Colored Coins: When A Bitcoin Isn't Just A Bitcoin

Colored coins can turn a bitcoin into anything

Colored Coins

You can send bitcoins over the bitcoin network, but wouldn’t it be cool if you could send other things, too? What about gold, or silver? Thanks to a development called colored coins, you can.

The bitcoin network is great for sending electronic money whizzing across the Internet. It uses a technology that enables people to transact with each other without relying on a central authority. Instead of sending money through the bank, they can send it directly to each other.

Cutting out the middleman in this way creates several benefits. These include reducing cost, because you don’t have to pay someone else a large commission for the privilege of moving your money around. It also means that you don’t have to trust a central authority, which might lose your transaction or otherwise make a mistake.

Bitcoins of Varying Hues

Bitcoin has limited utility, though. Many people would like to exchange other things with each other in the same way.

Colored coins works by labelling tiny amounts of bitcoin in the transaction. When the bitcoin network processes the transaction, everyone can see the label. This means that instead of just being a regular old bitcoin, its label can represent something else.

This something else could be non-physical – perhaps a corporate stock, or a financial instrument like shares in an ETF, or as an option or a future contract. It could be a loan, that would show up as an asset on one party’s books, and as a liability on another’s.

The colored coin could also represent something physical. The deeds to a house could be sent this way (after all, a house never physically changes hands – only the documents signifying ownership do). Or how about ownership of a car? Or of a field of wheat?

Who Is Coloring Bitcoins?

There are several projects targeting colored coins.

Most of them use the existing bitcoin network, but have developed their own client software wallets that include the ability to ‘color’ bitcoins, in addition to doing all the other things that a wallet does.

One of them is CoinPrism, which was started by Irish company Pixode in 2014. This company operates an online web-based wallet, meaning that its software runs on Internet-based computers, rather than on your own desktop computer. It also provides an Android-based wallet for mobile users.

Another company, CoinSpark, offers the SparkBit wallet. This handles colored coins, but also supports messaging, enabling people to send private messages tied to bitcoin transactions. This enables users to describe what they are sending when they send a colored coin.

Chromawallet is a third firm with its own wallet for colored coins, although this project is still in beta phase, and is currently pretty basic in features, its founder admits (April 2015).

Colu is yet another company in the early stages of working on a colored coin project. It hopes to bring the concept to a far broader range of users, by working with large companies who will be able to create their own tokens for particular purposes.

This can include tokens used for ticketing at events, for example, or perhaps as loyalty points for consumer brands.

Coloring Inside The Lines

Colored coins could be a useful way to expand bitcoin technology, enabling people to send other kinds of assets around the world instantly. But for it to really work, these wallets will need to become interoperable.

At the time of writing, all of these companies have their own technical standards for how to label colored coins, but they have also clubbed together to create the Colored Coin Foundation. This will create a single standard for labelling colored coins, which should enable people to exchange this smart property across different wallets.

The idea of labelling bitcoins to represent other things also feeds directly into the idea of cryptocurrency 2.0 projects, where digital tokens distributed on a decentralized network could be used to provide different kinds of services.

In the future, you could be using the decentralized bitcoin network for exchanging far more than mere money. What things would you like to send, and what business ideas could this facilitate?