Mastercoin is both a new type of currency (MSC) and a platform. It is a new protocol layer running on top of bitcoin like HTTP runs on top of TCP/IP. Its purpose is to build upon the core Bitcoin protocol and add new features, with a focus on a straight-forward easy to understand implementation which allow for protocol and analysis and its rapid development.
The MSC authors claim that the existing bitcoin network can be used as a protocol layer, on top of which new currency layers with new rules can be built without changing the foundation. They further claim that the new protocol layers will:
- Fix the two biggest barriers to widespread bitcoin adoption: instability and insecurity.
- Financially benefit the entire bitcoin user community, including those who don’t use the new protocol layers.
- Provide initial funds to hire developers to build software which implements the new protocol layers, and ongoing funds to pay for maintenance of this software.
- Richly reward early adopters of the new protocol, in proportion to how successful it is.
These claims are built on the following assumptions:
- Alternate block chains compete with bitcoins financially, diluting community's efforts. These barriers interfere with the adoption momentum of bitcoin and the adoption momentum of alternate currencies as well, regardless of how well-conceived their rules may be.
- New protocol layers on top of the bitcoin protocol will increase Bitcoin values and concentrate efforts, while still allowing individuals and groups to issue new currencies with experimental new rules. The success of any experimental currency protocol layer will enhance the value and success of the foundational bitcoin protocol.
- Getting consensus and widespread adoption from the bitcoin community is not needed to add protocol layers, since no changes to the foundational bitcoin protocol are required.
- Tiny bitcoin transactions can be encoded into the block chain to support and represent transactions in higher protocol layers.
- A protocol can pay for its own software development, “bootstrapping” itself into existence, utilizing a trusted entity to hold funds and hire developers.
- It is possible to create tools to allow end users to create currency protocol layers which have a stable value, pegged to an external currency or commodity. In this way, users of these currencies can own stabilized virtual currency tied to U.S. Dollars, Euros, ounces of gold, barrels of oil, etc.
- It is possible for users of these new currencies to exchange between currencies with each other using simple rules and no central exchange.
The proposed protocol layers can be visualized as follows, with arrows representing users exchanging between currencies: