Counterparty was born in 2014 as an open source protocol with no profit model (like Bitcoin). Counterparty extends Bitcoin’s functionality and was considered a “Bitcoin 2.0” platform to support assets by “writing in the margins” of Bitcoin Transactions. The protocol supports smart contracts and tradeable user-created coins. Rare Pepes were built as assets on Counterparty the ERC-721 standard even existed.
Counterparty has been on the “wrong” side of Bitcoin history and many chose to not talk about it at all. It has a native token (XCP) which is used to give arbitrary name to assets: if you pay 0.5 XCP, then you can call your new NFT “BTCTKVRMAG” instead of allowing the protocol to automatically name it “A11113761191968729490” (where “A” stands for “asset”). You can also sell your new tokens and give dividends to holders by using the XCP token.
But there’s a catch: Counterparty was created by bitcoiners who witnessed the Mastercoin ICO (which later turned into the Omni layer) and hated it. The creators of the protocol didn’t want to do a fundraiser and offer investors a token. That’s not Bitcoin enough.
So instead, they asked participants to “burn” their BTC and receive XCP in exchange. What this means is that in January 2014, almost 2131 bitcoins were irreversibly sent to the address 1CounterpartyXXXXXXXXXXXXXXXUWLpVr. They purposely made up an address that’s hard to generate, and to which nobody has access. So in order for the entire supply of 2,648,755 XCP tokens to get created, real BTC had to get burnt.
According to the March 23rd 2014 article “Why Proof-of-Burn”, the bitcoiners who created Counterparty didn’t want the developers to gain an unfair advantage and they didn’t want big investors to get any control over the network either. Everyone had an equal chance to burn BTC and receive XCP in exchange. Also, nobody got a first mover advantage so there would be no centralized entity to coordinate a pump and dump scheme. Everyone is just as interested in the project’s success and faces the same risks.
However, this doesn’t mean that the value of the XCP token is pegged to the price of BTC, or that the market cap should be equivalent with the 2131 BTC. As of December 28th 2021, 2131 BTC are worth $105 million while the entire XCP supply is only worth $32.8 million.
This comparison was not even necessary to prove a point about XCP being a utility token that doesn’t compete with bitcoin. It’s not supposed to be a store of value, you only buy it to issue your named asset and use it for its intended purpose. Holding XCP speculatively would be foolish, as the token is not even listed on popular exchanges and the only way to acquire it is through dispensers.