Mastercoin has launched a decentralized exchange feature, which is in effect a distributed exchange. Several months ago, the Mastercoin team launched the idea for this type of exchange. The concept had potential, as shown by the raising of 4.740 Bitcoins in a public kickstarter (this was worth about $600.000 at the time). The development process had contests for bounties to get developer’s attention. “We got some excellent developers to kick in and start developing four different wallets, and saw the ‘Bitcoin 2.0’ ecosystem built up from scratch around us.”, said the Mastercoin Distributed Exchange team in a statement.
So what is this distributed exchange anyway. Just like Bitcoin, Mastercoin is a completely decentralized currency. You can execute a transaction without relying on a 3rd party and without trusting your counterparty.
The solution to this problem is CoinJoin. A privacy improvement that was first talked about in a Bitcointalk post in August last year. It’s a way to trade Bitcoins with other users without trusting them.
The signatures, one per input, inside a transaction are completely independent of each other. This means that it’s possible for Bitcoin users to agree on a set of inputs to spend, and a set of outputs to pay to. After that, they individually and separately sign a transaction and later merge their signatures. The transaction is not valid and won’t be accepted by the network until all signatures are provided, and no one will sign a transaction that is not to their liking. Of course in the case of CoinJoin, you always want it to be a 1-for-1 trade, but it doesn’t have to be, the users just have to all agree with each other on the inputs and outputs.
Trading Bitcoins for other Bitcoins is boring, so if everyone agrees to designate certain Bitcoins (typically very small amounts so the Bitcoin value isn’t significant, like 1 Satoshi) to represent some other property such as US dollars you can now trade Bitcoins for Bitcoins that represent US dollars. This is called “smart property” or “colored coins”.
The team has several wallet options available, each showing unique characteristics. However, they decided to keep funding one web wallet and one desktop wallet. Right now, there are two versions of each in development. This seems to be a strategic decision, taking effect from April 1st. On top of that, the parsing and state engine will be consolidated into one reference implementation, called Mastercoin-Tools. The purpose of this tool will be to have a centralized point where people can check the balance of a Mastercoin address. Any so-called ‘consensus issues’ with other engines will defer to Mastercoin-Tools’ output.
There is also a roadmap prepared for the future, as stated in the press release:
In Q1 2014, we released Mastercoin wallets and the BTC <–> MSC decentralized exchange, and watched the BitAngels Fund form; 150.000 mastercoins ready to be invested into 3rd layer protocols developed on top of the Master Protocol.
In Q2, we will see the release of the first user currencies on top of the Master Protocol, among them some of the winners from the Austin Bitcoin 2.0 Hackathon. We have plenty of user interface, integration, and documentation improvements planned out during this quarter.
Q3 is when the fun starts. We will see more investments into user currencies, the Metacoin distributed exchange, as well as additional smart property and protocol features being implemented. And Q4? That’s a bit too far into the future; six months is already forever in Bitcoin terms!
This type of exchange offers a new way of approaching the way everyone is trading right now. Its key advantage will be the security it offers. No longer will you have to trust a central exchange with your own funds. The Mastercoin team hopes this may lead to higher liquidity, especially for larger orders. Their plans for the future are looking good to say the least. If the team is able to live up to expectations, there’s exciting times ahead.