Making Your Own Cryptocurrency Has Never Been Easier

This fall, Bitcoin became the toast of the Beltway. Far from its cryptoanarchist origins, US Senators, encouraged by Bitcoin investment and currency speculation, praised the fledgling cryptocurrency as a technological breakthrough.

The government was already well behind the techno-evolutionary curve. For several years, amateur and professional entrepreneurs have been testing the various ways Bitcoin can be used. One such innovation is Mastercoin, a programmable layer on the Bitcoin block chain that recently announced $5 million (4,700 BTC) in investor funding.

So, what is a "programmable layer of Bitcoin?" Think of it as some extra trunk space where any number of things can hitch a ride during a Bitcoin transaction—anything from airline miles or a "News Wire" coin that could help users evade the Great Firewall of China. It could also allow a Silk Road successor to arise and flourish without being tethered to a central server or owner.

I recently spoke to Dominik Zynis, head of communications for the Mastercoin Foundation, who explained other potential uses of the service. It's some pretty heady stuff for those just coming to understand Bitcoin techspeak, but fascinating in its ambition.

Motherboard: What was the initial idea behind Mastercoin?

Zynis: Bitcoin is designed to replace payment networks, but people get scammed all the time, and there are numerous examples of hacking. The price can also swing "to the Moon," a common phrase used by Bitcoin traders, or crash in a matter of minutes.

Mastercoin was designed to address some of these security and price stability issues. The idea behind the Master Protocol, which is the set of rules for using Mastercoins, is to use the Bitcoin network for creating rules for peer-to-peer trading and allowing the issuing of escrow-based currencies and smart properties or digitized property rights.

How do you add a "programmable money layer" on top of Bitcoin's existing block chain?

If you have ever used registered mail, you know that every person who touches that piece of mail signs off on its receipt until it gets to the intended recipient. Bitcoin basically functions the same way except that the sign-off is public knowledge in the blockchain, which is just a digital book of signatures and transaction amounts. So, just like when we share an mp3 on BitTorrent, we are sharing our signed transaction with everyone using Bitcoin.

Now, with the Bitcoin network we only send each other some amount of Bitcoins in that "registered mail" package. Perhaps that package has a piece of paper with 100 BTC written on it, but it is possible to stuff other things in there. For example, you can put in a stock certificate or a lottery ticket, or maybe some airline miles.

Can you elaborate on how Mastercoin will also allow people to create their own virtual currencies on Bitcoin's block chain?

Well, the secret sauce is the Master Protocol, which is not so secret since it's open source. Recall the package that had a piece of paper with "100 BTC" written on it, except this time I want to create my own currency. Let's call them "Virgin Space Dollars" (VSD) for a new Star Wars game I am building, and I want to create 1 Billion VSDs.

To do that I will need to send a registration transaction to 1EXoDusjGwvnjZUyKkxZ4UHEf77z6A5S4P, which is the Bitcoin address that created the finite set of Mastercoins in existence today. Since all Mastercoin clients watch this Bitcoin address, they will now know that I have registered 1 Billion Virgin Space Dollars. I can start to give them out to people for every light year they travel in my game.

In fact, I can give the game out for free to encourage people to use it. As more VSDs are given out I can then provide access to virtual goods merchants who will start accepting VSDs in exchange for virtual goods like virtual teddy bears in my Star Wars game. Let's say these teddy bears get really scarce because they increase the power of the Force, so gamers start buying up VSDs to get their hands on these rare teddy bears. The value of VSDs will increase and I can exchange them for Bitcoins to pay my artist and development teams.

What is the advantage in creating new cryptocurrencies pegged to commodities, other currencies, or precious metals?

Some people like to put their money in commodities and precious metals. It's part of someone's financial portfolio strategy. For the first time, Mastercoin makes this more accessible to the public and in a completely decentralized way.

Why was it important to make Mastercoin open-source?

Open-source is the way to go in fostering innovation, and being open to the ideas of all of the intelligent and hardworking communities of developers across the globe. Also, trust is an important factor in having a viable currency. People need to be able to trust that which is being built, and what they choose to use is something they must agree on.

We do not get to choose how the Federal Reserve or the World Bank functions, apart from perhaps a very abstract viewpoint. With Bitcoin and Mastercoin and the many child currencies that will flourish, people can choose which type of social contract related to economic systems they want to be a part of. It's about enabling choice.

How would Mastercoin be insulated against price/valuation fluctuations?

We have a concept called "Contracts For Difference" that will allow people to choose to essentially take out the volatility of cryptos. This is essentially similar to transferring your currencies into Dollars, Yen or Euros. However, Mastercoins themselves will float freely. A user will be able to opt into pegging some of his Mastercoins into other currencies or commodities.

How is Mastercoin currently being used? 

Mastercoins are being used to pay for bounties for development of the Master Protocol applications. Some people are using them as an investment vehicle. We use them for giveaways to help people learn how they function. There is a community of traders and speculators out there, as well as those testing various applications which are being built such Mastercoin wallets, block explorers, and the distributed exchange.

What's the advantage in creating a platform for the creation of other cryptocurrencies?

We can leverage the existing Bitcoin network infrastructure for running these currencies transactions and create smart properties that fulfill specific contractual requirements, such as easily paying dividends or profits to owners of some enterprise. That is not to say that new, very innovative cryptocurrencies will not come out. In thinking about allocation of resources, a lot of "alt coins" are simply clones of Bitcoin. Instead of the copy cat stuff that is happening now, folks can spend their time building new distributed applications.

For example, with Mastercoin they could release a "Newswire Coin" to fund the development of a completely distributed data storage blockchain for news snippets that allows anyone to access information. Imagine the Chinese government not being able to censor news because it is embedded in millions of computers world wide, or a Silk Road that has no owner or central server.

What type of individuals will Mastercoin most appeal to?

We have scores of requests from folks building the next generation of Internet applications, games, financial offerings, and services. A lot of people want their own currency for specific verticals and purposes. Besides that, it appeals to technologists, developers, and Bitcoin enthusiasts, and very likely anarchists, liberals (the European brand, not American) and libertarians who will appreciate using a distributed exchange that cannot be taken down by repressive dictatorships and governments for trading Bitcoins into other currencies.

Any final thoughts?

Within a few years we are going to see companies go public using cryptocurrencies; create Bitcoin mining bonds and make bond interest payments using cryptocurrencies; use cryptocurrencies to attach value and payment to all sorts of web services; cryptocurrencies for specific horizontal markets, games and so on.

Bitcoin opened up a new world in financial freedom. We aren't talking about get-rich-quick here. You, me, and everyone else can send money around the world light speeds faster than banks and without insane fees and hassles. That is great, but we need to get to the next level. Not only can Bitcoin be used for more than just payments, but for any kind of value transaction. That is the role that we intend to fill with Mastercoin, which is why it has received so much funding.