Counterparty and Medici

I don’t tend to write too frequently about Bitcoin here. Which is really odd because pretty much literally all of my time that I’m awake and not doing other (paid) work or doing family things is spent reading about, speaking about or thinking about Bitcoin. I think the reason is simply because the posts that I have written about Bitcoin recently (like here and here) tend to very much focus on the introductory, pack-it-all-in at a 30,000 foot high level kind of posts.

However, I did write one post with a slightly wider perspective back at the start of October following the huge announcement by Overstock that it planned to work with a couple of the core developers from Counterparty on Project Medici – in effect a decentralised exchange for the buying and selling of cryptosecurities. I’m pretty excited about the whole Counterparty project. It’s great to see Scotcoin making the decision to migrate to Counterparty for example – immediately tackling the network security issue full on by coming under Bitcoin’s wing.

Anyway, maybe this is a cop-out today (and certainly SEO suicide for the site….if I was concerned with such things…) – but I thought I’d repost my original piece on the Medici announcement from earlier in October – mainly because there’s some interesting links in there that some of my non-crypto friends might be interested in looking into further over time.

October 3rd, 2014

The big news in recent days has undoubtedly been the announcement from Overstock that it will commit real time and money to build a platform upon which cryptosecurities can be sold using Counterparty’s decentralised exchange. Adopting the name of Medici (in a nod to the pioneering Italian bank that pioneered improvements in the ledger accounting system in the 15th century), Overstock’s goal is to build a system that will let individuals trade securities directly on a decentralised exchange, thereby removing the need for any third party transfer agents.

There’s huge potential for a project that attempts to reimagine the financial markets using blockchain technology. If you’re looking for disruption, building a system that lets individuals execute trades of their own cryptosecurities directly in such a way that the cryptographic confirmation is verifiable to all on a public blockchain is a pretty good start.

CEO Patrick Byrne is no stranger to the world of cryptocurrencies of course. He drove his business to become the first billion dollar business to accept bitcoins earlier this year and gave the keynote at the Bitcoin 2014 Conference. However, the news is significant in itself for a number of reasons – not least because this is arguably represents the first major milestone for a 2.0 platform in the long journey towards much-touted mainstream usage.

Debate has raged about the choice of Counterparty, with members of the NXT and BitShares communities (amongst others) actively putting forward strong arguments for their own technologies during a process that was curated in part via Overstock’s wiki (“How to Issue a Cryptosecurity”) that was launched a couple of months ago with the purpose of focusing the debate. The decision is undoubtedly a significant boost for Counterparty which only launched at the start of 2014. But it’s important to bear in mind the fact that once any cryptosecurity is ultimately issued, the owner will be free to exchange this on another platform of his or her choosing in the future. Any decision to go with a specific platform was always going to split opinions amongst many exceptionally talented and committed individuals who appear at times to be competing, if simply for community mindshare.

However, the fact remains that the first attempt is being spearheaded by a corporation with ‘skin in the game’, so to speak, to deliver on the promise of decentralised exchanges for the mainstream – a concept that has been openly discussed within the wider crypto-community for a long time with few tangible results.

The benefits of a successful project are clear. To Byrne, a man who has campaigned against the inefficiencies – and alleged criminalities – of the capital markets for over a decade (focusing in particular on existing loopholes within centralised clearing and fractional reserve banking), the potential for pushing decentralised blockchain technologies to tackle the issues head-on is hugely attractive.

In theory, a decentralised exchange could bring significant benefits by enabling startups to take their companies public more easily – accessing deeper pools of public money to fund their growth – by slashing a significant chunk of IPO costs which currently go to middlemen. Some estimate that the costs of issuing a crypto-security via a decentralised exchange could be as much as 20% below the costs charged by Wall Street banks for listing.

But we shouldn’t underestimate the obstacles that lie ahead, nor the likely cost of surmounting them.

The reality is that the technology hurdles are small in relation to the regulatory obstacles and it’s without question that the regulators will have plenty to say about Byrne’s campaign to democratise Wall Street. Overstock have partnered with Perkins Coie, a law firm at the front of crypto developments, to shape that battle. And ultimately, regardless of the success or otherwise of Medici, Byrne and Overstock deserve much credit for  shouldering the cost (5-10% of Overstock’s cashflow has been earmarked) of a project that directly or otherwise will be used by others to deliver future implementations of the concept.

The costs are unlikely to be solely financial – hence the importance of having a figurehead who’s not frightened of ruffling a few feathers. It may be a long, arduous journey ahead but there can be no doubt for all those in favour of innovation that it’s worth watching the progress of Medici very closely over the coming months.