Could This Holy Bitcoin Trinity Revive Colored Coins?
A new wallet, Coinprism, launched this week – heralding a broader development that advocates say could revive a key application of bitcoin's technology.
Coinprism, designed to let users trade anything on the bitcoin network, supports a concept called 'colored coins' which aims to build on the already exciting bitcoin universe.
Bitcoins are useful, but like dollars or euros they are only used as currency. Colored coins look to change this by using bitcoins to represent other things. ‘Coloring’ a bitcoin means attaching a piece of information to it, which turns it into a token for something else.
For example, what if transactions in the bitcoin block chain could be used to represent, say, company stock, gold or a deed to a building? Then, someone could issue shares on the bitcoin network, or trade commodities on it.
This would give bitcoins a huge advantage over traditional ways of sending assets. If you want to send gold, company stock, or the physical deeds to a house today, this necessitates a complicated process involving notaries, registered deliveries and paper trails.
Bitcoin’s cryptographic technology has all that built in – you can know that a particular bitcoin came from a particular address and went to another one – and it can happen in just a few minutes.
If bitcoins could represent other assets, then the rights to those assets could be sent quickly and easily, anywhere in the world.
Wallets, exchanges and interoperability
Of course, there are three important components colored coins need in order to be used for asset transfer.
Wallets have to understand how to assign and read the extra information, everyone needs to agree on what a particular ‘color’ means and how it is stored in a bitcoin, and finally, exchanges are needed so that these assets can be traded.
Yesterday, Irish firm Pixode launched Coinprism. Pixode – the same firm behind predictions site Predictious – created its own protocol for storing colored coins on the bitcoin block chain, called Open Assets.
Coinprism is a web-based wallet implementation of the protocol, explains its founder, Flavien Charlon.
But, colored coins have long been a holy grail in the bitcoin world, and this isn’t the first project to try to implement them. That was ChromaWallet, aka ngcccbase. It is a desktop wallet offering colored coins capabilities, said Alex Mizrahi, who is behind the wallet:
"It will give users an ability to issue their own colored coins, work with colored coins issued by others, and has built-in exchange functionality."
However, he added that it still needs some work, and is not yet suitable for end users.
The ability to work with other peoples' colored coins and run an exchange is important. It's part of a collaboration with another group, formerly BitcoinX, which has since morphed into ColoredCoins.org.
That group is led by another advocate, Amos Meiri. This team is developing a standard and a P2P network for colored coins, which Meiri hopes to publish within a month. He said that it will describe the various types of assets that can be exchanged with colored coins.
The third part of this puzzle is Iridis, a new initiative for creating a peer-to-peer decentralized exchange based on colored coins, which has been created by the same people behind ColoredCoins. Iridis is organized by Oren Gample.
"We want to provide the users a way to trade assets, so we'll probably plug into Iridis," Charlon says.
The problem is that Iridis is still in its very early stages, and ChromaWallet is also not ready for commercial use.
"I think the competition we are seeing at the moment is healthy, however there is very little interoperability between those projects," admits Charlon, who says that the market is at an early stage.
Having said that, many of the people working on these projects seem to be advising each other’s projects, and the community appears relatively tight-knit.
"Open Assets will work with Iridis, and should be usable from ChromaWallet as well," Charlon concludes. "Open Assets itself is an open specification so it is easy to build something that can interoperate with it."
That would enable all of these systems to encode colored coins on the bitcoin blockchain in the same way.
At the end of the day, Coinprism wallet users will be able to exchange assets with ChromaWallet and with Iridis' wallet, he continued. “There is still some work to be done to get to that compatibility, but that's the goal.”
Bitcoin core developer Mike Hearn, who is also instrumental in the development of Java wallet library bitcoinJ, argues that these standards and interoperability issues will be thrashed out over time, suggesting that:
“Having some other guys go off and figure out standards and build wallets seems like the right way to go. Longer term, their work can always be ‘blessed’ by the wider community if it's good."
Yoni Johnathan Assia, a member of the colored coins team, tells CoinDesk:
“We support all efforts towards bitcoin 2.0 technology, and believe there will be multiple protocols that will also work together."
Perhaps one of the biggest challenges facing colored coins as a concept is that it’s just that. The current lack of interoperability and the slow pace of ChromaWallet development means that it is in danger of being surpassed by newer projects with a broader scope.
New frameworks and self-declared next-generation cryptocurrencies threaten to leapfrog this narrowly-defined concept of blockchain-based smart property. They offer a range of features, some of which overlap with each other. The smart property concept offered by colored coins is generally a subset of these.
