ChromaWallet (colored coins): issue and trade private currencies/stocks/bonds/..

[killerstorm]

This is an interesting idea.  However I don't see how it makes a distributed exchange possible.  The hard part is keeping track of buy/sell orders and colored coins don't do anything for that.

We can start with decentralized exchange first. Decentralized means that it lacks single center, not that it is strictly p2p.

For example, there might be three independent operators with their own order books. You can buy/sell via any of them, as security is guaranteed by colored coin protocol, and no matter where you buy, your ownership will be recognized.

If you think all three operators are assholes, you can run your own exchange software: there is almost no barrier for entry. Your exchange will be just as good as any other in terms of security and compatibility. Your only challenge is to attract users to get some market depth.

I believe this means that exchange is fully decentralized. And colored coins are important here because they are the substrate which guarantees security and universal recognition of asset ownership.

[jgarzik]

If you think all three operators are assholes, you can run your own exchange software: there is almost no barrier for entry. Your exchange will be just as good as any other in terms of security and compatibility. Your only challenge is to attract users to get some market depth.

Yes, agreed.

I believe this means that exchange is fully decentralized. And colored coins are important here because they are the substrate which guarantees security and universal recognition of asset ownership.

Fully decentralized would mean any two users may meet at any time, and there is an efficient method of advertising (bids, asks) and meeting in the middle (transacting).

Creating your own exchange, due to lower barrier of entry, simply means it is less centralized.  As you can see with, e.g. MtGox, being able to start your own exchange does not imply lack of defacto centralization.

[killerstorm]

Fully decentralized would mean any two users may meet at any time, and there is an efficient method of advertising (bids, asks) and meeting in the middle (transacting).

Um, maybe. It depends on how you define "decentralized". But, of course, there is a whole spectrum of solutions from a handful of large providers to full p2p with millions of nodes. (Which I would call 'distributed', maybe.)

Somewhere in the middle there is a federation of order book providers with a significant number of members. I would liken them to mining pool operators (which are numerous), thus it might be "decentralized enough" for Bitcoin crowd's taste.

Full p2p would be cool, but it has numerous problems.

Creating your own exchange, due to lower barrier of entry, simply means it is less centralized.  As you can see with, e.g. MtGox, being able to start your own exchange does not imply lack of defacto centralization.

Not quite the same thing: there is much higher barrier to entry for exchange which deal with USD, and also an exchange like MtGox holds people's money, which creates a trust issue.

But I would agree that a solution with completely independent order book providers is far from perfect. But much better than what we have now...

Perhaps a federated protocol won't be too hard to implement...

[jgarzik]

Fully decentralized would mean any two users may meet at any time, and there is an efficient method of advertising (bids, asks) and meeting in the middle (transacting).

Um, maybe. It depends on how you define "decentralized". But, of course, there is a whole spectrum of solutions from a handful of large providers to full p2p with millions of nodes. (Which I would call 'distributed', maybe.)

Somewhere in the middle there is a federation of order book providers with a significant number of members. I would liken them to mining pool operators (which are numerous), thus it might be "decentralized enough" for Bitcoin crowd's taste.

Full p2p would be cool, but it has numerous problems.

I raise the point because that is precisely what distributed bonds proposes, with its financial P2P network and financial hashmap.

[killerstorm]

I raise the point because that is precisely what distributed bonds proposes, with its financial P2P network and financial hashmap.

I feel like a simpler and a bit more centralized solution would offer 95% of joy for 5% of effort. I haven't analyzed it thoroughly, though, so I can be very wrong here... But still, I would prefer seeing something simple up and running to waiting for a perfect solution to be built.

[jgarzik]

I raise the point because that is precisely what distributed bonds proposes, with its financial P2P network and financial hashmap.

I feel like a simpler and a bit more centralized solution would offer 95% of joy for 5% of effort. I haven't analyzed it thoroughly, though, so I can be very wrong here... But still, I would prefer seeing something simple up and running to waiting for a perfect solution to be built.

Oh, I completely agreed with you  Centralized solutions are easier, and still provide plenty of value.

However, given real world experience in this community, such exchanges also have a nearly 100% chance of (a) getting DDoS'd and (b) getting attacked by determined, knowledgeable thieves.

That is why decentralized, open-review systems are preferred.

[killerstorm]

However, given real world experience in this community, such exchanges also have a nearly 100% chance of (a) getting DDoS'd and (b) getting attacked by determined, knowledgeable thieves.

Well, it would be quite similar to how mining pools work in terms of centralization. Some pool might be attacked, but that's barely a problem.

Note that thieves wouldn't gain much from a hack, so there is almost no incentive to do that.

That is why decentralized, open-review systems are preferred.

I think it's unlikely that full p2p system can be as fast as semi-centralized (federated) one. I.e. daytraders won't like it.

But it would be cool to have it as an option.

[bitcool]

an interesting idea. want to know more.

[cunicula]

I agree with killerstorm 100% on this issue. The order book is not the problem. Theft of assets is. Secure the assets and the the important problem is solved.

[Jutarul]

However, given real world experience in this community, such exchanges also have a nearly 100% chance of (a) getting DDoS'd and (b) getting attacked by determined, knowledgeable thieves.

semi-centralized exchanges allow the user to mitigate the risk better by moving long-term investments offline. I'd call that an improvement over existing infrastructure.

[jl2012]

Bitcoin from different inputs are completely mixed in a transaction. Assuming that Alice has 1 Red coin in a single output, and Bob has 5 Blue coins in a single output. To buy the Red coin from Alice, Bob will pay 1 Blue coin + 5BTC. Bob will also pay the transaction fee.

