Yes, you have the right idea.

It's a protocol (I think) which would allow for "deriv[ing] some type of master identity system which could be used to generate new identities from a central key, like how bitcoin uses one key to generate many public addresses."

You'll see the most common use case demonstrated being a more secure website login replacement. You create a secret master identity and then derive unique usernames and login credentials for each website. This approach would be more secure than reusing the same email and password for all your logins.

There are more use cases but I brought it up because it seems like it would help facilitate  nostr:npub1lnms53w04qt742qnhxag5d6awy7nz6055flnmjkr6jg39hm86dlq7arrnt advice on anonymous development accounts.