We study the optimal regularity and nondegeneracy of a free boundary problem related to the fractional Laplacian through the extension technique of Caffarelli and Silvestre. Specifically, we show that minimizers of the energy [mathematical equation] where [mathematical equations] with 0 < [gamma] < 1, with free behavior on the set {y=0}, are Holder continuous with exponent [Beta] = 2[sigma]/2-[gamma]. These minimizers exhibit a free boundary: along {y = 0}, they divide into a zero set {u = 0} and a positivity set where {u > 0}; we call the interface between these sets the free boundary. The regularity is optimal, due to the non-degeneracy property of the minimizers: in any ball of radius r centered at the free boundary, the minimizer grows (in the supremum sense) like r[Beta]. This work is related to, but addresses a different problem from, recent work of Caffarelli, Roquejoffre, and Sire. / text