Stablecoin History: The Master of All AltCoins

In the excitement of my number one new book release on stablecoins, I’m sharing a few inserts from my book exclusively with my lovely Hacker Noon family to enjoy! <3

You can pick up the complete book, Stablecoin Evolution on Amazon, or obtain the pdf version/autographed copies on my website. Thank you!

The History of MasterCoin

At the beginning of 2013, Bitcoin was $13.30. It reached $946.92 by December 2013. Many blockchain advocates were delighted, but J. R. Willet was looking to transform the entire future of digital banking and assets. Willet was determined to derive a solution by creating a protocol layer on Bitcoin. This layer allowed for a plethora of new digital assets that could exist on the Bitcoin blockchain. Willet and his co-founders called their project MasterCoin (or Mastercoin).

Purpose

The Mastercoin Foundation Vision Statement:

“Accelerate innovation worldwide by building a global value exchange platform in an open, decentralized, transparent way.”

The Mastercoin Foundation Mission Statement:

To become the standard protocol for smart properties and virtual currencies on the Bitcoin network by providing peer-driven development of Mastercoin-enabled distributed applications that are easy to use, secure, and decentralized.” Source

Concept of Mastercoin

“The Second Bitcoin Whitepaper” (version 0.5), written by J.R. Willett, was made public in January 2012. It laid out the basic concept behind Mastercoin: namely, that the existing Bitcoin network could be used as a layer for higher-level protocols, paving the way for new rules for contracts, thus enabling the creation of new currencies without changing Bitcoin or requiring the creation of an alternate blockchain.

For those familiar with the OSI protocol stack, the relationship between Mastercoin and Bitcoin can be imagined in this photo below (Source)

J.R. Willett’s proposal was a solution to several pain points, as it improved the stability of Bitcoin through the issuance of new currencies.

The new digital currencies have evolved into Contracts For Difference, or CFDs. Contracts for difference are “an arrangement made in financial derivatives trading where the differences in the settlement between the open and closing trade prices are cash-settled. There is no delivery of physical goods or securities with CFDs. Source

Legal Warning

Actual Contracts For Differences, or CFDs, are considered over-the-counter investment products. The Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) prohibit residents and citizens of the U.S. from opening CFD accounts on domestic or foreign platforms. As a result of limited clarifications from the SEC, some cryptocurrencies may fall under the CFD regulations and may not be legal to possess, trade, or provide to customers. Consult legal and financial advisors for more information. Source.

Mastercoin and other new digital assets have aided in legalized “CFD-like” trading accessibility by:

Adding further value to the Bitcoin network;
Providing a mechanism to fund software development,
Marketing and supervision of the latest protocol layer(s);
Also, conveying ways early adopters could benefit financially. Source.

With Mastercoins’ protocol layer, Bitcoin users could create smart contracts within Bitcoin’s ecosystem. Mastercoin’s smart contract protocol enabled encapsulation to facilitate verification and enforcement of contracts, thus enabling the electronic exchange of smart properties such as stocks, bonds, real estate, intellectual property, etc.

Mastercoin allowed two parties to make opposing bets regarding Mastercoin value and the value of any asset, accomplished using contracts for difference. Contracts for difference allowed people to discard Mastercoin price risk in favor of any asset with a tractable value, like, gold, silver, or USD.

Mastercoin Contract Example Summary

It was clarified and edited by this author.

Orginal summary by Ron Gross, Mastercoin’s Executive Director: Source.

Person A and Person B enter into a contract. Person A and Person B both deposit 100 Mastercoins.

1 Mastercoin = 15 USD.

The contract states that neither can liquidate the contract at any time. When liquidation occurs: Person A receives 1500 worth of Mastercoin, while Person B receives the rest.

Example 1: 1 Mastercoin is worth $10 USD. When liquidation occurs: Person A receives 150 Mastercoins, while Person B receives 50 Mastercoins.

Example 2: 1 Mastercoin is worth $30 USD. When liquidation occurs: Person A receives 75 Mastercoins, while Person B receives 125 Mastercoins.

Example 3: 1 Mastercoin is worth $150 USD. When liquidation occurs: Person A receives 10 Mastercoins, while Person B receives 190 Mastercoins.

Example 4: The price of Mastercoin reaches $8 USD. The protocol automatically liquidates the contract to ensure it has enough funds. Person A receives 187.5 Mastercoins., while Person B receives 12.5 Mastercoins.

Example 5: The price of Mastercoin quickly drops to $7 USD without a prior price point at $8 USD. When liquidation occurs: Person A receives 200 Mastercoins which is equal to $1400 USD ($100 USD less than Person A should receive). Person B receives 0. Source.

