I understand how coloured coin works. If a trusted third party adds a text like “1BTC= 10k of gold” in Pubkey script in a transaction (say A), then from this time, any transaction takes money from A has an information “1BTC=10k gold”, so that other people will know that this transaction is following the rule “1BTC=10k gold”. This concept is called ‘coloured coin’.
Now, I am trying to understand how mastercoin (also known as metacoin) works, but I have a trouble understanding it.
As I explained above, coloured coin actually uses the bitcoin blockchain. However, I am not sure when and how mastercoin uses the bitcoin blockchain. I also read the white paper on mastercoin, but nothing was explained about its algorithm.
I searched for mastercoin algorithm, and here is how understand it;
Mastercoin developer(a trusted third party) creates a bitcoin address.
Just like coloured coin, if a user (say A) sends bitcoin to the developers address with an information like “I am buying master coin” written in pubkey script, the developer records the fact that the user sent him bitcoin in his own system.
At this point, we are leaving the territory of Bitcoin network and landing in a third-party’s network. This contradicts the fact that “Mastercoin(metacoin) uses Bitcoin blockchain”.
How mastercoin exactly works? I heard that mastercoin allows us to move from one protocol to another. That is, even though I am a bitcoin user, it is possible to use Ethereum protocol using metacoin. (Sidechain = mastercoin?)
Every concept is so puzzled in my head, and I need someone to make it correct. Thank you in advance..