Innovation is a theme that runs throughout this post. New use cases for Bitcoin* and its underlying blockchain are being actively pursued by hundreds of startups around the world. The market cap of Bitcoin currently exceeds six billion dollars, greater than the total of all altcoins combined . Angel investors, venture capitalists, crowdfunding platforms, big banks, and established tech companies are pouring millions of dollars every month into blockchain research and alternative applications . Note, however, that innovation is not limited to the technology itself. The entire digital currency space is spawning all kinds of creative ways to interact with, and potentially profit from, this “emerging” market sector. Many of the blockchain startups are deploying novel business models, and even the process of early funding is being transformed by the disruptive influence of crowd-equity platforms.
This blog post will provide a high level perspective of alternative uses for the Bitcoin blockchain, and then quickly focus on one promising upstart, Factom. Without getting bogged down in too many details, the basic functionality of Factom will be described, and how it leverages the Bitcoin protocol. For those wanting a more in-depth technical understanding, there is an optional section on Factom’s architecture that delves into some of the specifics of their network. General readers are welcome to skip ahead to the Application section for an overview of potential use cases.
The Trust Machine
This past October, the cover of The Economist declared: “The Trust Machine—How the technology behind bitcoin could change the world.” The featured article explains how there is more to Bitcoin than simply a P2P cryptocurrency that doesn’t rely on a central authority for issuance . In essence, Bitcoin’s data structure, known as the blockchain, is recognized as a technological breakthrough that has the potential to transform how people collaborate using the Internet. Inherent in the Bitcoin protocol is an innovative structure that eliminates the need for trusted central parties—a consensus of “the facts” can be reached even in the presence of malefactors. This is a radical concept that has far-reaching implications.
Many, if not most, of the world’s institutions rely on centrally controlled and “trusted” repositories of information to function. Unfortunately, central databases are choke points that can be abused by corrupt gatekeepers, potentially subjected to unauthorized tampering, and natural targets for hackers. Now imagine the potential disruption to the status quo if there existed a more robust and secure method for maintaining digital records that does not rely on central databases! The team at Factom is laser-focused on using the inherent trust of the Bitcoin blockchain to eliminate the need for vulnerable, centralized collections of data. The end result will be new ways for people and businesses to cooperate that are more honest and reliable than legacy systems .
The remainder of this post will focus on Factom. An overview of their business model and funding method will be given before getting into the details of Factom’s functionality and their potential for transforming how organizations manage data-intensive records.
Creative Business Model
Factom’s business model is important to understand. There are really two complementary business entities, one non-profit and the other for-profit: 1) Factom Foundation, and 2) Factom, Inc., respectively. The Factom Foundation is an open source software project tasked with creating and maintaining the core client software and API development. The Foundation’s mission is to “make the world’s systems more honest and transparent”. On the other hand, Factom, Inc. is a commercial partner responding to enterprise clients who want to implement specific applications with the Factom Foundation software. One can think of Factom, Inc. as being in the business of providing “blockchain as a service” (BaaS), and the Factom Foundation as the keeper of the code .
State-Of-The-Art Software Token Sale
One great thing about Factom’s business model is how they were able to bootstrap their open source software development. In the spring of 2015, the Factom Foundation offered a pre-sale of Factoids (FCT), the software tokens required to power their new data layer protocol. Some cryptocurrency watchers were cautious and warned that this was just another pump-and-dump altcoin scam. However, some research at the time revealed a well-conceived white paper  and a strong development team backing the project . Moreover, the funds raised through the software token sale were held in escrow using multi-signature security, and would only be released in stages as significant milestones were achieved. The crowdsale did not even commence until a working alpha version of the software client existed. Third party experts were enlisted to evaluate progress. Bitcoin was the medium of exchange, and Koinify.com collected the funding. In addition, clear guidelines for the distribution of funds and long-term issuance of FCTs were spelled out. Truly, Factom helped write the book on best practices for software token crowdsales. In fact, David Johnston, CEO of the Factom Foundation, is a significant contributor to the GitHub section that deals with this topic . Factom sold about 4.4 million Factoid tokens for 2,278 BTC, or about $540,000 worth at the time .
