Omni – a Less Trusted Counterparty

Summary

Mastercoin was the first bitcoin 2.0 solution to utilize the bitcoin blockchain to secure transactions. This broadened the horizons of the cryptocurrency marketplace, allowing new technologies – such as Factom, Tether, MaidSafe and even semi-clone Counterparty – to offer unique services to customers while enjoying the unparalleled security of the bitcoin blockchain.

While Mastercoin has a number of innovative products utilizing it’s protocol, a series of controversies has served to tarnish their reputation, allowing Counterparty to emerge as the top technology in the enhancer space. A recent rebrand is hoped to shed past indiscretions and move the coin – now known as Omni – into the future. 2015 will most likely be the pivotal year for Mastercoin in this regard.

Innovation

Mastercoin is the pioneer of our so-called enhancer category of altcoins, the first coin designed as a layer atop the bitcoin protocol offering additional applications of the underlying technologies. Until then altcoins had attempted to create these applications through the development of entirely alternative blockchains which, in the words of creator JR Willet, “compete with bitcoins financially, confuse our message to the world, and dilute our efforts. These barriers interfere with the adoption momentum of bitcoin.”

Mastercoin allows users, both companies and individuals, to create user issued assets which are essentially tokens representative of other values, such as stocks, commodities, or information. There are a number of innovative companies that utilize the Mastercoin protocol in different ways to power their business economy, most notably Tether, Factom, and MaidSafe.

Tether provides an interesting example of how tokens can be utilized. Tether tokens are digital representations of real world dollars, euro, or yen. The tokens are backed with real world assets held by Tether, which is a fully transparent company offering audits to demonstrate 100% reserves at all times. The tokens are redeemable for cash, through their platform. Tether can be held in any HD wallet (where the user holds the private key), or a few Tether-enabled bitcoin wallets. allowing dollars or euros to be held in a cryptographically secure manner, and instantly convertible to bitcoin.

MaidSafe offers a hard drive storage exchange in which users can sell extra storage space to others who have files to store. SafeCoin, powered by Mastercoin, is the unit of exchange to buy and sell the storage space. Additionally, David Irvine, the CEO and owner of the Edinburgh-based company, decided to raise money using a MasterCoin-powered crowd sale, in which 400 million Safecoin would be created and sold at an $8 million valuation. This was the first of its kind and perhaps predictably came with a number of problems. It is worth reviewing the crowd sale here, first because it was an innovation that is now relatively common, and because the execution has left a lingering stain on Mastercoin’s reputation.

The crowdsale offered a 100% incentive for buying Safecoin with Mastercoin instead of Bitcoin in the hopes of boosting Mastercoins non-existing trading volume. Mr. Irvine was assured that their would be a cap of 25% in Mastercoin allowed for the crowd sale, and this was not actually honored. The incentive resulted in massive MSC trading volume, which served to temporarily jack up value. This allowed early Mastercoin holders to dump their coins, mostly on an unsuspecting David Irvine, who has since been stuck with millions of dollars in illiquid, and thus worthless, MSC. He was able to raise $3 million worth of bitcoin, however, which continues to fund the MaidSafe operations, and will do so for three years.

Transactions in SafeCoin or Tether are hashed and passed by the Mastercoin protocol directly to the bitcoin blockchain, where they are mined and secured along with standard bitcoin transactions in exchange for a standard – or perhaps slightly elevated – transaction fee. This provides a huge benefit for companies to work with an enhancer technology like Mastercoin rather than an alternative network – users are provided a level of security and stability consummate with that of bitcoin. Criticism has been leveled at Mastercoin by bitcoin core developers, the exact content of which is explained elsewhere, but basically boils down to their actions being somewhat parasitic and contributing to blockchain bloat (Cramming extra data into the blockchain that was never meant to be there, thus eating storage space without permission). We discuss below in “Mastercoin’s future” the specific steps being taken by Mastercoin to limit that bloat and act as a good bitcoin citizen.

Aside from that, it is worth pointing out that there is a benefit to the bitcoin network in offering additional applications for the technology without the need for any code change or dilution of primary purpose – namely securely transferring bitcoin. This helps to put a stop to the market fragmentation resulting from numerous altcoin launches, and focus attention on the bitcoin blockchain.

Launch Methodology

Mr. Willet created what he termed an “exodus address”, a play on the Bitcoin Genesis Block terminology. Users who sent bitcoin to the exodus address prior to August 31st 2013 were credited with 100 times the amount in Mastercoin, with a few bonus incentives to encourage early adoption and create momentum. The funds were to be used for development costs (i.e. to pay Mr. Willet) and marketing.

Additionally, for every 10 Mastercoins sold in the initial auction, one reward Mastercoin would be created, which would be slowly released to the same exodus address over the “following years” to “ensure [Mr. Willet and the developers] have plenty of motivation to increase the value of Mastercoins”. This methodology was not received without criticism, and brings into better focus why Counterparty launched using proof of burn. While eventually Mastercoin proved successful, Mr. Willet asked that people transfer money to his wallet for an untested product, accepting his word that he would act responsibly with their coin. No doubt this curtailed interest. It should be noted that Mastercoin has proved entirely transparent in their usage of the funds, with a publicly accessible financial report.

Mastercoin’s future

In January 2015, Mastercoin made the decision to rebrand as “Omni”. This was due primarily to reputational issues stemming from a suspicious coin launch to an arguably disastrous crowd funding of SafeCoin. Compounding this was the rising star of competitor Counterparty, whose joint venture with Overstock and the cloning of Ethereum’s Smart Contract technology had delegated bitcoin 2.0 pioneer Mastercoin firmly in the back seat.

In a CoinDesk interview, the Omni team stressed that its biggest weakness was messaging, that Counterparty had simply out-PRed them. They pointed to the interesting and larger applications built using its platform – namely Factom, MaidSafe, and Tether. While there might indeed be some truth to this, the larger issues of mistrust were not addressed.

However, uninspiring interview aside, Mastercoin is making some interesting moves, particularly with partner Factom. Factom is an extraordinary technology, allowing the auditable storage of library-sized data amounts secured on the blockchain with a single transaction hash, which is sent once every 10 minutes. We review how this works in more detail elsewhere, but the end result not only provides an amazing solution for data storage, but solves the issue of blockchain bloating.

Mastercoin means to utilize this technology to deliver the network’s transaction data to the bitcoin blockchain, thus eliminating the Mastercoin contribution to blockchain bloating and reducing transaction costs. This is an extremely efficient and simple solution, much more elegant that the OP_Return solution employed by Counterparty.

Bottom Line

Mastercoin is a true pioneer in the bitcoin 2.0 space, having conceptualized and deployed the first enhancer technology on the blockchain. However, a series of mistakes has most likely permanently tarnished their reputation, and propelled Counterparty into the number one spot in this particular niche. There does not seem to be much need or room for two contenders in this space, and we would imagine that one will die out within the next year or two. While there are a number of interesting technologies utilizing Mastercoin which provides some breathing room, there is very little to prevent their migration to counterparty, aside from the headache. Well, that and the couple of million dollars that SafeCoin has locked in an illiquid Mastercoin.

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