COUNTERPARTY

The years 2013-14 were a time of bold experimentation within the rapidly expanding Bitcoin ecosystem. Serious players were moving in, bringing with them fresh ideas of what could be done with Bitcoin and the funds to build out their theses. It was an era when the limitations of Bitcoin’s architecture were still being explored, and while many of the protocols being trialled during this phase never caught on, they blazed a trail for subsequent blockchain movements to follow. One of these was Counterparty.

Created by Robby Dermody, Evan Wagner, and Adam Krellenstein, Counterparty was a bold attempt at expanding Bitcoin’s utility that was, in retrospect, ahead of its time. The trio’s goal was to develop a suite of peer-to-peer financial instruments directly on the Bitcoin blockchain. This included custom digital assets known as metacoins, a fully decentralised asset exchange, trustless gaming, native oracles, and even complex smart contracts.

Counterparty was one of the first serious attempts to build upon Bitcoin by combining the security of its base layer with proprietary tools and services its codebase couldn’t natively support. The project can be credited with a host of innovations starting with the Proof-of-Burn (PoB) mechanism used to issue its native XCP currency.

During a one-month period in January 2014, anyone could participate by sending bitcoin to a provably unspendable Bitcoin address. In return for their burned BTC, they received a proportional amount of XCP. Over the course of the month, approximately 2,130 BTC valued at around $2M were permanently destroyed, creating a total supply of approximately 2.6 million XCP.

Kicking Off the Counterparty

As a metaprotocol, Counterparty didn’t have its own blockchain. Instead, it leveraged the Bitcoin blockchain as a transport layer for its own transaction data by embedding small, custom data payloads into standard Bitcoin transactions. This was an idea that had already been tried with Colored Coins and proven to be technically feasible. A series of Counterparty nodes were tasked with continuously scanning the Bitcoin blockchain to identify and interpret these special transactions based on a predefined set of rules.

Among the numerous firsts Counterparty can claim is being the first project to utilise the OP_RETURN script opcode. Introduced in Bitcoin Core version 0.9.0 in March 2014, OP_RETURN provides a standardised method for including a small amount of arbitrary data in a transaction. Despite being able to hold just 40 bytes of data, this small addition to Bitcoin’s codebase was to spark fierce debate over the following years as to whether filling Bitcoin transactions containing unrelated data constituted “spam.” As one of the primary users of the OP_RETURN field, Counterparty formed a lightning rod for much of the early debate.

Counterparty Founder Adam Krellenstein notes that “Before Counterparty, there were only a few, very specific applications of blockchain technology outside of payments, most notably Namecoin.” His goal in developing the protocol was to “Reduce the reliance of the blockchain ecosystem on centralised exchanges. There had been a rash of exchange failures and rug-pulls, and people were generally very interested in the theoretical possibility of building a trustless “decentralised exchange.” Counterparty had the first, with a fully onchain central limit order book working on day one.”

While Bitcoin developers debated arcane protocol rules, Counterparty got to work on building out its metaprotocol, and within a year of its launch was to spawn another first when it formed the foundation for Spells of Genesis, now regarded as the first blockchain-integrated game. This combined a trading card game with an arcade-style shooter, using the Counterparty protocol to tokenise its digital cards. The first onchain asset for the game, FDCARD, was issued on March 11, 2015, marking the birth of “true” digital ownership or what we now call NFTs.

Spells of Genesis was followed in 2016 by Rare Pepe, which tapped into the internet’s obsession with creating variations of the mischievous green frog – and no variety came rarer than the very first and now-legendary NAKAMOTOCARD. Despite these notable successes, Counterparty never really took off, yet played an oversized role in influencing the NFT mania that would follow years later.

Spells of Genesis pioneered the idea of true digital ownership for in-game items, while Rare Pepe established the viability of community-driven art collections with dedicated secondary markets. Indeed, CryptoPunks, the NFT project that directly inspired the creation of the ERC-721 standard, was itself inspired by the success and culture of the Rare Pepe community. Counterparty’s long-term impact on Bitcoin may have been slight, but its impact on the broader blockchain industry has been significant.

According to early Bitcoiner and industry figure Adam McBride, “Counterparty was a pivotal moment in NFT history, offering creatives an easy-to-use platform to experiment with digital assets. Rare Pepe became its breakout project and is widely credited with inspiring other artists, including the founders of CryptoPunks. It also sparked a passionate early community that continues to influence crypto culture today.”