(Advanced) Mastercoin Explained. An Amazing Bitcoin 2.0 Idea!

July 30, 2020Alternative currencies have become a popular topic in the crypto wold. For example, Litecoin is trying to introduce a new mining algorithm with new features. Ripple is trying to create a crypto network that will allow loans to be processed globally. There are over 80 more projects of this kind and more are added every day.

Alternative currencies have become a popular topic in the crypto wold. For example, Litecoin is trying to introduce a new mining algorithm with new features. Ripple is trying to create a crypto network that will allow loans to be processed globally. There are over 80 more projects of this kind and more are added every day.

Mastercoin is one such project. However, it is not trying to create a new cryptocurrency like the others. Instead, Mastercoin is trying to create a new network of currencies, assets, and securities based on the bitcoin network. With our article “Mastercoin explained simply” we answer the most important questions about Mastercoin.

“Mastercoin explained simply. What is Bitcoin 2.0?” – Content:

Mastercoin explained

There is a mechanism called “merged mining” where miners rely on alternative currencies. Miner Pointers are published and point to the bitcoin blockchain. This allows us to significantly reduce the risk of a 51% attack. Mastercoin takes this concept and goes one step further. Bitcoin is used here not only as a timestamp system to store for their blocks but for each individual transaction. Mastercoin, therefore, analyzes all available bitcoin transactions and uses them for its own network.

Who invented Mastercoin?

The Mastercoin protocol was published in a document by J.R. Willett on January 6, 2012. He called his white paper “The Second Bitcoin White Paper”. He suggests that Bitcoin can be used as a protocol layer on which we can build new currencies with new rules. We do not have to change the layer below.

How does Mastercoin work?

Other blockchains usually compete with each other. As a result, everybody focuses on the financial incentive and the technology behind it is often neglected. This ensures that the adoption of blockchain technology is slowed down.

With Mastercoin we get new protocol layers. This protocol is based on the Bitcoin protocol. This increases the price of Bitcoin and at the same time accelerates the adoption speed. As a result, we can create new cryptocurrencies. Thus, each new protocol will increase the value of Bitcoin. This creates a win-win situation for both sides.

Mastercoin can use Bitcoin’s popularity and mining power to provide security. You can also use Mastercoin to create protocols that interact between Bitcoin and Mastercoin.

The Key Feature of Mastercoin

Mastercoin is interesting because it has some unique features. In the following, I will show you what makes Mastercoin so useful.
User defined currencies: Everyone can create their own currency with Mastercoin.

Decentralized exchange: With Mastercoin we can trade with any currency in the Mastercoin network. Anyone can place a transaction on the blockchain.
And because we use a blockchain everything is completely automated.

Price feeds: Trusted organizations or individuals can publish prices such as the value per ounce of gold in USD. The whole thing is then displayed in the Mastercoin network for all to see.

Mastercoin Shares: You will also be able to register options/futures with another person. This means that you are speculating that the price will be higher or lower at a certain time in the future. This essentially allows speculation with leverage. You can speculate with prices in the Mastercoin network without exposing yourself to high volatility.

Saving address: If you want a transaction back, you can do it in a very short time. This increases your security by a lot for high quality savings accounts.

What makes Mastercoin special?

Mastercoin is a self-stabilising currency. With Mastercoin it will be possible to place bets to secure your own position. The value of Mastercoin will follow the value of a traditional stable currency or an asset like USD. Imagine a Mastercoin is worth 10 USD and you buy 5 pieces. You can protect yourself against a loss of value by betting on a falling value. So you can bet 1 USD for every Mastercoin that is less than 10 USD in the future. The more the coin falls, the less your 5 Mastercoins are worth. However, you can compensate for the loss in value by betting on a falling value. The whole thing works of course the other way around. This way we can stabilize the value of Mastercoin.

But the whole thing can go much further. Imagine that you create your own currency with Mastercoin in the form of a fund. For this, your currency must follow another currency. Mastercoin takes this information together with some other metadata, such as an “aggression factor”. This indicates how closely the currency should follow the underlying index and publishes it as a Mastercoin transaction. From that point on, the Mastercoin protocol manages your currency like a central bank. It then creates a unit from scratch and sells it to anyone who is willing to pay something above the market price. If nobody is willing to pay the market price, then the price can go down. This creates a market dynamic that independently determines the optimal price. As a result, we created a stable cryptocurrency.

Advantages of Mastercoin

The idea of a self-stabilizing currency can change the crypto-world significantly. This would mean that you can store any currency you want on the network. And no financial institution can influence the currency.
This means that cryptocurrencies make a step in the right direction to be recognized as a useable currency by the regulator.
This could mean that cryptocurrencies can be used as a legitimate and efficient payment method in any industry.

Disadvantages of Mastercoin

However, there is also a decisive disadvantage. If you create your own currency in the form of a fund, you may run out of money. This means that you sell your currency at a high price and later it drops. If a lot of people want to sell your currency you have to buy it back. You will make a loss on every currency you buy back. If the losses are too big, you can go broke.

But there can be a protection against this. The users of the currency know that if the price does not fall below 0.97 UDS, they can make a profit as long as the fund is active. This allows them to profit from the currency when the price rises again. This market dynamic can protect your currency from bankruptcy.

Problems of Mastercoin

One of Mastercoin’s problems is decentralization. It is more centralized than other cryptocurrencies such as Bitcoin or Litecoin. With the standardized cryptocurrencies, anyone can earn a coin by mining, which is issued by the network. With Mastercoin, coins are issued to users who have sent money to the Exodus address. This means that there is a central party responsible for the issue of the coins.

However, Mastercoin is not a central party like Ripple, which initially has Mastercoins by default. The Mastercoin Foundation is rather a non-profit organization and is part of the Bitcoin Foundation. Nevertheless, the Mastercoin Foundation is a privileged entity, since no one else has the opportunity to earn Bitcoins. In addition, Mastercoin earns 1.2 cents for each transaction. This centralized position and privileged status could disqualify Mastercoin as a cryptocurrency.

Another problem of Mastercoin is security. For example, if you try to send a transaction to someone and at the same time to yourself, the second transaction will be rejected. The reason for this is that the Bitcoin network denies an already known transaction. This ensures that there can be no double spending and protects the network. With Mastercoin, the double spending problem causes great uncertainty. Most of the Bitcoin network does not know the Mastercoin network. This means that a hacker sends the same transaction to the Mastercoin network and to the Bitcoin network. The second transaction is okay according to Mastercoin’s rules and the miners from the Bitcoin network accept it. Therefore, a Mastercoin transaction is only considered confirmed after 10 minutes. However, there are already solutions to solve the double spending problem and it will only take time.

Mastercoin Future

It is difficult to say exactly whether self-stabilizing currencies work in real environments. It is also unclear how the market will react to a bankruptcy scenario of the fund. There are two different future scenarios. Firstly, self-stabilizing currencies can work and change the cryptocurrency market significantly for the better. However, it is also possible that some unforeseeable events could sweep all the self-stabilizing currencies off the market at once.

“Mastercoin explained simply. What is Bitcoin 2.0?” – Summary:

Mastercoin definitely brings new wind into the crypto world. It can make it possible that cryptocurrency is finally recognized as a real currency by the regulator. Of course Mastercoin still has to deal with obstacles like the double spending problem or centralization. But the developers of Mastercoin are already trying to finding solutions for this. With all these new ideas, Mastercoin could in the future be even the basis of a decentralized market

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