Factom – Blockchain-Driven Data Integrity

The mission statement on Factom’s homepage is rather bland: “Factom is using the technology behind bitcoin to change how businesses manage data and keep records”. However, behind the statement is an extremely ambitious program that fits in nicely with the wider bitcoin 2.0 trend.

Factom utilizes the blockchain to provide a decentralized and cryptographically-secured method for the auditing of a distributed, immutable and limitless library of data. While Factom’s mission statement seems to limit the technology to business, it has applications elsewhere as well, most notably for record keeping pertaining to deed ownership. The solution also allows passing millions of records to the blockchain within a single hash, providing an innovative solution to the growing problem of blockchain bloating.

Problem with data storage

“Honesty is subversive”, writes CEO Paul Snow to introduce the Factom white paper. Subversive, which generally has a negative connotation, means to undermine or destroy an existing system. However, used in conjunction with the word honesty, subversiveness takes on an entirely different connotation. It is the destroyer of dishonesty, the champion of truth and transparency.

Contemporary methods of bookkeeping have proved unequal to such a task. Central management of bookkeeping has allowed Enron, Lehman Brothers, and Bernie Madoff, to name a few examples, to hide the actual state of their finances to the detriment of investors. Factom likes to cite the $37 billion worth of fines racked up by Bank of America, JP Morgan and Citibank for inadequate mortgage record keeping, which allowed repackaging of toxic mortgages to misled investors. 75% of these mortgages were granted by Bank of America acquisition Countrywide, whose shoddy accounting practices masked the extent of their mortgage malpractice.

Factom endeavors to provide efficient, auditable, and fraud-proof bookmaking tools meant to mitigate against future Enrons – or at the very least facilitates early detection – while providing Bank of America the tools necessary to avoid the next fine. It also provides a powerful incentive for self-policing, as all data can be easily audited and the ability to backdate changes to original material without detection is eliminated.

Factom’s solution

Factom utilizes a decentralized network of servers to store mountainous amount of data. Entries from these giant databases are hashed, one against another until the final hash, otherwise known as the merkle root, is passed to the bitcoin blockchain where it is irrefutably recorded. The alteration of a single word within any entry would have a waterfall effect, meaning the blockchain hash would no longer be replicable by its component hashes. A simple audit following the altered hashes back through the merkle tree (the order in which the information has been hashed, one entry against the other), would be able to isolate the first hash change, thus isolating the entry in which it occurred.

It is one thing to ensure that data cannot be altered – it is quite another to provide users a tool to effectively make sense of the data. Let’s revisit the mortgage example from above to illustrate how this is done. Each and every document generated in any mortgage transaction, otherwise known as “entries”, are time-stamped and placed in a chain of entries. The end user would be able to easily access the specific information held within the chain, while a privacy protection feature ensures that outsiders are unable to view sensitive private data.

From the bank side, all data could be audited in real time against user-determined sets of rules, so if some data is missing, it is realized immediately. If Bank of America had such a system at its disposal before the acquisition of Countrywide, argues Factom, the transparency afforded might well have saved them approximately $17 billion.

Factom could just as easily be used as a decentralized, immutable ledger for the documentation of global land titles. In the developing world, much of the land title records are held offline in ledgers, susceptible both to the forces of nature as well as the pen of corrupt officials. Factom could be used to modernize these land registries, record any change in title, lending agreements or land usage rights. It further could help to identify any illegitimate land seizures, offering a method of reverting the land back to the rightful owner.

This transparency has other applications that can be utilized outside (and inside) the realms of business and deeds. Organizations can build trust by showing complete transparency and real-time operational audits. For example, Factom CEO Peter Kirby recently made the case that Factom could be used as an instrument to monitor government spending, which allows for a greater level of accountability while encouraging self-policing to avoid public shaming for frivolous spending.

Security

The network is secured and information distributed by Full nodes, the equivalent of bitcoin miners. Nodes are compensated for their efforts with “factoids”, the native digital currency of Factom. Factoids are used to purchase entry credits, which allows information to be stored in Factom.

There are at least 32 full nodes. Sixteen of these nodes are called “federated servers”, providing the consensus mechanism for ensuring data validity and mitigating against any one server acting as a single point of failure. Sixteen additional servers – called audit servers – ensure the veracity of the federated servers, publicising misdeeds.

All the full nodes are elected in democratic fashion by users of the factoid system. Users may change their votes based on the performance of any particular node – for instance, if a full node performs poorly, users may change their vote resulting in the node’s replacement by the top audit node. This institutes an interesting adversarial dynamic meant to keep nodes honest, reminiscent of the delegated proof of stake concept utilized in the BitShares network.

Factom and blockchain bloat

We describe elsewhere the issues that bitcoin will face as it is used to facilitate more and more transactions. Currently, each bitcoin transaction block is limited to a size of 1 MB, which will eventually prove insufficient to support the additional bandwidth required from bitcoin 2.0 applications. Factom serves to move non-BTC denominated transactions off the blockchain, and aggregate them to the blockchain in a single merkle root.

Currently, this is utilized to secure the libraries of data stored on the Factom servers, but the same technology could be used for any third-party service that processes many transactions. This could be usefully exploited today, for instance, by bitcoin exchanges. And not only does this constitute being a “good bitcoin citizen” by limiting the amount of bandwidth one consumes, it is much cheaper. If we assume that each transaction costs approximately a quarter of a penny and a particular merkle root contains 20,000 transactions, the Factom technology would have saved $50 in transaction fees.

Factoids

Factom launched on March 31st a 1 ½ month long crowd sale of it’s token, the factoid. The initial price was set at 2000 factoids per bitcoin, which was labeled a 25% reduction of the final price. The crowdsale ultimately sold 4.38 million factoids, raising 2,278 btc.  Prior to the crowsdsale, Factom announced that the eventual factoids purchased would account for 50% of the factoids released during the genesis block.  The additional 50% of coin will be split 60/40 between early contributers – basically the core team – and early purchasers, who bought in prior to the crowdsale.  An additional 10% of the overall genesis block coins would be released each year, used to compensate the federated servers.

Factoids are used for a few purposes. As described in the security section above, Factoids compensate the federated and auditing servers for securing the network. Factoids are also used to buy entry credits, which are needed by users to create and introduce entries into the network; once used, the Entry Credit is destroyed and the factoids are distributed amongst the federated nodes.  Not only will Factoids be necessary for utilizing the network, they also have a speculative function as well. Traders can buy and bsell factoid against, for instance, bitcoin, under the assumption that greater adoption of Factom will result in rising prices paid for the factoid coin.

Conclusion

Factom is an excellent bitcoin 2.0 product, providing the infrastructure for securing millions of records in a cryptographically-secured and immutable fashion. This has disruptive potential in the bookkeeping and auditing markets, with applications across a number of industries. Additionally, the Factom technology allows for applications to be built utilizing the bitcoin blockchain without bloating the network or incurring prohibitive transaction fees. It will be interesting to see how Factom develops its business over the coming months, and with whom.

You can find exchanges that offer Factom at our exchange comparison page.