In my previous post, I discussed how one might build a decentralised asset register on top of Bitcoin. However, there is another approach, one taken by mastercoin. There is a very good explanation of how the system works by Vitalik Buterin at Bitcoin magazine. What makes this approach interesting is that it is based on a deep insight: the bitcoin network and the bitcoin currency are not the same thing.
They don’t describe it this way, but what I think is going on is that they have implicitly said that we can think of Bitcoin itself as the core network (providing consensus services, storage of transactions, etc) and a currency and payment system that sits on top. The colored coin shemes I described in my last post can be thought of as providing a third layer above these. Graphically, we might draw it like this:
The key insight of mastercoin is that you could also build a distributed asset register on top of the network services, without making much use of the bitcoin currency itself. That is: whereas a bitcoin transaction and a colored coin transaction are really the same thing, a mastercoin transaction could have no real conceptual linkage to the underlying bitcoin transaction that happens to carry it. It would, in effect, be a second currency system sitting on the same network infrastructure.
Unfortunately, the bitcoin network doesn’t provide the generalised storage facilities that this approach requires and the current mastercoin implementation feels, to me, like a hack. For example, bitcoin addresses are repurposed to represent concepts other than addresses in a really quite unsatisfactory way. An ingenious solution to the problem but still a hack 🙂 This means that they haven’t quite managed to remove the middle box in the diagram above and the result is an uneasy half-way house.
However, once a seemingly minor change to allow 80-bytes of arbitrary data in a bitcoin transaction is introduced in bitcoin 0.9, it may be possible to implement a far more elegant implementation of mastercoin. In essence, their architecture might herald a wave of alternative schemes that sit on the core bitcoin network.
I have no idea which approach will prevail (economics will no doubt trump architectural purity, as ever!) but it is great to see so much innovation in this space.