How Counterparty Works
Counterparty (XCP) is a protocol and software implementation that allows for the issuance and exchange of cryptoassets on top of the Bitcoin blockchain.
Counterparty makes cryptoassets on top of the Bitcoin blockchain possible by writing metadata into bitcoin transactions. That data is then read, validated, and executed by Counterparty nodes. (E.g. “Buy 100 TOKEN / SELL 10 XCP.”)
Each block, Bitcoin full nodes that are running the Counterparty software scan for this metadata. If found, nodes validate that data and update their ledgers, accordingly. This is a method known as “embedded consensus”.
As long as the federated nodes in the Counterparty network are running the same version of software, they can all independently compute — and come to consensus on — the state of the network. (E.g. “Who owns what.”)
Counterparty & Bitcoin
As a result of this embedded consensus approach, each action taken — whether it’s creating, sending, or trading an asset — requires confirming bitcoin transactions. Necessarily, Bitcoin fees affect Counterparty users.
With that in mind, developers work hard to make transactions more efficient, both in terms of how many actions each transaction can perform and how many bytes of data are required. (See: CIP 9, CIP 10, and CIP 11.)
That’s It For Now Folks!
There’s A LOT more to it, but I want to keep this brief. In short: information that relates to asset ownership is written into and read from the blockchain, but in a way that is far less complicated than coding a smart contract.
Learn more here: https://counterparty.io/