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Dacoinmister's "The Second Bitcoin Whitepaper" is a new proposal to create another p2p network over Bitcoin (called MasterCoin), that will fix some of Bitcoin's drawbacks.

Are there any logical inconsistencies in the paper? How about "economic falacies"? The paper talks about manipulating certain coins and shares to maintain certain properties (e.g. a minimal and maximal value of each MasterCoin). Can this be achieved?

Note that MasterCoin is not marketed as a Bitcoin alternative, but rather enhancement - if a value of MasterCoin rises, so will Bitcoin's.

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It will fail for the same reason other attempts to stabilize currency values always fail. The first time there's a crisis, the regulator will have to decide whether to permit the crisis or prevent the crisis. If they permit the crisis, people will realize that the promised 'guarantees' are shams. If they try to prevent the crisis, they will run their reserves down to nothing, and the same thing will happen as if they permitted the crisis except they'll be broke.

If you make one small change though, I don't see any major technical flaws. Simply accept that the regulation will be maintained only under normal conditions and that crises may push the ratios out of bounds. The regulator should have a policy for how it detects a crisis, what it does during them, and how and to what extent it compensates people harmed by them afterwards, if at all.

For example, before banks were Federally insured, they would have a policy that the board of directors of the bank could declare a "crisis", suspend withdrawals, but later compensate people with extra interest.

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Reading the paper whereas the idea behind it might be plausible, it adds unnecessary levels of complexity to creating money and transferring it. Moreover, anything advocating for "destroying Bitcoins" as a part of their protocol should not be welcome in the community.

From the economical point of view, a much simpler approach to the whole problem is the idea of Digital Coins, wherein one has two types of currencies - Perpetual Coin and Digital Coin. First one can be created by anyone in any volume, destroyed by the issuer and is backed in value by goods and services. The other is like Bitcoins - is fixed in amount, cannot be destroyed, and is a measure of value (like gold is today).

All in all, whereas anyone can do anything with the Bitcoin network and efforts of coming up with new ways of using the currency is commendable, I personally don't see the place for "MasterCoin" anywhere.

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  • We should reason about this rationally, not emotionally. Even if a new protocol advocates destroying some bitcoin (coins), it is not necessarily aimed at devaluing Bitcoin (the network). It tries to enhance Bitcoin in a way that will make Bitcoin more valuable whenever MasterCoin becomes more valuable ... coded in the protocol. The fact that actual Bitcoin are destroyed should not be "taken personally".
    – ripper234
    Jan 7, 2012 at 20:12
  • Anyway, I did not ask here if "there's a place for MasterCoin", but whether the paper/protocol contains inherit logical flaws, or are the aims it's trying to reach "min/max value for Mastercoin, a GoldCoin which is just as valuable as an ounce of gold" correct ... as in - can it work? Or if it can't, where will it fail?
    – ripper234
    Jan 7, 2012 at 20:14
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I may be biased (I'm the author), but I believe it can work and is worth the extra complexity. Please take a look at my answers to some common objections here: http://bitcoinmedia.com/the-second-bitcoin-whitepaper/

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