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Mastercoin and the Master Protocol

The 'Master Protocol' is an open source project which aims to allow people to encode digital assets other than Bitcoin, as well as 'smart contracts', within the Bitcoin blockchain. This is done through building a higher level protocol, with more advanced features, on top of the basic Bitcoin protocol.

Mastercoin is a unit of accounting and exchange which is required by anyone wishing to make use of the Master Protocol, and which can also be traded and spent as a digital currency in its own right. The currency symbol of Mastercoin is MSC.

The development of Mastercoin and the Master Protocol was initiated, at least partially, as a response to external threats to the success of Bitcoin from competing technologies which offered more advanced features, which Bitcoin itself could not offer. By creating a method for such advanced features to be built on top of Bitcoin, it was hoped that the threat of more advanced products making Bitcoin obsolete could be reduced.

This approach of developing advanced features on top of Bitcoin through the creation of higher level protocol layer, as an alternative to creating new protocols and technologies from scratch, has both advantages and disadvantages.

The primary advantage is the network effect – Mastercoin is able to co-opt the large and established network of Bitcoin users, who in the future may be able to use the new protocol's features from a BTC wallet, and who have an incentive to use a product which is seen as adding value to their Bitcoin holdings rather than competing with the currency they already hold.

The primary disadvantage is technological, as Bitcoin was not really designed for the kind of purposes that the Master Protocol wants to put it to, meaning that the process may end up being more complex, and therefore slower, more unwieldy and difficult to use and build on, as well as more prone to problems than would be the case for a technology built from the ground up with these more advanced features in mind from the start.

Master Protocol Features

At the time of writing both Mastercoin and the Master Protocol are still at a relatively early stage of development. Many of the features listed here are therefore still under development, and should be considered as future plans rather than functioning products.

Distributed Exchange: The master protocol aims to offer a distributed peer to peer exchange, which would allow users to trade Bitcoins for other digital currencies without having to send their coins to a third party exchange website. Instead, each trade would be made through the Bitcoin blockchain itself. This could potentially decrease the risk of losing your coins in the event of fraudulent, insecure, or failing exchanges – as happened dramatically to users of Mt. Gox, once the world's most popular BTC exchange.

Savings Wallets: Savings wallets are a form of 'cold storage' which offer users additional security for the long term storage of Bitcoin. They are not, as some people may assume from the name, an interest bearing or investment related product. The primary feature of a savings wallet is reversible transactions. These savings wallets are not used to pay for things, but to transfer money to and from a 'hot wallet', which is used for everyday payment purposes. Reversible transactions improve security because if a hacker manages to breach the security of a savings wallet and transfers money out, then the owner who has control of the secret key will still have time to cancel the transaction and prevent the thief from taking the money.

Smart Properties: A smart property is basically a digital representation of any other asset stored and traded through the blockchain. It could potentially be used to create digital representations of physical property rights, such as the deeds to a house, to create funds which track the price of physical commodities like gold for investment purposes, or for users of the Master Protocol to create their own digital currencies.

Smart Contracts: A smart contract is a codified agreement between two people, which is automatically executed by a software program if certain conditions, agreed upon by both parties at the time the contract is created, are met.

Using Mastercoin and the Master Protocol

Mastercoins, as well as any other digital asset transmitted through the master protocol, can be sent to any Bitcoin address. In order to send or trade them, however, users need to have a mastercoin enabled wallet. Currently there are two options – a Windows wallet which works in conjunction with the Bitcoind client software, or a web wallet, which is still in its alpha version and should not be considered reliable.

Notable Uses of the Master Protocol

In late April 2014, Maidsafe launched a pre-sale of their 'safecoins' through the Master protocol. This involved the sale of a currency called 'maidsafecoins' created on the Master Protocol, which are effectively an IOU to be exchanged 1-1 for Safecoins once the live SAFE Network is launched and the first Safecoins created.

There was some controversy surrounding this sale, as the maidsafecoins were offered for sale in both Bitcoin and Mastercoin, but with a cheaper price in Mastercoin. This led to two things – firstly the price of Mastercoin went up as people bought them purely to exchange for maidsafecoins and because the Mastercoin sales went through more quickly, Maidsafe was also forced to halt Mastercoin sales early so as to still be able to process all of the BTC orders before the alloted number of maidsafecoins ran out. This meant that some people who bought MSC in order to use them to buy maidsafecoins were left with MSC which they couldn't use, and which then dropped in value back to its normal level – leaving them out of pocket and prompting some to describe the pre-sale as a 'pump and dump' scam on behalf of MSC.

Categories: E-Currency | Cryptocurrency | Bitcoin


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