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Bitcoin 2.0 Explained: Colored Coins Vs Mastercoin Vs Open Transactions Vs Protoshares
2014 Will Show the True Power of the Blockchain
Kyle Torpey, Yahoo Contributor Network
Jan 9, 2014
While the entire world is beginning to learn about the power of the Bitcoin payment network, the real innovation behind this protocol is happening behind the scenes. There have been many different Bitcoin enthusiasts who have been talking about the holy grail of decentralized exchanges and using the Bitcoin protocol for more than just payments, and it seems that 2014 is going to be the year when we see these features finally get implemented into some real world applications. There are many different projects that are currently aiming to take Bitcoin to the next level, and it's likely that there won't be one clear winner when everything is said and done. Before we hop into the competition, let's take a closer look at exactly what these projects are trying to accomplish.
Decentralizing the Internet
Most people who learned about Bitcoin for the first time in 2013 look at it as nothing more than a currency, but the reality is that it's much more than that. At its core, Bitcoin is a new technology that allows everyone around the world to come to a consensus on who owns what without the use of a centralized third party. There are many different applications that can be built on top of this technology, and Bitcoin is only the first of many apps to come. When you forget about Bitcoin and just look at the technology, there are a large number of new possibilities that jump out at you. For example, if you can have a decentralized ledger that explains who owns which asset, then why do we need centralized stock exchanges? If we can have a global consensus on who owns which domain name or email address, then why do we need centralized versions of these services? If it's possible to create a global marketplace where buyers and sellers can find each other in a decentralized manner, then why do we need to use eBay? These are just a few of the possibilities that people are looking at right now when it comes to taking the technology behind Bitcoin and applying it to more than just payments.
Colored Coins
One of the first Bitcoin 2.0 platforms that was put into development was Colored Coins. They recently released the alpha version of their Chromawallet, and the developers behind this project expect to have a lighter version of the client released in a few weeks. So what will you be able to do with this specialized wallet? The main idea behind the Colored Coins project is that you will be able to apply secondary values to certain bitcoins on the Bitcoin blockchain. Those secondary values can then be used to create completely new digital currencies that are backed by real world assets. For example, let's say you own some gold at your house. You could hypothetically take 5 satoshis (0.00000005 BTC) and say that each one of those satoshis is equal to one gram of the gold that you hold in your home. You could then exchange those 5 satoshis backed by one gram of gold each on the decentralized exchange in the Chromawallet. This means that you could instantly exchange gold to bitcoins, dollars, euros, or any other user currency that is created in the Chromawallet. Another, and perhaps ever more exciting, example is creating stock in a company on the blockchain with Colored Coins. In this situation, you would take 1000 satoshis, or however many shares you want to create in your company, and say that those 1000 satoshis are now equal to one share of your new company. The Colored Coins project is a nice introduction to the kinds of features that will are going to see built on top of Bitcoin over the next few years.
Mastercoin
Mastercoin is a project that is somewhat similar to Colored Coins, but they are attempting to reach their goals in a different manner. The Mastercoin project was created in August of 2013 as a way to kickstart many of the features that are expected to be included in the Colored Coins project. The first mastercoins were created when early funders sent their bitcoins to a particular Bitcoin address. Their bitcoins were basically then converted to mastercoins and sent back to them. Mastercoin is a new protocol layer built on top of Bitcoin, so mastercoins are basically just small amounts of bitcoins that have certain characteristics. Some of the other exciting features being developed by Mastercoin include a decentralized betting exchange and using contracts for differences to create currencies that don't need to rely on a third party for physical backing. One thing that needs to be pointed out about the Mastercoin protocol is the mastercoins on that layer also have their own value separate from bitcoins. This means that Mastercoin is also an alt coin. There are some interesting features that are being added to the Mastercoin protocol, such as the ability to mark certain mastercoins in a savings account where payments can be reversed if they are made without the address holder's permission. The only real problem with Mastercoin is that it is going to be competing with Bitcoin. Although it is often stated that Mastercoin and Bitcoin are not direct competitors, the reality is that users will have to convert some of their bitcoins to mastercoins if they are going to be able to take advantage of many features of the Mastercoin protocol. If many of the features implemented on the Mastercoin protocol layer are also implemented directly on top of Bitcoin, then there really won't be any reason for people to switch from bitcoins over to mastercoins. There will actually still be an incentive to stick with Bitcoin if there are not major advantages of Mastercoin over Bitcoin because the price of bitcoins will likely be less volatile. The entire value of all the bitcoins in the world is currently hovering around $10 billion, while the value of all the mastercoins has dropped below $100 million. Liquidity is a huge factor when it comes to the viability of a currency, so it will be interesting to see if the advanced features of Mastercoin allow it to overcome the liquidity advantage of Bitcoin. Either way, the world is likely to benefit from the advanced features that are currently being implemented in the Mastercoin protocol. Mastercoin, much like Bitcoin, is a technology that is difficult to understand at first. The good news is that there a number of different videos on YouTube where Mastercoin Executive Director Ron Gross explains most of the important features of the protocol in various interviews and presentations from over the past few months.
