The Genius of the Factom Two-Token System

8th August 2017

The majority of internet traffic runs on the TCP/IP protocol yet few understand how it works or even know that it exists. Technology integrates it seamlessly so that we don’t have to. As the Factom Protocol continues to move towards becoming the internet’s data integrity layer, businesses, governments, and application builders will use it in much the same way as TCP/IP when they want to ensure the integrity of their data. For true data integrity, one must have a trustless, decentralized, immutable, censorship resistant, autonomous protocol and that is exactly what the Factom Protocol is. As Paul Snow, Chief Architect of Factom stated:

While many in cryptocurrency circles have heard of Factom, most don’t know that it actually is a two-token system; Factoids (FCT) and Entry Credits (EC) and it is this two-token setup that, “Isolates use of the protocol from a tradable token” as Paul Snow states above. Even fewer understand the genius of this setup and what it enables.

The Factom Protocol is currently decentralized by 26 (eventually 65+) “Authority Node” servers that are operated by Authority Node Operator companies. These Authority Node Operators provide the infrastructure to decentralize the protocol and in return, they are compensated in Factoids (FCT) which are the publicly traded token of the protocol that has its price determined by the market. The protocol compensates the Authority Node Operators with approximately 73,000 FCT per month now that Milestone 3 (M3) is complete.

The Founders of the Factom Protocol realized that many businesses, governments, and app builders will want to use their protocol but there would be two problems with this:

1. Many companies and governments cannot hold cryptocurrencies for regulatory or internal policy reasons.

2. Cryptocurrencies tend to be highly volatile and companies and governments need to be able to budget effectively to use something like the Factom Protocol. If the token you use is $5.00 one day, $30.00 a week later, and $2.00 a month later, you can’t effectively budget.

As such, the Founders came up with an absolutely brilliant solution. They created Entry Credits (EC) in addition to Factoids thus inventing the two-token system and, “Isolat[ing] use of the protocol from [the] tradable token”. It is ENTRY CREDITS that allow you to enter data into the Factom Protocol. One EC allows you to enter up to 1kb of data and has a fixed cost of $.001. Note it’s not .001 FCT, but $.001. You receive EC by burning FCT and that FCT (and all fees) are burned (removed completely from existence) thus reducing future inflation. To reinforce the fact that EC are priced in dollars, not FCT, note that:

  • If one FCT is worth $1.00 and you burn it, you get 1,000 EC
  • If one FCT is worth $10.00 and you burn it, you get 10,000 EC
  • EC are not transferable and you can’t turn them back into FCT. However, you can purchase EC from a service like this one who acquire and burn the FCT on your behalf. You pay a premium to them for that service, but you don’t have to hold or deal with cryptocurrency. Or, you can build an application that provides this service in the background without the user ever having to deal with EC.

    This solves the two problems:

    1. Companies and governments don’t have to hold cryptocurrency if they don’t want to or can’t.

    2. Companies and governments can effectively budget for the cost of using the protocol because the cost for EC will effectively be $.001 each.

    Absolutely brilliant.

    The more the protocol is used, the more FCT should go up in value. However, these first few years it will likely be speculation about the potential of the protocol that determines the value of FCT moreso than EC usage. In time, I suspect EC usage will begin to drive the value of FCT.

    Factom aims to be like TCP/IP but for data integrity. When that comes to pass, the protocol will see massive usage.

    The Factom Protocol solves a very real, very big problem that plagues business and government and thus society. Considering the impressive coalition of companies working on the Factom protocol and the two token system, Factom is perfectly positioned to become the defacto data integrity layer.