Meni Rosenfeld, a bitcoin advocate who has been advising Meiri's team, defines them as distinct from the colored coins effort, saying:
"In my view what characterizes pure colored coins projects are that they can be put on top of bitcoin, and bitcoins are all that is required to use them."
One of the alternatives is Counterparty, another decentralized exchange facilitating smart property transactions.
Counterparty, which has its own wallet called Counterwallet, does use multi-signature transactions on the bitcoin block chain to describe transactions. But, it doesn’t use bitcoins themselves for transactions. In fact, it created more than 2.6 million units of its own currency, XCP, which participants accrue by 'burning' their own bitcoins, rendering them unusable. Instead, assets are created by users.
Counterparty is also far more than a simple block chain-based colored coins system, argues spokesperson Matt Young.
"Users can create a smart property that has as few or as many units as they like," says Young, who adds that he sees applications in personal branding, user acquisition, and user retention.
"Counterparty offers the ability to create binary bets and contracts for difference. Contracts for difference allow people to profit off the price movements of US dollars, euros, corn, wheat, soy, or any other currency or commodity.
Leverage can be employed to further increase exposure. Binary betting and contracts for difference within Counterparty are peer-to-peer and require no trusted third party."
The ability to describe assets using the bitcoin block chain is therefore part of a far bigger picture for Counterparty. One advantage that Counterparty has over Iridis is that it has been out there doing this for a while. Users typically won't care about what happens under the hood, as long as something works.
No wonder Meiri sees them as competition. "Counterparty are really professional guys," he says.
There are several other ventures that offer a variation of coin coloring – or at least the potential for it – but he doesn’t view these as competition. "Others are not on the bitcoin blockchain so they are more competitors for bitcoin," he suggests.
Beyond colored coins
Who are these others? The Ethereum framework, still in stealth mode, aims to offer a complete platform on which to build various cryptocurrency applications. Vitalik Buterin, who was originally working with Meiri’s team, left to develop that concept.
Ripple is a different beast altogether, constituting a trading network and currency that has the ability to describe any type of virtual asset.
Bitshares is another venture that uses cryptocurrency units as asset classes. And Mastercoin relies on the bitcoin blockchain, but is a 'metacoin', which uses the blockchain for its own currency. That project recently launched smart property functionality.
Then there’s NXT, another entirely different cryptocurrency, which has now launched the NXT asset exchange.
“The NXT asset exchange allows decentralized trading for almost any currency for almost any commodity. It’s not an afterthought; it’s developed right into the NXT core,” says John Manglaviti, a spokesperson for NXT.
“The asset exchange is just the first step; we’re developing other key technologies such as the decentralized digital goods store, instant transactions, automated transactions and a turing complete solution."
Still in the wings is the burgeoning side chain movement, which could offer all kinds of chains designed for alternative assets.
Many of these ideas overlap in the problems that they try to solve, expanding the concept of cryptocurrency to represent other assets, and offering innovative ways of exchanging them.
Many of them will face the same challenge: how do participants in these trading schemes get others to honour these digital assets, and redeem them for the assets that they represent? If person A issues person B a colored coin transaction that says it entitles person A to an ounce of gold, then how is that legally enforceable?
You’d need a third-party depository of some sort that agreed to honour a colored coin transaction, says Charlon. But with interoperability and mindshare so fragmented in an early stage market, how is that going to happen?
Meiri hopes that having trusted, asset-backed issuers will solve that problem. He explains:
"We are separating the assets in to two different classes: 1) untrusted issuers (you and me issuing assets). 2) Trusteed issuers, such as banks, trusts etc.”
These trusted assets will be backed either by real holdings, or by open hedge accounts, which the issuers can show to prove that they have the holdings. It remains to be seen how many of them will step up.
“It’s true that there are very few companies that act as a gateway,” Charon says, adding that he is in discussion with a bullion storage company in Singapore. “They want to be able to allow people to withdraw their ounces of gold in the form of a colored coin.”
Charles Hoskinson, co-founder of Ethereum, says that broader enforcement of property titles based on colored coin technology will be challenging, saying:
“There is no framework within the block chain or automation to enforce such rights. With Ethereum we are planning on exploring smart contracts connected to property that use Unidroit."
Unidroit is an intergovernmental organisation developing uniform law instruments to harmonise law between different states.
As of today, there are at least a few places where you can download wallets, access decentralized exchanges, and begin to use cryptographic currency technologies to represent other assets. That’s a lot further ahead than we were six months ago.
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