source:
http://www.ofnumbers.com/2014/03/04/chapter-3-next-generation-platforms/...
CounterpartyFor perspective I had an email exchange with Ryan Orr, who is a professor at Stanford University (teaching Global Project Finance and Infrastructure Investment) and chairman at Zanbato.33 Orr has also been closely following Counterparty, which is the first functioning protocol layer fully integrated with the Bitcoin blockchain that supports peer-to-peer transfers of a coin called XCP.34 At the beginning of January the Counterparty development team announced that they had successfully released a working protocol including asset-backed issuance, betting, dividends, callable assets and the world’s first decentralized exchange.35
As the next few months will involve a race between Colored Coins, Mastercoin, and Counterparty as well as other non-blockchain equivalents such as Ripple and Open-Transactions, with each system bringing its new innovations, many outside commentators have expressed interest over Counterparty’s integration with the Bitcoin blockchain and execution to date. ”The fact that we have six serious competitors is a huge development for the entire segment,” says Orr, “The early days of this race will be about tech execution whereas the later days will involve regulatory finesse. The ‘value web’ (as opposed to the ‘information web’) is finally here. The significance of these developments for the future of the field finance are gargantuan – what we are witnessing could be the equivalent of the invention of http on top of TCP/IP, and these are the protocols that are likely underpin the evolution of the value-web over the coming decades.”
In February 2014 I exchanged messages with one of the lead developers, who used the pseudonym “PhantomPhreak.”36 According to him, “Counterparty is a protocol, and a piece of software, that takes the technology underlying Bitcoin and extends it beyond simple payments, implementing a wide range of financial instruments. It may be used to trade cryptocurrencies, create assets, make bets, and more, with all other Counterparty users, safely and anonymously, with no middleman at all. It is built on top of the Bitcoin blockchain, so it can be very simple and reliable. It is being developed very quickly, and it has a large feature set already. Counterparty inherits all of Bitcoin’s security and reliability. It is open-source, and its launch was entirely decentralised, as is the protocol itself. And as its name suggests, implements a completely distributed, automatic and deterministic clearing house, so there is no counterparty risk to speak of in most transactions. Of course, if someone were to issue an IOU using Counterparty that he did not make good on, then the anonymous nature of the protocol would leave the slighted party with little legal recourse.”
This last sentence is of particular interest as it still shows a problem that is currently not solved in a decentralized manner, as Preston Byrne identifies in Chapter 2. As this space matures, developers will need to learn how to structure smart contracts so they are legally and commercially useful. How to enforce these clauses without an escrow-based DAO, without an independent mediator or without a reputation system (e.g., credit score) can and will be tricky but could be a business opportunity for experienced professionals in those segments who are looking to get exposure to the cryptocurrency sector. One competing developer explained to me that, “Counterparty is way ahead of the game because their distributed financial system is deployed today. In many ways, the team is reminiscent of Satoshi: they are people in our community who saw a problem with prior attempts and are fixing it. All others are still spinning their wheels and really need to deliver functionality on which we can all explore further. What’s more, proof-of-burn is a big commitment and raises the stakes for everyone. That’s why there’s so much development activity going on with Counterparty. The investors have to pull to make the coin work and they’re pulling hard. They released alpha software and folks are losing money, but they’re shipping code updates daily which means the software is getting better and the markets more active. This is an exciting space and this level of competition motivates all of us to take it up a notch.”
