Understanding Mastercoin (-> Counterparty/Omni)

Mastercoin is a protocol that massively expands upon the uses and functions of bitcoin, it does so by leveraging the bitcoin blockchain as a message and time stamping third party.

After two years of closely following the cryptocurrency ecosystem, mastercoin was the first thing beside bitcoin I got excited about from an investment perspective, simply because it is an innovation bringing something new to the party.

Bitcoin allows people to agree on the characteristics of an interaction in a completely decentralized manner. For bitcoin this applies to solely bitcoin currency units. Mastercoin is attempting to use bitcoin’s technology to make all sorts of things possible, not just the transfer of currency units.

Let’s make it simple. Mastercoin’s features are attainable because bitcoin transactions are immortally archived within the blockchain and can be interpreted (parsed) in whatever way you want, meaning that if transactions are sent according to the correct systematic blueprint, then they can be picked up, read and interpreted as something other than simply a bitcoin transaction.

Mastercoin transactions are just bitcoin transactions carrying little packets of data that are interpreted to mean something different. This allows expansion of the possibilities of bitcoin without changing the bitcoin protocol.

Don’t know how it works? Who cares? It works. Smart people told it to work.

Not just another altcoin

Generally speaking, altcoins are simply copies of bitcoin with a few parameters tweaked. Mining differences, block discovery times, number of coins, inflation rates etc.

Altcoins tend not to interest me despite many posting big short term returns (I’m looking at you dogecoin). I’m not interested in picking winners in a game that at its core is just a giant lolly scramble.

wow, much lolly scramble
wow, much lolly scramble

Mastercoin is one of the first endeavours to hit the space that proposes to take advantage of some of the other possibilities of decentralized peer to peer ledgers. Don’t be fooled into thinking it’s the only player though. Check out: CounterpartyBitsharesNxt and Ethereum. Mastercoin will have to fight for its slice of the pie.

Distributed exchange

Before I push forward I need to mention that anything on the Mastercoin network can be traded in a completely trust-less, peer to peer manner. All online, no input from any third party, completely managed by the Mastercoin network. A superb foundation to build on. This feature has been launched, the following features are still in the pipeline awaiting development and launch.

Edit: Smart property capability was launched with the indisputably successful Maidsafe crowd sale of MaidSafeCoins on the 22nd of April 2014.

Contracts for difference

Mastercoin will allow two parties to make opposing bets regarding mastercoin value and the value of any asset. This can be accomplished using contracts for difference. Contracts for difference will allow people to discard mastercoin price risk in favour of any asset that has a value that can be tracked. Think Gold, Silver, or US dollars.

The following is an example explained by Ron Gross, the Mastercoin Executive Director:

You and I enter into a contract.

We both deposit 100 mastercoin.

Let’s say 1 mastercoin = 15 USD.

The contract states that either of us can liquidate the contract at any time (other liquidation conditions are also available, this is just an example).

When liquidation happens, I get $1500 worth of mastercoin, and you get the rest.

Example 1:

1 mastercoin is worth 10 USD when liquidation occurs.

I get 150 mastercoin.

You get 50 mastercoin.

Example 2:

1 mastercoin is worth 30 USD when liquidation occurs.

I get 75 mastercoin.

You get 125 mastercoin.

Example 3:

1 mastercoin is worth 150 USD.

I get 10 mastercoin.

You get 190 mastercoin.

Example 4:

The price of mastercoin gets to 8 USD. The contract is automatically liquidated by the protocol, to ensure it has enough funds.

I get 187.5 mastercoin.

You get 12.5 mastercoin.

Example 5:

The price of mastercoin quickly drops to 7 USD without a prior price point at 8 USD.

I get 200 mastercoin = 1400 USD (100 USD less than I should).

You get 0.

In the above example, one person is exposed to USD and has no exposure to mastercoin. The other person has double their initial exposure to mastercoin. Understand that contracts don’t necessarily have to exist within these constraints. Contracts can be tweaked in order to allow any party to choose what level of exposure (leverage) they would like in USD (any asset) or mastercoin.