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 exist within these constraints. Contracts can be tweaked 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 the bet.

Users can set their contract terms. Parties can discount/overcharge over the actual 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. It was believed a competitive market would pop up around asset pairs and drive margins towards zero. A new party wanting to buy or sell a contract for the difference in a large enough market 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 parties are willing to take the opposite side of your bet. Source.

On July 31, 2013, MasterCoin’s v1.0 whitepaper was released and included a call for funding the Mastercoin project. A Bitcoin “Exodus Address” was created where anyone that sent Bitcoin to the address before August 31, 2013, was promised 100X that number in Mastercoins, as well as extra Mastercoin rewards depending on the week during which the send transaction took place.

July 2013 was the initial launch of the Mastercoin Project fundraiser, and on August 15 of that year, the first Mastercoin transaction was recorded when CryptoBegger was sent 1 Test Mastercoin. Up until this point, the 1EXoDus address had received a significant investment from Mastercoin’s founders and other individuals. However, the big push came with a presentation of Mastercoin to BitAngels in the middle of August 2013.

The Exodus Address

The” “Exodus Address” was a Bitcoin wallet for the Mastercoin protocol that served the same purpose as the genesis block did for the Bitcoin blockchain. The Exodus Address was a milestone achievement for the Bitcoin blockchain and a way to fund the Mastercoin ecosystem. Those who donated to the Exodus Address before August 31 of 2013 were awarded a hundred times more Mastercoins than Bitcoins donated. An early adopter bonus was assumed where the (fractional) number of weeks before the deadline determined the bonus amount of Mastercoins.

When asked what the donations were to be used for, Willet responded:

“I have had a few minor expenses, but most of that money will probably be used for bounties once I have the basic code-base set up. Also, I’m not touching the money at that address until the fundraising is done [on] September 1.”

On December 4, 2013, Yahoo Finance shared that Mastercoin had raised approximately 4740 Bitcoins, or over $5 Million USD. The auspicious fundraising was led by J.R. Willett and David Johnston of BitAngels, resulting in the creation of 563,162 MSC by August 2013. No further MSC was ever to be created from the 1EXoDus address.

The Mastercoin Foundation was established from its origin to facilitate smart property transactions and build a distributed exchange for Bitcoin. This was all to be powered by the Mastercoin Protocol. Ron Gross was named as executive director of the new foundation.

The Mastercoin Foundation was registered in September 2013 with seven volunteer Board members, including:

J.R. Willett, Mastercoin
Brock Pierce, Tether/EOS
Jonathan Yantis, OPSkins/WAX
Ron Gross, bitBlu
David Johnston, BitAngels
Antony Vo, Mastercoin
Sam Onat Yilmaz, Bloccelerate

The board energetically worked to minimize its stated “temporary central role in the Mastercoin protocol” – controlling the Mastercoin Spec and awarding bounties. The Foundation board members intended to transition control from the board to the community via Proof of Stake voting. Mastercoin holders fully managed the evolution and development of the protocol and associated software.

Protocol

Mastercoin’s protocol can be described as being similar to the HTTP protocol, where the World Wide Web (www) resides. It is a layer that exists on top of the TCP/IP protocol and works atop the IPv4 protocol. It enabled new protocols, i.e., new currencies, to exist as part of the Bitcoin blockchain.

In the Mastercoin specifications published on Scribd, Willet describes his estimation of alternative digital currencies or altcoins, as

“Alternate blockchains [that] compete with Bitcoins financially, confuse our message to the world, and dilute our 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.”

Inspired By The Colored Coins in 2012

Colored Coins were repeatedly noted as the beginning of Bitcoin 2.0, as the expansion of utility in the Bitcoin blockchain. Colored Coins were tokens that are representations of real-world assets on the blockchain. One could use Colored Coins to prove ownership of any physical asset, from precious metals to cars to real estate, or equities and bonds, and they are nearly effortless to issue.

Designing Mastercoin, Willet planned to take a similar approach as Colored Coins. The MasterCoin protocol facilitated the creation of new currencies that can be assigned data streams from stock or commodity markets, thus representing the value of the selected item. The intended purpose was to track the values of the tokens to their corresponding commodities.

Enforcement of the market value for whatever stock or commodity a “higher protocol” currency correlated with was to be achieved using an escrow fund built into the currency’s protocol.

