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What are mastercoins used for in the Mastercoin system?
In Bitcoin, bitcoins are the only store of value and are spent as fees that the miners earn. In Ripple, ripples are used as a meta-currency accepted by everyone and are spent as fees that decrease the supply of ripples.
Does Mastercoin use any of those models? Are mastercoins the primary store of value in the Mastercoin system, or can one use bitcoins? Are they used for paying fees? If so, is anyone earning the fees and how?
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From our FAQ
The initial value for mastercoins came out of the fundraiser "anchoring". People were willing to "sacrifice" 1 BTC in exchange for about 100 MSC, so it anchored the initial value of MSC in at least 0.01 BTC per MSC.
The more general answer is that Mastercoin provides a set of features that only work with MSC or Mastercoin-based currencies, and there is a limited number of them. So, in order to enjoy these features, you have to own some mastercoins, giving them an independent value. The more real world usage Mastercoin sees, the higher the value of each mastercoin. In addition, as always, a lot of its value is currently driven by speculators executing a price discovery process.
Specifically, mastercoin tokens are used for:
Creating derived currencies and smart property are used to create and/or promote smart property tokens as an anti-spam measure. Mastercoins are used as the liquidity layer for Contracts for Difference The distributed exchange between Mastercoins and user generated currencies is more efficient than BTC<->MSC or BTC<->Derived exchanges - the latter require a 2 step commit process. As the protocol evolves, more direct usages for Mastercoins may be created.
I added this last bit about token usages to the FAQ following your questions - thanks ThePiachu for this questions!
So how are they used for the smart property tokens? Are they converted like colored coins into those tokens, destroyed to create them, or perhaps a fee is paid that someone else can earn? – ThePiachu – 2014-03-15T17:18:31.913
I believe the currently agreed on mechanism is that anybody can create SP tokens without paying/destroying anything, but MSC can be destroyed to promote your SP. We will have a SP directory where the top promoted assets appear first. This is still work in progress and can change - I'll ask J.R to chime in here as well. – ripper234 – 2014-03-16T14:09:49.593
What Ron said, plus once you've issued a Smart Property, you need MSC to buy and sell that property on the distributed exchange. – dacoinminster – 2014-03-17T17:05:36.870
What do you mean by "spent as fees"? The value isn't implicitly in the fees. – John T – 2014-03-14T02:58:46.597
@JacobTorba It means that one spends bitcoins in the system to process transactions. Similarly in Ripple one needs to use/destroy XRPs, even when dealing in IOUs. – ThePiachu – 2014-03-14T03:32:36.317
You created the new tag "utility" for this question. Does it have a specific meaning in this context? Otherwise it might be a meta-tag and should be removed. – Murch – 2014-03-15T13:56:29.780
@Murch I guess in this context it means whether the coins are useful in some way, whether they have a utility value, or are they valuable only because of scarcity and other factors that don't correlate to a function they are serving. – ThePiachu – 2014-03-15T17:15:51.377