Goal:

Those who have followed the discussion/debate in the Factom community will likely have
noticed some common threads emerging. Most tokens associated with a blockchain project are
expected to grow in value as the blockchain becomes more popular or successful. The goal of
this document is to outline some criticisms of this premise with respect to the factoid (FCT), the
native token of the Factom blockchain. I’ll then do my best to offer up a rebuttal.

Full disclosure: I’m a human being, and I happen to be one who thinks that FCT economics are
well designed to accrue value to the token provided the protocol is successful. I’m summarizing
a lot of arguments put forth by other people. I’ll credit exact quotes if and where I use them. I’m
not going to credit general ideas to any one source, mostly to avoid boosting/reducing the merit
of the idea based on the perceived authority behind them. If you feel like I’m stealing your idea
and you want credit, I’ll be happy to amend this. Ultimately these are mostly paraphrased by
me, @stevek216 on discord, so feel free to yell at me if you have concerns.

Finally, this assumes an understanding of basic FCT economics. The tl:dr of it is that FCT price
should tend toward an equilibrium that’s directly proportional to the amount of entry credits burnt
to commit data to the public protocol. I might make an appendix to this with greater detail but
there are sources out there if you need to learn more - Multicoin Capital for instance has a nice
write-up available on their blog.

Content:
Criticism #1: Private Chains
Criticism #2: EC Price Reduction

Potential Future Content:

● There’s only so long ANOs can operate at a loss before conceding defeat. Will
the protocol reach usage levels to support ANO growth organically before ANOs
give up? (my personal biggest fear, though I think there’s a strong rebuttal)
● Could a competitor “borrow” the protocol’s technology and spin up a rival protocol
in any meaningful way? Possibly offer cheaper ECs just long enough to damage
Factom irreparably? (my take: seems unlikely)
● Is Factom’s technology inferior to competitor blockchains like BTC, ETH, EOS,
etc? Are our advantages enough? Will Factom always be almost ready to make
it big?
● Suggestions? I’m getting a bit more philosophical at the end of the list, I’d prefer
more concrete ideas but I’m not opposed to wading into the qualitative.
Criticism #1: ​Most usage will occur on private chains (Factom-on-Factom setups).
Companies will prefer this as a cheaper, more confidential means to incorporate blockchain.
The only entries that will trickle down to the public blockchain will be anchors of anchors, orders
of magnitude less than would be used if it was all on public. ANOs will run thriving
Blockchain-as-a-Service (BaaS) businesses on top of Factom while the public blockchain
remains somewhat anemic and the FCT token price with it.

Response #1: ​There’s a lot to unpack here so I’ll try to tackle it point by point. First, I’d like to
acknowledge that if this situation were to pan out then I agree that the FCT price will go
nowhere fast. I think there are some flaws to the logic, or at least very open questions.
● Private blockchain instances won’t necessarily be cheaper
○ Companies would still have to set up their own servers and develop/maintain
some expertise (or pay someone like Factom Inc. to manage them). There’s
definitely a tipping point at which a private instance makes sense. In fact, I think
a big trigger for this criticism was Paul Snow mentioning a very large user that
would have to use private due to the massive usage they would require.
However the tipping point is unknown, and I think that there’s a good chance it’s
more economical for most use cases to use public than set up their own private
instance.
● Private chains would be more confidential, but less useful
○ It’s true that private chains are more confidential, but as an argument for their
usage it’s a rebuttal of itself. Part of the value proposition of a public blockchain
is that it’s independently auditable. The further you abstract layers of data from a
public blockchain, the less you can trust it. There are real concerns about
privacy and blockchain, but at least from what I’ve seen not many in the space
are coalescing around “make a private blockchain” as a solution. There will be
use cases where a private blockchain makes more sense (anonymous huge
user, Gates Foundation’s work in Africa), but there’s not much evidence that it’ll
be the majority of use cases.
● Most solutions being built on Factom are using the public blockchain.
○ FAT Protocol, BIF’s work, OffBlocks, DeFacto’s work - all use or intend to use the
public blockchain. Paul has stated that even Harmony is set up to use the public
blockchain by default. This list is nowhere near comprehensive (even as an avid
Factom follower, I have a hard time coming up with a comprehensive list). What
is easier is to come up with solutions that are known to be using private chains:
Factom Harmony, in some instances.
○ While I know we all hope that Harmony will be a wild success, it is far from the
only thing using the Factom protocol. I think even the most skeptical community
members will have to admit that some of the things being built on Factom exceed
what most of us even dreamed ​could ​be use cases (I’m looking at you, FAT).
While it’s possible that there will be successful products that mostly use private
chains, the fact is that most current projects use the public blockchain.
Criticism #2: ​Technological improvements will force down the price of entry credits, thus
reducing the value of the FCT token.

Response #2: ​First, I think it’s important that we work outside the world of the speculative
premium when talking about this. Yes, the speculative premium exists (it’s most of the token
price right now). Yes, there’s a very strong argument that it will always exist as long as the
protocol is growing. However, the main argument for the accrual of value to the token is the
burn/mint equilibrium (BME) price model, and for FCT to grow sustainably in price then it must
be via the BME mechanism at its core.

If the price of entry credits is lowered, then (all else equal) the price of FCT should fall roughly
proportionally. This is just a property of the BME math, I have no argument against it.
Therefore, any rebuttal to this criticism has to rebut the idea that the price of entry credits will be
substantially lowered. Here are some thoughts:

● One of the stated arguments I’ve seen for the $0.001 EC price not being lower is that it
should be cost prohibitive to spam the network to its breaking point. It’s beyond the
scope of this document (and probably my brain) to figure out a relationship between a
minimum entry credit price and the ability to spam the protocol enough to interfere with
its function, especially as sharding increases capacity. I just want to throw it out there as
something to consider - there’s probably a floor EC price below which the security or
functionality of the protocol is threatened.
● ANOs would have to agree to lower the price. This kind of decision wouldn’t be taken
lightly, as it would amount to a pay cut for them. The only situation I envision this
happening would be if it was necessary to compete. That might happen. Still, I think
there’s a limit to how low competition could drive the price. Ultimately, a competitor
blockchain still has to provide financial incentives for their consensus system to function.
The less economic incentive there is for consensus, the weaker the consensus will be.