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Counterparty, Dogeparty, and Why the Term 'Burning' Gives the Wrong Impression

Published on August 18th, 2014 by Rob

The world of cryptocurrency has progressed so that now anyone can create their own cryptocurrency. With only basic experience using Bitcoin or Dogecoin, it is easy to create blockchain-based tradable digital tokens, thanks to the Counterparty protocol, and its brand new implementation called Dogeparty.

How Does Counterparty Work?

The Counterparty protocol allows users to create and trade their own cryptocurrency tokens. Users do this with a wallet dedicated to sending and receiving Counterparty messages on the bitcoin blockchain. The messages are broadcast by sending very small amounts of Bitcoin, coupled with Counterparty data. Only the owner of the private key for a bitcoin address can send a Counterparty asset, and the complete history of Counterparty transactions is as secure as the blockchain it runs atop (the bitcoin blockchain, in the case of Counterparty, or the Dogecoin blockchain, in the case of Dogeparty).

Burning Is Not Wasting

The coin that acts as the fuel for the Counterparty system is XCP. The developers decided the most fair way to distribute XCP was to allow people to acquire it for Bitcoin. People who wanted XCP sent Bitcoin to an address that has no private key, so all Bitcoin sent to that address was gone forever. But it was not wasted. It was effectively transformed, at a given rate of exchange, into XCP, which was distributed to each address that contributed Bitcoin. This process is referred to as burning, and it is often panned as a wasteful destruction of a coin and its value. However, the destruction of value in one coin sprouts new value in another coin, so the net effect is transformation, not destruction. Proponents see this method of coin creation as the least corruptible way to launch a new platform; it removes a major greed motive, and thus also removes the potential skepticism inherent in new platforms that provide huge fundraising windfalls to the development team.

Why Dogeparty?

Many people have jumped on the Counterparty platform, as it is the first easily-accessible way to create tokens that leverage the inherent security of the bitcoin blockchain. For example, the Let's Talk Bitcoin! ecosystem is currently run on a Counterparty asset called LTBcoin. While the Counterparty protocol is relatively cheap to use, the costs add up when there is a lot going on. That is because each transaction requires sending Bitcoin and enough in miner's fees to make sure the transaction is recorded to the blockchain. Thus, any time you send a Counterparty token, you need to send a base level of Bitcoin. Recently, the Counterparty developers decided to create a version of their protocol that would live on the Dogecoin blockchain. That not only reduces the transaction fees to less than 1% of those running on the bitcoin blockchain, it also allows for much faster transactions. Now, anyone who wants to experiment with asset creation on the Counterparty protocol can do so for pennies!

The Dogeparty protocol uses XDP as the native unit for the system, instead of XCP used for Counterparty. If you want to create your own assets, you need XDP, plus some Doge (as you must send Dogecoin to carry the data for the Dogeparty transaction). Because the Dogecoin protocol just launched, the "burn" period is still in effect, so you can acquire XDP by using the Dogeparty Wallet to send Doge to a specific nonrecoverable address. I've seen this process interpreted as a nonsensical wasting of Dogecoin, as an artificial attempt to prop up the overall Doge platform. But that overlooks the fact that people are converting their Doge into XDP, because they believe in the potential of the Dogeparty platform. After seeing how well Counterparty has worked on the bitcoin blockchain, it is not surprising that there is excitement about Dogeparty, even for people who have never been involved with Dogecoin.

Counterwallet and Dogeparty Wallet

One thing you'll immediately notice is how easy the developers made it to get started with their web wallets. Simply go to counterwallet.co or wallet.dogeparty.io, click the button to create a wallet, and save the pass phrase you are given. That is it. People can send you asset tokens on the platform, or you can create your own assets, provided you have the native coin (XCP or XDP) and some Bitcoin or Dogecoin to send in tiny amounts, to carry your token transactions. Once you have both the native token and the blockchain currency in your new wallet, go to Address Actions, click Create a Token (Asset), and fill in a handful of details about the asset. Note that the asset-name land grab has already begun on both platforms.

When you have a wallet running in your browser, it is not simply a connection to a Counteryparty server. Once the wallet is launched, your browser is actively a javascript wallet. Thus, trying to log in to your wallet from a second computer, when the wallet is already open on another computer, can cause problems. (Fortunately, the wallet warns you if you try to do this.)

Risks

This is all experimental (for that matter, even Bitcoin is technically still in beta). It is certainly possible there are bugs or exploitable flaws in both implimentations of the Counterparty protocol. Of course, the hashing power securing the Dogecoin blockchain is but a tiny fraction of the hashing power securing the Bitcoin blockchain. And, unlike Bitcoin's trend of ever-increasing hashrates, Dogecoin's hashrate is well off highs reached in February of this year. So there is a lot more risk of a 51% attack on Doge. Such an attack could render recent transactions (of Doge or Dogeparty assets) invalid, but Dogecoin and Dogeparty assets still could not be spent without having the private key for a particular address. Counterparty's original flavor, running on the Bitcoin blockchain, appears to be much more secure from 51% attack, as its hashrate eclipses all others.

Perhaps a greater risk is that most users are using the online Counterwallet or Dogeparty Wallet. All that is required to access either wallet is a passphrase, because two-factor authentication (2FA) has not been implemented yet. Many people would not feel comfortable with their tokens being so accessible if their computer (or password itself) was compromised, so I hope 2FA will be added to the online wallet soon. There are also offline wallets offered that can be compiled by users, but it is unclear how many people will utilize these much more technical wallets. If you are about to put any serious value into a Counterwallet or Dogeparty Wallet, or base an important project on these protocols, an offline wallet is the safe way to go.

Bottom Line

These are very exciting technologies that bring nontechnical cryptocurrency enthusiasts the ability to create their own asset tokens, at a very low cost. And that does not scratch the surface of these protocol's more complex abilities, or explore interesting uses that may develop on top of these platforms. If you have any desire to experiment with these platforms, now is your chance to dive in as an early adopter.

Disclosure: I own small amounts of XCP and XDP. Note that implications of trading in these new tokens may be a tax headache for those who attempt to be 100% compliant with outdated tax regulations.

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