If Alice sends Bob one bitcoin on the mastercoin network, this transaction is technically implemented using a standard bitcoin transaction with a negligible amount. Isn't that equivalent to creating bitcoins from thin air?


No. Mastercoin clients form a bridge between the bitcoin network and the mastercoin network riding on top of it. When Alice sends Bob one bitcoin in exchange for, say, 2 Mastercoins, the Mastercoin client recognizes a standard bitcoin transaction from Alice to Bob and a mastercoin transaction (encoded as a negligible amount bitcoin transaction) from Bob to Alice. No bitcoins are created.

This type of transaction is the basic way to create value in the mastercoin network. Note that the same answer doesn't hold for other currencies, say US dollars, because there is no direct way for the mastercoin client to know that US dollars changed hands.

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