Notice that there always has to be someone to make up the opposite side of your bet. You might be asking the question, where do they come from, and what encourages them to take up an opposing position?

Well, just like you, will have the option to set their own contract terms. Parties can discount/overcharge over the real value of an asset and make ‘free’ money off the spread, while hedging their risk (if they want) using an offsetting contract with better terms. I think it’s safe to say a competitive market will pop up around asset pairs and drive margins towards zero. This means in a large enough market a new party wanting to buy or sell a contract for difference will always find a counterparty with a relatively low margin.

The best part is that the process can be automated to find another counterparty (with equivalent terms) when the duration of your initial contract runs out. You can remain in a position as long as there are parties willing to take the opposite side of your bet.

Keep it simple, stupid. Contracts for difference on the mastercoin network will allow people to have their wealth track assets of their choosing. No bank account needed, completely decentralized, accessible by anyone, anywhere in the world. This is huge.

Smart property

reinventing finance
reinventing finance

This feature will allow assets to be represented by tokens that the user creates. It’s a way of digitizing a claim on real world assets. Think shares in a new company, deeds, titles, products, user backed currencies and services.

Consider the possibility of being able to raise capital for a new company using the mastercoin network. An entrepreneur can create a set amount of shares representing their company, (that cannot be diluted in the future) and offer them for sale to the public. They can then use the capital raised to carry out their business plan. If at some point in the future the business is profitable, they can issue a dividend to shareholders in proportion to their holdings.

Key benefits for the entrepreneur and investor:

  • No software development required.
  • No brokerage fees.
  • No trusted third party needed.
  • Access to a global investment audience.
  • Instant access to capital once sale is made.
  • Shares can continue being traded on the mastercoin network after IPO.
  • Dividend payments are easy and rapid.
  • No bank account needed.

User backed currencies offer similar benefits. Consider a business that holds gold in a vault and wants to allow people to have a digital claim to, say, grams of gold. The business can use the mastercoin to create a ‘gold’ currency where every unit is a claim to a gram of gold in its vault. The business can sell these units to other users of the mastercoin network who have a desire to own gold. These digital claims on grams of gold can be sent and traded just like any other asset on the mastercoin network. The only downside is the trust you need to have in the business that is storing the physical gold.

Does this sound like E-gold to anyone? Mastercoin will make it possible for every man and his dog to start an E-gold equivalent, for any asset they wish, at any scale, anywhere in the world on a network that is highly accessible and notoriously hard to shut down. Sounds pretty disruptive to me.

Notable mentions

  • Savings addresses. Allow the user to designate an address as savings, making it very difficult for funds to be stolen.
  • Distributed betting. Same idea as contracts for difference, but you can bet on the outcome of anything that can represented by a data stream.
  • Escrow backed currencies. Will attempt to track the value of an asset like contracts for difference do, but achieve that goal by holding a pool of funds in escrow and buying or selling units in an automated manner until the price matches that dictated by the data stream.
  • Supply is capped at approx 620,000 mastercoins.
  • The protocol does not necessarily have to exist on top of bitcoin. If at any point, bitcoin is deemed not suitable, mastercoin will be able to migrate to new chain.
  • Mastercoins have to represent the value of most assets on the mastercoin network. As usage increases, so will the price.
  • User friendly web and Windows wallets are available.
  • Mastercoin has attracted serious investment from BitAngels.


  • Bitcoin/mastercoin protocol failure.
  • Governmental ban.
  • Technical barriers, although it seems to be universally agreed that all proposed features are technically feasible.
  • Predation by a better, faster moving competitor. A legitimate concern at this point, even though mastercoin has a solid development team, first mover advantage and lots of cash, there is certainly risk.
  • High cost of transactions. Due to the nature of the Mastercoin protocol, currently a single transaction costs about 20c.
  • Scalability issues with the Bitcoin network due to the huge amount of transactions mastercoin activity will contribute. There is concern in the community that the Bitcoin will struggle at higher levels of transactions per second. This concern is addressed here.

Where does that leave us?

Mastercoin is a new technology and remains largely experimental. If the project continues gaining public support and performs to expectations, without being made redundant by a superior technology, mastercoins could become absurdly valuable.

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