Bitcoin expert J. R. Willet is looking to transform not just Bitcoin, but the cryptocurrency world. In his view, Bitcoin is incomplete, and has led to the creation of altcoins which he says has diluted the message of Bitcoin. He wants to change the situation by creating a protocol layer that exists on top of Bitcoin.

That protocol layer will allow for a plethora of new digital currencies to be created that will all exist on the Bitcoin block chain. It's called MasterCoin.

The MasterCoin protocol can be described by analogy to the HTTP protocol, which the World Wide Web runs on, being a layer that exists on top of the TCP/IP protocol and that working atop the IPv4 protocol. It will enable new protocols, i.e. new currencies, to exist as part of Bitcoin, and not something different from it. In other words, currencies created on top of MasterCoin will use the Bitcoin block chain.

In the specification that Willet published online, he describes altcurrencies as: "Alternate block chains compete with bitcoins financially, confuse our message to the world, and dilute our efforts. These barriers interfere with the adoption momentum of bitcoin and the adoption momentum of alternate currencies as well, regardless of how well-conceived their rules may be."

What Willet wants to do is similar to the idea of Colored Coins. MasterCoin will facilitate the creation of new currencies that can be assigned data streams from stock or commodity markets, thus making them represent the value of the selected item. For example, Willet intends to create USD Coin and GoldCoin, which will track the values of their corresponding commodities.

Enforcement of the market value for whatever stock or commodity a "higher protocol" currency relates to will be achieved by the use of an escrow fund built into the currency's protocol. When the value of the "commodity coin" goes too high, the currency's escrow fund will start creating new commodity coins in exchange for MasterCoins. When the value is too low, it will trade MasterCoins in exchange for commodity coins, then destroy those coins. Through this control of supply and demand, a MasterCoin derived currency can sustain a balanced value. The efficacy of this will depend how intensively the currency's author sets the protocol to check and interact with the market.

That's not all that MasterCoin will do, there is also support for "savings addresses". This is a MasterCoin feature that adds an extra layer of protection to those storing their wealth in digital currency. With savings addresses, MasterCoin has the ability to reverse transactions – whereas ordinary transactions from "spending wallets" are irreversible just as with the basic Bitcoin protocol. To complement the savings wallet, there is a "Guardian" wallet which is used for receiving reversed transactions – this is to be used when someone believes their savings wallet has been compromised.

That's the theory. The practice is shaping up too – you can follow Willet's progress on the Bitcoin forum.

Willet has created something called the "Exodus Address", which is a bitcoin wallet that will serve the same purpose to the MasterCoin protocol as the genesis block did to the Bitcoin block chain. Not only is the Exodus Address a marker on the Bitcoin block chain, but Willet is also using it as a way to fund his efforts. Those donating to the Exodus Address before the 31st August 2013 will be rewarded with a hundred times more MasterCoins than the bitcoins donated. There is also an early adopter bonus where the (fractional) number of weeks prior to the deadline determines the bonus amount of MasterCoins. At the time of writing the Exodus Address had received over 2,107 BTC (more than $220,000).

As for what he'll be using that money for, he responded: "I have had a few minor expenses, but most of that money will probably be used for bounties once I have the basic code-base set up. Also, I'm not touching the money at that address until the fundraising is done [on] 1st September."

Willet is also keen to highlight the risks that would-be investors face. He has published a partial list of risks and his specification paper even goes so far as to say: "Investing in experimental currencies is really, absurdly risky."

Willet's specification also speculates that MasterCoin will be even more attractive to criminals than bitcoin. When asked why, he replied: "I think criminals (like the rest of us) will prefer to deal with stable currencies rather than unstable ones. Also, betting on data streams will likely be a breeding ground for insider trading. (Note: I'm writing this protocol, but I'll be very careful not to use it for anything like that myself – I would prefer to stay out of jail!)"

It's an intriguing idea that raises a lot of possibilities. It's also fair to say that you need to have an in-depth understanding of the protocol to really appreciate it. Even then, some on the Bitcoin forum have questioned the validity of MasterCoin.

Also, the user of higher level protocols requires miniscule transactions to (so-called) 'fake addresses' as a means of passing data through the block chain. This in turn will lead to even more clutter and overhead on the size of bitcoin's public ledger.

Willet admits this is a problem, "Yes, this will cause some additional headaches for bitcoin scalability. If wildly successful, this sort of protocol layer will make the impact of Satoshi Dice seem pretty tame in comparison. However, this is a problem we need to face sooner or later anyway."

Furthermore, while Willet argues that altcoins are diluting bitcoin's message to the world, those currencies are here. For MasterCoin to succeed in bringing focus back to the bitcoin movement, it would have to cause altcoins to fall out of use in favour of MasterCoin derived currencies.

How likely do you think this is? Have you invested in MasterCoin? Would you want to trade in commodity driven cryptocurrencies?