The Mastercoin Foundation announced its launch earlier this week. Its development team, let by JR Willet, hope to add a programmable 'money layer' on top of bitcoin's existing block chain.

The development work will allow just about anyone to create their own virtual currencies using the existing Bitcoin protocol. In turn, this would allow new currencies to effectively 'piggyback' on bitcoin's infrastructure and economy.

It isn't a simple plan, as Mastercoin isn't just another cryptocurrency, it's a new protocol – a protocol that could change the way people feel about virtual currencies. In theory, it could allow people to devise new currencies pegged to certain commodities, other currencies or even precious metals.

Since bitcoin is often criticised for not having an intrinsic value, Mastercoin could lead the way for virtual currencies backed by tangible assets.

It's an ambitious goal, but the Mastercoin Foundation has plenty of backing already. The foundation has managed to bank about $5m (or just over 4,700 BTC) since fundraising began. The initial sale was organised by David Johnston of BitAngels back in August. Ron Gross of Bitblu was named executive director of the foundation.

Mastercoin's block chain went live on 1st September and since then its overall market cap has grown to $132m, or roughly 1% of all bitcoins in circulation.

"Bitcoin is not only proving to be a sturdy foundation to support all kinds of commercial activities, but to also support a secondary layer such as Mastercoin," said Willett. He said:

One of the more interesting aspects of Mastercoin is the creation of a new, distributed exchange.

This exchange allows traders to deal in bitcoin through the Mastercoin layer. Since the foundation is taking an open-source approach, developers could potentially introduce new software to address specific needs of certain investors.

"While Mastercoin itself is decentralised, the Mastercoin Foundation will be instrumental in helping to continue to make Mastercoin the conduit through which people can practically apply and use bitcoin," said Gross.

"Whether it's personal money transfer, payment fulfilment, issuing user currencies and future event triggers, or simply conducting and recording bitcoin transactions, Mastercoin is the perfect operational unit, and its continued growth will proceed to drive the overall value of Bitcoin at large," he added.

The emphasis seems to be on more serious transactions, fulfilment and transfers, and this is understandable.

Bitcoin is possibly one of the best ways to transfer vast amounts of money at next-to-no cost, but many businesses simply refuse to embrace it, due to its frequent price fluctuations.

The Mastercoin layer could address this problem, at least in theory.

For example, e-commerce businesses could start using stable virtual currencies pegged to gold or a quasi-currency board in lieu of traditional transfers, thus eliminating currency issues in cross-border trading.

Mastercoin has three basic features that make it stand out. Firstly, it has a decentralised exchange that should speed up trading and simply exchanges between different currencies and Mastercoin.

It also has block chain price feeds that could be used to publish price data that can be used in virtual currencies. Lastly, it has an added layer of security, as it saves addresses and bolsters security for high-value savings accounts.

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