Factom is an open-source protocol that leverages the best qualities of Bitcoin, security and immutability, to efficiently record data. Working as a layer above the Bitcoin blockchain, Factom’s own consensus protocol commits data nearly continuously to Bitcoin’s chain.
Continuous time-stamping and securing of data on an institutional level is impractical and consumes too many transactions per minute if working directly on Bitcoin’s protocol. Companies need data secured and pulled potentially more often then Bitcoin’s 10-minute average block times would allow. There also is the fluctuation of transaction fees to consider.
There are possible ramifications for enterprise users, both legally and financially, in using Bitcoin for their business. Nonprofits, for example, may not be even able to transact in cryptocurrency due to regulatory risks. Factom was built to address this issue with its two-token system. The protocol is designed in a way that entities can utilize the benefits of Factom without having to hold or transact cryptocurrencies.
To see how Factom negates this problem, it is important to understand how Factom functions as a decentralized network. The design of the protocol involves “Federated Servers” (Similar to DASH masternodes, except much larger). Federated Servers provide network security and they are paid in Factoids (FCT), Factom’s native tradable tokens. These are the main nodes securing the network and are the ones writing data to the Factom chains. The protocol compensates the work of these servers with approximately 73,000 FCT per month.
Smaller, with less power, are Audit Servers. Using a voting system, Factom users can participate in the ranking of all nodes. When a Federated Server misbehaves, it is voted out and the highest ranking Audit Server takes its place.
The second part of the two-token system are Entry Credits (EC) in addition to Factoids. This creates the separation of a tradable token from the ability to use the protocol. Institutions that are unable or unwilling to use a tradable cryptocurrency do not have to utilize one to partake in the service of the protocol.
Entry Credits facilitate the entry of data onto the Factom Protocol. A single credit allows entry of up to 1kb of data. To receive EC, a user has to burn FTC. Even though EC are non-transferable, there are services that you can pay in dollars to have the process done for you. EC has a fixed cost of $0.001 which allows for companies to effectively budget the cost of using Factom without having to deal twith the volatility associated with the cryptocurrency marketplace.
Burning FCT to create EC creates a relationship in usage of the Factom platform and the market price of the tradable token. With a 73,000 FCT fixed supply created per month, there will be a balance created based on the demand for data being stored on the platform. Theoretically the more Factom is used, the more FCT will go up in price.
Factom’s protocol first compresses the data using merkle trees in combination with a few other methods. Huge amounts of data can be stored using a single transaction with this mathematical advantage. Not only is this data compressed but it is organized in a way that entities can get the data they need quickly. All data has a very specific point that can be searched and categorized in a way that makes institutional data storage on the blockchain viable. All data that is entered into Factom’s protocol has an ID. These IDs determine where the data will be stored under what sub-group (think computer folders and files). Each entry is linked together to create a chain, leaving a trail for effective audits. The ability to simply perform audits is an essential part to the storage of institutional data and files.