Principal founders of Factom released a white paper in November 2014. The subtitle reveals the overall vision for Factom: “Business Processes Secured by Immutable Audit Trails on the Blockchain” . The abstract of this paper goes on to describe some of the primary challenges faced by computerized record keeping: Legacy databases can be difficult to secure from attack, synchronize across platforms, and verify for accuracy. The writers go on to point out that blockchains are an elegant solution to these problems. In the case of Bitcoin, its ever-growing blockchain can be viewed as a time-stamped database and complete history of every BTC transaction. The distributed nodes of Bitcoin cooperate to arrive at consensus before committing transactions to the blockchain. The state of the blockchain becomes immutable as it ages, and remains an openly accessible record of every bitcoin transaction. Thousands of Bitcoin full nodes maintain a complete replica of the blockchain, securing its contents from tampering and thereby guaranteeing its accuracy. As the one definitive ledger for all bitcoin transactions, the blockchain eliminates the problem of synchronizing between disparate centralized databases. In fact, Bitcoin’s blockchain is arguably the most secure and tamper-proof database in existence.
The blockchain, however, is not able to handle large volumes of general data storage. By designing Bitcoin for digital currency, relatively little space is allocated for each transaction, limiting the flexibility of the protocol to handle other types of data. Factom proposes an innovative data-layer protocol that copies aspects of Bitcoin’s decentralized architecture while leveraging the security of the blockchain and forgoing currency transactions. By doing so, Factom creates a distributed protocol that can store and secure unlimited amounts of data. Factom then uses the Bitcoin blockchain as an immutable anchoring mechanism. In lieu of transacting in bitcoin, Factom sends a small data fingerprint to the Bitcoin network every 10 minutes, the average rate that new blocks of transactions are created and appended to the blockchain. These fingerprints act as unique, verifiable markers for all data entered by Factom users during the last 10 minutes. The open source nature of the Bitcoin blockchain makes this audit trail universally accessible via the Internet, independent of any government or business entity.
Warning: This section is more technical in nature and is optional for understanding the use cases for Factom discussed in the following section.
“At its heart, Factom is a decentralized way to collect, package, and secure data into the Bitcoin blockchain” . The upper layer of the Factom protocol parallels that of Bitcoin. Factom allows users to create their own unique data chains, analogous to a private blockchain. To achieve decentralized consensus, Factom employs a network of thirty-two Federated servers and thirty-two audit servers. Like the miners, these servers are incentivized to act cooperatively and arrive at consensus. Bitcoin miners use a mechanism known as proof-of-work. Factom, on the other hand, applies a concept they call proof-of-usage , which is similar to the more well-known idea of proof-of-stake. Users of the Factom protocol must acquire Entry Credits (ECs) for all of the data they want to securely record and maintain. Influence in the Factom network is proportional to the number of ECs used, hence, the term proof-of-usage. PoS, on the other hand, is a consensus mechanism based on the proportion of total crypto-tokens owned. Peercoin is an example of a cryptocurrency that implements the PoS concept .
In the case of Factom, the crypto-token is called a Factoid. FCTs are easily tradable on cryptocurrency exchanges and were first offered in a crowdsale last year. Factoids can be redeemed for Entry Credits which are required to participate in the Factom data layer. Unlike Factoids, Entry Credits are not tradable and can only be used to enter data into Factom chains. Once users own Entry Credits, they then have the right to choose the Federated and audit servers in proportion to their EC holdings. If Factom used PoS, then someone could conceivably purchase a large portion of the outstanding Factoids and gain control over the Federated servers. However, Entry Credits limit the influence to those who are committed to using Factom. For a business to use Factom, it needs a preset number of ECs per kilobyte of data to make entries into a chain. The company can simply procure the necessary Entry Credits by paying Factom the going rate for the required number of Factoids. This shields businesses from dealing directly with any cryptocurrency, yet grants access to Factom’s secured data chains. Factoids are designed to reflect the value of the Factom protocol in the long run. The greater the demand, the more valuable FCTs become. Entry Credits, on the other hand, are designed to stay relatively constant in price. The Federated servers adjust the Factoid-to-EC exchange rate to make using Factom affordable for large amounts of data.
Now for the fun part. Having plowed through some of the technicalities of Factom, how it functions, and how it leverages the Bitcoin blockchain, let’s take a look at what kind of real world problems Factom can address. Much of the world’s wealth is safeguarded using electronic databases, e.g., real estate titles, financial accounts, security holdings, government records, etc. Let’s take a look at real estate first.
The US economy entered a deep recession after the subprime mortgage crisis hit in 2007 and 2008. Many people lost their jobs and were unable to pay their bills. By 2010, foreclosures were hitting record numbers as banks evicted delinquent homeowners. In the midst of this phase of the crisis, an outrageous scandal came to light. It turns out that the paperwork being submitted to the courts by the banks was often fraudulent. This became known as the “robo-signing” scandal in the US because false document trails were created and signed en masse. The end results were multi-billion dollar fines paid by the likes of Bank of America, Citigroup, JPMorgan, and others—not to mention the injustice done to many homeowners who were victims of fraud !