Open Transactions
Open Transactions is a project that has been in development since before Bitcoin became a big deal. The lead developer behind the project, Chris Odom aka FellowTraveler, originally thought of the main idea behind Open Transactions with gold-backed digital currencies in mind. Once Bitcoin came along, it only made sense to integrate into OT. One of the main aims of the Open Transactions project is to decentralize the entire financial landscape by allowing anyone to issue currencies and various financial assets that are secured with cryptography. Anyone will be able to create digital tokens that represent real value on Open Transactions, but one of the most innovative features of this system is that the people who issue the digital tokens will not be able to alter the ledger for their currency or stock. For example, PayPal can technically go into their servers and change your account balance from $11,873.33 to $4,902.34 if they felt compelled to do that. This kind of action is impossible with assets issued through Open Transactions because of the way that the transactions are handled and signed. Of course, there is still the problem of having to trust that a third party who is backing their currency by gold, silver, dollars, or any other asset actually has the asset in a vault somewhere. The good news is that a solution for this problem has recently been found. In addition to issuing a currency, an issuer can also store collateral for the users of his or her currency in the form of bitcoins. For example, if there was a currency that was backed by one ounce of gold, then the issuer of that currency could send an ounce of gold's worth of bitcoins into an escrow account and agree to distribute those bitcoins to the holders of that particular currency in a situation where there is a "run on the bank". For more information on Open Transactions, I recommend this interview with Chris Odom and this panel on decentralized exchanges. You can also watch Odom's interview on Let's Talk Bitcoin where he talks about integrating Bitmessage into Open Transactions for transactions between different servers.
Protoshares
Much like Mastercoin, Protoshares is an altcoin that actually gets people excited because it offers something different than a simple clone of the Bitcoin blockchain. The idea behind Protoshares is that anyone who owns Protoshares will also get a stake in the decentralized autonomous corporations that are created by Invictus Innovations. Their first project, Bitshares, is basically their way of going after the problem of creating a decentralized exchange. Their solution is similar to the contracts for differences idea that Mastercoin is also implementing. Basically, various assets, such as BitUSD and BitGold will derive their value from two parties who own Bitshares and place long and short positions on that particular asset. You can find an explanation as to where BitAssets will get their value from bytemaster on the bitcointalk forum. Bytemaster, aka Daniel Larimer, is the CEO of Invictus Innovations. After BitShares is ready, Invictus will then begin to work on DomainShares and a number of other decentralized autonomous corporations that can replace some of the centralized online services that we use today.
Decentralized Autonomous Corporations
You may have noticed the term "decentralized autonomous corporation" being thrown around a few times in the section on Protoshares. What exactly is a decentralized autonomous corporation or DAC? A DAC is basically a way to use the blockchain technology behind Bitcoin to created a decentralized service. For example, Bitcoin is technically the first DAC ever created. There is no central authority that controls Bitcoin, and it keeps running without the need for some guys in a corporate office decide on what kinds of moves Bitcoin needs to make as a company.
Namecoin is another example of a decentralized autonomous corporation, and it becomes much easier to understand this concept when you take a look at this altcoin. Namecoin is a decentralized service that allows you to register a .bit domain. They are also working on similar services for email and online identities. Namecoins are basically a commodity that allow you to purchase a .bit domain. This setup allows the original developers and early adopters of Namecoin to profit from their work. People who own namecoins also have an incentive to promote and build on top of Namecoin because it will help their namecoins increase in value. Without the profit motive, many of the decentralized services that we are going to see pop up in the coming years may not have been possible or viable over the long term. We will soon see many different DACs come about that will offer decentralized alternatives to services such as Facebook, Twitter, Gmail, online sportsbooks, voting booths, SSL, cloud storage, and much more.
So Who Will Win the Battle?
At the end of the day, the reality is that all of these Bitcoin 2.0 technologies are not really competing against each other. Open Transactions will allow people to trade protoshares, mastercoins, bitcoins, and everything else on their servers. Perhaps you will even be able to trade a protoshares-backed currency on top of Mastercoin for BitMastercoins one day. Humanity wins with the creation of all these new decentralized services and technologies, and we can all thank Satoshi Nakamoto for his, her, or their creation of the blockchain technology. In a few years, we could be talking about a situation where the entire Internet has been replaced with services that use the blockchain technology as the foundation of their development.
Published by Kyle Torpey
Email: kyletorpey@riseup.net