Proof-of-burn (POB) is a unique turn on allocating “scarce resources” (tokens). Whereas cryptocurrencies such as Bitcoin, Litecoin and Dogecoin use proof-of-work to allocate resources (e.g., a token), proof-of-burn requires that the miners (or any user actually) send their tokens such as a bitcoin to a provably unspendable address (a terminator address) where they are untouchable forever by any party.37 The first and only “burn” took place beginning on January 2, 2014 and lasted for thirty days – now all of the XCP that will ever exist have been created. During that time, 2,130 BTC were effectively destroyed amounting to roughly $2 million in market prices (the actual repercussion was that all other holders of bitcoin saw a net gain in value by roughly 0.01%).38 Counterparty then automatically converted the “burned” token into its own unit, called an XCP resulting in no premine or foundershares. It currently takes five XCP to create your own asset, the five are destroyed in the process as a spam control function. While it is a controversial method, proof-of-burn does remove the human element from the equation. That is to say, while other ‘”2.0” projects are typically funded by IPOs whose assets are then (usually) managed by a non-profit organization, because there is still a trusted 3rd party involved, abuse can occur. That is not to suggest that any abuse is happening, but rather that Counterparty is re-solving the Byzantine General’s problem in a different yet mathematically similar, manner than what Satoshi did in 2008.39
“PhantomPhreak” also sees potential in other decentralized platforms, “I think that there’s a very good chance that so-called second-generation cryptocurrencies will “take off” in the next year or so. Bitcoin was a revolution, in a number of ways, and now it’s time for an evolution of the core concepts and paradigms that it introduced. Computer science has to catch up with it, so to speak. A secure, distributed blockchain can be used for so much more than simple payments: advanced financial instruments (a la Counterparty), messaging protocols (c.f. Bitmessage, Twister), etc. Certainly the future of finance is more decentralised than the present, and the economy as a whole will have to change accordingly.”40
Bitmessage is a peer-to-peer protocol that allows users to send encrypted messages to anyone in a decentralized trustless manner (i.e., Bitcoin for messaging).41 Twister is an encrypted decentralized peer-to-peer microblogging application that uses both the Bitcoin and BitTorrent protocols to enable users to tweet and communicate anonymously.42 Other projects in this space are Bitcloud (decentralized cloud services), Maidsafe (decentralized dropbox and API platform) and SyncNet (decentralized web browser).43
In addition, he believes there are many applications that financial instrument designers could contribute to this space and in particular Counterparty, stating: “the most obvious possible contributions are simply new features. Right now, for instance, Counterparty only has two different types of ‘bets’, namely simple ‘Equal/NotEqual’ bets and contracts for difference. Counterparty, however, has the potential to implement very nearly the entire range of tools commonly available to professionals in the financial industry. Of course, pretty much any developer could contribute a lot to the Counterparty project, which still has a relatively small codebase and an underdeveloped software ecosystem, simply by writing user-friendly interfaces, or algorithmic trading engines, for example, on top of the reference client.”
I also exchanged messages with “cityglut” who is another member of the development team. In terms of business opportunities, it is his view that, “what cryptocurrencies in general and Counterparty in particular allow for that is arguably most significant is further decentralization. I believe that businesses which capitalize on this aspect of Counterparty will have opportunities they have not had until now.” As noted above, this project does have code that is shipped and is currently being used by the community at large.
He also sees that there are a number of areas of low-hanging fruit. According to him, “in my mind the most obvious financial instrument that Counterparty is currently lacking is a real options function. Counterparty allows for binary (Equal/NotEqual) bets and the creation and (distributed) sale of assets, and I believe that a combination of these functions could create a full-blown options function, but it may well be that in Counterparty’s current implementation this is infeasible. Even if an options function can’t be built from Counterparty’s extant functions, it seems to me both possible and desirable to implement options in Counterparty in some way.”
Yet there are challenges too, “It is precisely Counterparty’s brand new functionality that entails greater necessary due diligence on the part of users. Since anyone can make an asset, and anyone can publish a broadcast upon which to bet, users must do what they can to make sure the asset they are purchasing is legitimate, and that the broadcast upon which they are betting has not been “tampered” with. In an effort to facilitate the former, we have recently implemented a description space for every asset: issuers of assets can include up to 42 bytes (in UTF-8) with each issuance, describing the asset being issued. Regarding broadcasts, aside from the financial incentive feed-operators have to stay honest (namely, collecting betting fees), we imagine that an – albeit informal – reputation system will naturally evolve, helping users to decided which addresses’ broadcasts to bet on and which to avoid.”
This secondary attribute, a type of descriptive space is a feature that many of the other platforms are trying to enable in order to organize and manage different types of assets. The issue involving reputation is also a theme repeated by many other investors, developers and experts and one that a DAO escrow could potentially resolve.
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