Given how mortgage servicing has evolved, it is no small wonder that the paperwork trails were sloppy at best. Keeping track of mortgage records is complicated, especially with the advent of collateralized derivatives that slice-and-dice and repackage the pieces. Who exactly has the right to foreclose on a particular property when the originating mortgage is dispersed across the globe in the form of fragmented derivatives?
Factom has an elegant solution for preventing such scandals and other institutional fraud in the future. Their platform can be used to track mortgage underwriting from inception to payoff. Mortgage applications, title reports, appraisals, tax forms, payments, servicing, transfer of ownership, securitization, etc., can be recorded in a Factom chain and audited in real-time to ensure regulatory and procedural compliance. Backdating and alteration of the records is prevented using Factom’s secure data layer anchored in the Bitcoin blockchain.
Factom has useful applications across the globe. In much of the developing world, land title records are either non-existent or held by backward and corruptible institutions. This has the effect of locking up capital formation because property owners cannot leverage their assets without proof of title . Factom is partnering with the Honduran government on a trial basis to record land titles in their fourth largest city. If this proof-of-concept succeeds, then the hope is to get approval to use Factom as a land title repository for the entire country . It will be interesting to see how these plans progress, and if there is widespread implementation, how the Honduran people will benefit.
One more promising real life application for Factom came in a recent press release about an ambitious project in China. Factom announced a partnership with consulting outfit, iSoftStone, that has extensive experience with providing IT services in China. The aim of the project is to improve the administration of smart cities, a major initiative of the Chinese government. By employing state-of-the-art techniques in urban planning, they hope to improve efficiencies and save money. Factom has a golden opportunity to prove the value of their innovative approach . These are just a few potential applications for the Factom protocol. The possibilities appear limitless.
The Bitcoin ecosystem is evolving rapidly. Complementary protocols, such as Factom, effectively extend the functionality of the blockchain beyond the domain of digital currency. Factom embraces innovation on many levels, including its initial funding method, overall business model, and technological use of the blockchain. Factom is a prime example of an application meta-layer built on top of Bitcoin, arguably the most widely adopted, distributed consensus protocol presently available. Imagine any business process that creates a mission-critical data trail: a Factom application can be built to manage the entire process. Factom is setting a high standard for database management in the twenty-first century, and the back-end security of Bitcoin’s blockchain is fundamental to Factom’s success.
Personally, I’ve wanted to take an in-depth look at Factom for some time now. Last year they caught my eye with a promising white paper, describing their vision of leveraging the security of Bitcoin to create tamper-proof documentation and business processes that can be audited in real-time. In fact, I thought their idea was intriguing enough to participate in the software crowdsale of their platform tokens, cleverly named Factoids. Almost a year passed, and I had forgotten about the financial support I offered the Factom Foundation. Later in 2015, I participated in an early equity round for Factom, Inc. offered at BankToTheFuture.com, an innovative crowdfunding platform that accepts bitcoin from qualified investors. Several weeks ago, I heard some news about Factom being endorsed by Microsoft, and it occurred to me to check the market value of Factoids. I was pleasantly surprised to see a ten-times increase since the crowdsale—much better than a savings account! (This gain will help offset my losses in Bitshares and NXT.)
After writing this article, I am cautiously optimistic about the long-term prospects of Factom. They appear to be a viable business enterprise that may one day be widely recognized. Factom is actively promoting the use of their open source software, and gaining a lot of media attention in the process. Time will tell if the Factom protocol attains widespread adoption, and thereby increases the demand and price of their crypto-token. I look forward to the day when I can say: “Here’s a fun factoid. I got in on the ground floor at Factom.” My research, explored here in this blog post, persuades me to hold some Factoids for the long term. Maybe a smart city initiative in China will help fund my retirement—one can always hope.
(Caution: This is not investment advice and confirmation bias may well be lurking. )
* Bitcoin with a capital B is used for the protocol and system as a whole, whereas bitcoin with a small b refers to the actual digital currency unit.
API Application Program Interface
BaaS Blockchain as a Service
EC Entry Credits, purchased with FCT
ETH Ether, Ethereum’s digital token
FCT Factoids, the digital token issued by Factom
IT Information Technology
P2P Peer To Peer
US United States
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- RIzzo, P. (2015, December 26). CoinDesk. Blockchain Land Title Project ‘Stalls’ In Honduras. Retrieved from http://www.coindesk.com/debate-factom-land-title-honduras/
- Moreau, J. (2016, February 6). CCN.LA. Factom Lands Smart-City Deal With China. Retrieved from https://www.cryptocoinsnews.com/factom-lands-smart-city-deal-china/