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. If Factom is successful, businesses and people will one day use the Factom Protocol in much the same way 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 Factom is building. 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. As developers slowly begin to comprehend the utility of the two-token system, I suspect many future blockchains will replicate it.

For Factom to be decentralized, the design calls for 64 “Federated Servers” (Think somewhat along the lines of DASH masternodes on steroids). These Federated Servers provide a service and in return, they are compensated in Factoids (FCT) which are the publicly traded token that has its’ price determined by the market. The protocol will compensate the 64 Federated Servers with approximately 73,000 FCT per month once Milestone 3 (M3) is complete.

Now, the Founders of Factom realized that many businesses will want to use their protocol BUT there would be two problems with this:

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

2. Cryptocurrencies tend to be highly volatile and companies 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 costs $.001 at present. Note it’s not .001 FCT, but $.001. You receive EC by burning FCT and that FCT (and all fees) are removed completely 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 and have a service like this one 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.

    This solves the two problems:

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

    2. Companies 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 will 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. If that comes to pass, the protocol will see MASSIVE usage.

    It’s all very exciting to me not just from a potential monetary reward perspective, but because Factom solves a very real, very big problem that plagues business and thus society. With the team they’ve put together, the financial backing they’ve received, and the genius of the design of the Factom Protocol including the two token system, Factom is one to watch very closely.