While Bitcoin provides an efficient method for exchanging funds, what other benefits does this cryptocurrency hold? Bitcoiners could find even greater value in using it to issue bonds, shares and IOUs or even create other currencies atop bitcoins - something the Bitcoinx community aspires to accomplish with their "coloured coins" concept.
Colored coins aim to provide traders with additional layers of information regarding the coins being traded over Bitcoin, using specific characteristics of coloured coins to "colour" individual bitcoins with certain characteristics - creating tokens which can represent anything. According to an Israeli programmer and notable member of the Bitcoin community who was involved early on with the coloured coin project, "It serves as a decentralized asset management infrastructure utilizing Bitcoin technology, enabling individuals and companies alike to issue various asset classes."
What Is The Origin Of Colored Coins?
Yoni Assia, CEO of eToro, first coined the phrase "coloured coin" after working alongside Ethereum creator Vitalik Buterin to co-author a whitepaper entitled Colored Coins in 2013. They explained in this whitepaper why an update to the Bitcoin blockchain must occur to facilitate processing metadata and enable its addition.
Assia and Buterin proposed that certain Bitcoins be "colored differently from others, creating two layers within the Bitcoin blockchain:
- The base layer, which employs cryptography to process transactions
- A colored coin processing overlay, also known as an open asset
By creating an overlay, colored coins could be guaranteed not to alter the source code for Bitcoin; on the blockchain however, transactions would take place as normal. Assia and Buterin saw coin coloring as a means to facilitate non-monetary transactions; that is to say colored Bitcoin coins could represent ownership or transference of items other than money such as contracts, game tokens and company shares.
How NFT Crypto Coins Work
"Colored coin" describes the process of producing something unique through design. Each Coin contains an identifiable, distinguishing feature encoded within its metadata, which gives its Coin its color.
Colored coins are-
Colored coins are cryptocurrency tokens with additional metadata added, creating valuable representations. Let's quickly go over how coloring works to have some context when discussing how colored coin crypto transactions operate.
The Genesis Transaction
NFT cryptocurrency coins cannot be released until a genesis block has been created. This involves appending metadata produced during creation to the initial block in a chain's initial block - known as its initial transaction or block as the genesis transaction- thus setting out guidelines for all subsequent deals.
Technically speaking, in order to prevent coloured coin data from slowing down the network and disrupting regular transactions. One or two change outputs must follow Bitcoin's OP_RETURN data output with at most 40 bytes per output so no part of any metadata describing colored coins may exceed 40 bytes in size - thus protecting both network stability and their use within regular transactions.
Transfer Transaction
Blockchain-colored coins must be quickly transferred once created using transfer transactions, otherwise you risk their being sent directly into their original wallets without them being identifiable to both addresses, rendering coloring algorithms impotent in this situation.
Coloring Algorithms
Coloring computation refers to any process by which transactions occur following predefined rules and can take many forms, including but not limited to:
- BC (Order-based Coloring)
- TBC (Tagging-based Coloring)
- POBC (Padded Order-based Coloring)
Though they vary slightly, all color coin wallets share similar fundamental principles. Senders and recipients of color coin wallets are informed through these mechanisms as to their expected actions in their transactions:
- Its color balance, or the sum of every input
- The position of the outputs (i.e., the coins in the transaction) relative to the inputs
- The size of the outputs concerning the network
- The details of the script and code (i.e., data) of the outputs
Each transaction conforms to the rules thanks to coloring algorithms. This ensures smooth, safe, and decentralized transactions of colored coins while at the same time guaranteeing NFT cryptocurrency coins remain immutable; meaning they cannot be altered after their initial creation.
How Do Colored Coins Expand The Potential Of The Blockchain?
Blockchain-colored coins offer a decentralized method for sending something other than money. NFT coins were initially popular among Bitcoin holders; however, other blockchains, such as Ethereum, have recently adopted this idea of non-fungible tokens (NFTs). Ethereum tokens used as colored tokens represent either virtual game tokens or tangible assets like property ownership evidence and serve as evidence proving ownership by their owners - providing clear evidence proving ownership over what are effectively non-fungible tokens (NFTs). Here are a few applications of colored coins before discussing the debate between NFTs and NFTs.
