is the power and reach of bitcoin itself. It would be quite sad if the work of this young, superstar developer was simply grabbed and replicated on bitcoin. It is, of course, the nature of open source code, and he will have made a sizable contribution to the market. However, that his project might be stillborn is unjust. The market is waiting eagerly to see a fully functional Ethereum platform, which is meant to be launched in March of 2015.
Counterparty has accomplished on the blockchain what alternative technologies such as bitshares and ethereum have spent years and millions of investor dollars trying to do. However, with the launch of the lightning network, as well as the success of these alternative protocols, Counterparty has sort of slipped softly into the night.
Still interested? Have a look at the exchange comparison tool to find platforms that sell Counterparty.