Every time a new altcoin comes out, Bitcoin hoarders often have a knee-jerk reaction: “Who are these upstarts, and what is it going to do to my investment?”
Their reaction is understandable. Some new cryptocurrencies present no fundamental innovation, and are clearly the offspring of sour late adopters. Many make an honest effort, bringing non-currency functionality, but questions remain about whether these splinter movements can survive the network effect. The open source movement requires cooperation.
Factoids are neither of those. They are the token of access for the Factom network, which utilizes the power of the Bitcoin blockchain to verify all of its data. Many users want a blockchain that can handle smart contracts and property, but directly inserting all such data into Bitcoin transactions would bloat the blockchain to an unwieldy size.
Factom handles this outside the Bitcoin blockchain, in Factom Chains of its own; all of the relevant data is combined and distilled into a single numerical value. While Factom lacks the immense mining power of the Bitcoin network, by inserting that value into a transaction, Factom data can be recorded without bloating the blockchain.
This is done by a distributed system of servers; any server that attempted to fake Factom data would find its Factom blocks nullified by the Bitcoin ledger. They’re rewarded for this service with Factoids, which can be traded on the Factom chain. Without them, you cannot produce Entry Credits, the tickets needed to use Factom’s services.
You might be wondering: “why go through all of this trouble? Why not just pay the servers in bitcoins?” There are a couple of reasons.
Foremost, that would counteract one of the intended purposes, which is reducing blockchain bloat. In order for Factom to handle all of the decentralized applications under development, it will require a massive network; this will mean lots of small transactions, which many will consider to be spam. As block rewards drop and miners demand higher transaction fees, this will become too expensive.
The Bitcoin protocol is also too slow for most decentralized applications, with a block time of 10 minutes. Real-world scenarios require much faster confirmation times, or else a malicious user would have too long to carry out an attack. The attacker could still attempt to forge Factom blocks beyond the last Bitcoin block, but this provides additional defense for programs that will be operating on fractions of a second.
It also takes a lot of effort to design this whole system, although it requires little to no maintenance once complete. It wouldn’t really be fair, then, for Factom to maintain any kind of centralized fee structure–instead, they get some of the initial offering of Factoids, a one-time payment. They’re gambling that they will do a good job, and people will want to use Factom.
There’s a lot of room to collaborate, but a lot of questions about the blockchain’s future. The Factom network itself could utilize both the Omni and Counterparty protocols, and other blockchains, as well.