But coloured coins present many problems. One was the release in early April of an "anti-dust" patch to the Bitcoin protocol that required minimum sizes for output transactions involving colored coins; an output transaction is defined as any unit which identifies both its new owner and quantity transferred; any amount less than 5,430 Satoshis (0.0000543 Bitcoins) in any output will now be ignored by this patch, created to prevent users from flooding blockchain with multiple small transactions that clog it up with data. This change was implemented so users wouldn't overload the blockchain with multiple tiny transactions, thus slowing its adoption by users as much.
Though 5,430 Satoshis might seem minor, colored coins work best with more fine-grained transactions. According to the project leader for colored coins, according to this change the project suffered significantly: colored coins could still work effectively even though there had been drawbacks and redesign ideas were proposed; nonetheless this delay proved significant enough.
How could one encourage the Bitcoin community to adopt colored coins? Much depends on whether floating (add-on) support in Bitcoin clients or native protocol support is considered a way forward. It is states native support will enhance thin client performance (client-server versions that do not store full blockchain copies). This is unlikely as Bitcoin does not tolerate change well. Before Bitcoin, Charles Lee anticipated native support for colored coins in altcoins other than Scrypt-based currencies such as Litecoin. According to Charles Lee of Litecoin’s team: "We may look into providing color coin implementation directly within Litecoin protocol; however, nothing is planned at present."
Smart Property
Assia suggested that smart property could be authorized with colorful coins. He speculated that car rental companies might issue colored coins to each car they rent out; only a unique private key--possibly sent via text message--could activate each Coin; only then could people renting the vehicle use the car because the key sent a signal directly from their phone to unlock their vehicle and use it themselves.
Company Shares, Contracts And Bonds
Company shares could be sold as colored coins as proof of ownership while making trading possible; bonds and contracts could similarly benefit.
Demand Deposits
Deposits could be represented using National Financial Trading cryptocurrency coins; individuals could exchange Litecoin tokens or Bitcoin colored coins while tracking their deposits.
Emergent Currencies
Colored coins could provide the basis of an entirely new form of currency. Such an entity would exist on Bitcoin's blockchain while having different values and properties than Bitcoin itself.
How Do Colored Coins Work?
Colored coins refers to Bitcoin transactions that have been tailored by adding metadata, according to their original paper. The ColoredCoin framework integrated within Bitcoin allows for this customization by providing more transaction details and distinguishing one Coin from another; an asset with metadata attached can even serve as representation.
Bitcoin was initially designed as a cryptocurrency and collectible based on cryptography; however, its scripting language also allowed for additional metadata storage on its blockchain network. Colored Coin's original creators recognized how this data could help identify or represent different groups of coins, their goal being that Colored Coins serve as virtual conduits between tangible assets such as trading transactions, etc, and Colored Coins as virtual gateways into physical asset manipulation through trading/transaction/other means.
Colored coins could potentially serve to represent different values, representing nations in this way.
- Property
- Stock
- Commodities
- Bonds
- Contract
- Or any other type of asset that needs a Virtual representative
Why Have Colored Coins Lost Interest?
Colored Coins were among the first applications developed for Bitcoin back in 2012. When they first emerged as one of its applications, Colored Coins created quite an uproar within the community - they represented a quantum leap forward for how people thought of blockchain and used cryptocurrency like Bitcoin as more than just collectible fungible cryptocurrency - thus sparking developers as well as regular community members alike into experimentation with colored coins with hopes that something useful may emerge out of this concept.
One could make the case--with some degree of success that colored coins were the catalyst in an ongoing chain reaction that started more than 10 years ago, leading to Sub-Chain Networks, Smart Contracts, Specialized Blockchain Networks and many other innovations. Although less popular nowadays due to more feature-rich and general-purpose networks emerging than previously intended, their concept was original yet simple and creative. It set the ground for further experimentation, leading to even more inventive designs while abandoning its initial goal altogether.
Researcher brought an experimental element to the Blockchain market when she demonstrated to everyone how to harness its surface properties to develop features and applications with diverse use cases, like Colored Coins. Though no longer popular or attractive due to newer and more useful innovations, Colored Coins played an instrumental role in initiating The Domino Effect; though eventually abandoned as an idea by its proponents, their legacy will endure long after.
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Conclusion
Though still early days for colored coins to flourish, there is immense interest and enthusiasm behind their success. David Johnston of BitAngels (an altcoin investment network) is particularly excited by this development; both technology and will to make Bitcoin move beyond mining are present; who will use coloured Coin initially is yet another question; according to Blummer, "Bitcoin is cash; you get any remainder if using coloured coin."