When the “commodity coin” value excessively increased, the currency’s escrow fund would create ancillary commodity coins in exchange for MasterCoins. When the value was too low, the fund traded Mastercoins for commodity coins, eliminating them upon receipt.

A Mastercoin derived currency could sustain a balanced value through this superintendence of supply and demand. The efficacy of such a protocol depends on how the currency’s author calibrates it to analyze and interact with the market.

Warnings From Willet

Willet appeared transparent to accentuate the risks users may face, as he published a partial list of risks. The Specification copy is bold in stating:

“Investing in experimental currencies is really, absurdly risky” – J. R. Willet

Willet’s specification speculated Mastercoin would be more attractive to criminals than Bitcoin; he states,

“I think criminals (like the rest of us) will prefer to deal with stable currencies rather than unstable ones. Also, betting on data streams will likely be a breeding ground for insider trading. (Note: I’m writing this protocol, but I’ll be very careful not to use it for anything like that myself – I would prefer to stay out of jail!).”

Mastercoin needed an in-depth understanding of the protocol to appreciate the idea. Since the Mastercoin solution was introduced early on, its intriguing concept raised endless possibilities that many enjoyed discussing on the Bitcoin Forums, still others questioMastercoin’sin’s validity, which some attributed to not fully comprehending the complicated ecosystem.

Mastercoin was a hopeful experiment. Trading commenced September 1, 2013, and in just a little more than 90 days, Mastercoin had reached an overall market cap of $132 million USD or slightly above one percent of all Bitcoins. Over this time, the new token also witnessed a value increase from 0.01 BTC (approximately $1 in August 2014) to 0.2 BTC (roughly $220), representing a 220x increase in value in just a little more than 90 days.

Controversy

Mastercoin was termed “Bitcoin 2.0,” using Bitcoin’s technology to make safe and protected transactions resulting in unexplored possibilities for the blockchain industry and fintech market.

With the emergence of Mastercoin, several similarly advanced technologies surfaced, including Tether, Factom, and Mastercoin’s main competitor, Counterparty, which reached the front as the best technology in enhancer space by the end of 2013. Many projects were inspired by Mastercoin and started offering innovative services to their clientele while leaving them stress-free about blockchain safety concerns.

In the beginning, many unique products were enjoyed within the Mastercoin ecosystem, but swiftly a chain of disputes tainted its reputation. When Mastercoin began to face negative press and suspicion torrents, the co-founders decided to rebrand.

In 2015, Mastercoin was rechristened Omni. The team hoped the rebranding would jettison suspicion and concern surrounding the project.

Omni’s official website describes itself in the following way:

Omni is a platform for creating and trading custom digital assets and currencies. It is a software layer built on top of the most popular, most audited, most secure blockchain – Bitcoin. Omni transactions are Bitcoin transactions that enable next-generation features on the Bitcoin Blockchain. Our reference implementation, Omni Core is an enhanced Bitcoin Core that provides all the features of Bitcoin as well as advanced Omni Layer features.

The Omni Protocol continued and expanded the Mastercoin mission to become the go-to protocol for smart contracts and digital currencies on the Bitcoin network. It enables a decentralized token exchange and provides a free-to-use protocol that supports token creation. Omni operates by encoding all data on its protocol as encrypted messages. However, it can not be considered a stablecoin, as it is instead a Scryptcoin, like Litecoin and Dogecoin. Scryptcoins are mineable cryptocurrencies that utilize encryption, requiring a large memory volume and a long time for selection. As of November 15, 2021, the current value of an Omni token is $3.74.

Source: Stablecoin Evolution

You can pick up the complete book, Stablecoin Evolution on Amazon, or obtain the pdf version/autographed copies on the Tech & Authors website.

Alyze Sam is a refreshing blockchain strategist, a novel educator, multi-award-winning author, serial co-founder, and a vehemently driven advocate. Sam wrote the first crypto dictionary and published the first books on stablecoins. Don Tapscott published her book ‘Stablecoin Economy‘ at The Blockchain Research Institute in January 2021. Sam’s newest book, ‘Stablecoin Evolution‘ is currently the number one new release on Amazon in Computers & Technology. The Bad Crypto Podcast developed a Blockchain Hero NFT inspired by her work: Mz. Stability. After nearly losing her life a few times, Sam is a retired nurse and owns T__ech & Authors__ with her best friends and soulmates, where they spend their days being grateful as they joyfully produce unbiased poetic technical education.

Sam is currently launching/advising multiple fintech projects. Visit MassCrypto.io and follow her on social media to support or find out more. Collaborations, very welcome! 😀 Thank you so much. ??♥️!

Everscale