Input
1. Address A (Red coins): 1BTC (Alice)
2. Address B (Blue coins): 5BTC (Bob)
3. Address C (Normal bitcoin): 10.005BTC (Bob)

Output
1. Address D: 1BTC (Bob)
2. Address E: 4BTC (Bob)
3. Address F: 1BTC (Alice)
3. Address G: 5BTC (Alice)
4: Address H: 5BTC (Bob)

Transaction fee: 0.005BTC

Presumably, the 1BTC in Address D should be a Red coin, and the 1BTC in Address F should be a Blue coin. The 4BTC in Address E is a "change" from Address B and are Blue coins. The 5 BTC in Address G is the payment in normal bitcoin, and the 5BTC in Address H is the change of normal bitcoin going back to Bob.

The question is, since bitcoin is fungible, how do we know the color of these coins?

Furthermore, if someone mixes 1 Red coin and 2 Blue coins and makes a single output of 3BTC, what is the color of the output?

How about paying transaction fee with colored coins? Will the miner claim it with the coinbase input?

I understand the coloring part, but I don't get how this paves the way for distributed exchanges. What am I missing?

People having coins of different colors can exchange them securely via a simple bitcoin transaction which would be atomic.

E.g. one person gives 1 red coin and gets 5 blue coins, other person gives 5 blue coins and gets 1 red coins, they construct a transaction, sign it, and once it is in blockchain trade is done. (If one person signs but other doesn't transaction would be invalid. If there is a double-spend, it would also invalidate whole txn. So trade transactions are in fact more secure than accepting bitcoins.)

So what's left is order matching logic, i.e. allowing person which is willing to trade red coins for blue coins to find a person who wants the opposite.

This is fairly simple to implement and straightforward.

[killerstorm]

The question is, since bitcoin is fungible, how do we know the color of these coins?

Via a special coloring rules/algorithm. See here: https://bitcointalk.org/index.php?topic=114571.0

Furthermore, if someone mixes 1 Red coin and 2 Blue coins and makes a single output of 3BTC, what is the color of the output?

Uncolored. Essentially you're scrapping your colored coins for underlying BTC in this case.

How about paying transaction fee with colored coins? Will the miner claim it with the coinbase input?

If you pay fee with colored coin miner will get this money fresh and uncolored, so don't do that with coins more valuable than underlying BTC

There are several solutions to transaction fees with colored coins:

• don't pay fee. some transactions are eligible to be included into blockchain for free
• have a small amount of uncolored coins and pay fees with them. presumably your client software will do that automatically
• find someone to pay fee for you: you'll pay him colored coins, he will pay fee with his uncolored coins

[jl2012]

The question is, since bitcoin is fungible, how do we know the color of these coins?

Via a special coloring rules/algorithm. See here: https://bitcointalk.org/index.php?topic=114571.0

Furthermore, if someone mixes 1 Red coin and 2 Blue coins and makes a single output of 3BTC, what is the color of the output?

Uncolored. Essentially you're scrapping your colored coins for underlying BTC in this case.

How about paying transaction fee with colored coins? Will the miner claim it with the coinbase input?

If you pay fee with colored coin miner will get this money fresh and uncolored, so don't do that with coins more valuable than underlying BTC

There are several solutions to transaction fees with colored coins:

• don't pay fee. some transactions are eligible to be included into blockchain for free
• have a small amount of uncolored coins and pay fees with them. presumably your client software will do that automatically
• find someone to pay fee for you: you'll pay him colored coins, he will pay fee with his uncolored coins

This is relieving the debt of the color coin issuer and sounds not very ethical. If the colored coin is linked to a smart property, the property is also lost to no one. I have a new proposal, which every single satoshi has unique color:

https://bitcointalk.org/index.php?topic=117224.0

[ShireSilver]

This colored bitcoin concept just doesn't seem right to me. Bitcoins are supposed to be fungible, and this takes away from that as well as causes unnecessary deflation.

One of the concerns I have is that it will make it easier (or at least more common and accepted) to track bitcoins that are "dirty" somehow (at least in some people's, or more importantly governments, eyes).

[jl2012]

This colored bitcoin concept just doesn't seem right to me. Bitcoins are supposed to be fungible, and this takes away from that as well as causes unnecessary deflation.

One of the concerns I have is that it will make it easier (or at least more common and accepted) to track bitcoins that are "dirty" somehow (at least in some people's, or more importantly governments, eyes).

Bank notes are fungible but still traceable, so as bitcoin. You can not stop people tracking bitcoin with the current blockchain system. If we could not avoid, why don't we make good use of this feature? (Unless you have a better idea)

For the deflation issue, the face value of colored bitcoin should be also considered in the transaction. For example, if you want to buy 1 colored satoshi with 10000 satoshis, you have to pay 10001 satoshis.

[Polvos]

Every now and then appears someone with the "new" idea of tainting coins. It's a very bad idea for multiple reasons. God, use the search button and you'll find a lot of threads about tainting.

What we need is an add-on for the Satoshi client and for the usual mining software to allow people melt-mining coins. That way we prevent the next "visionary" to taint our coins.

Melt-mining: mine a block and add a selfmadetransaction with all the coins you want to "melt" as fees. You need a tweaked client that prevents the selmadetransaction to be broadcasted but in your brand new mined block.

BITCOINS MUST BE FUNGIBLE.

[ShireSilver]

Every now and then appears someone with the "new" idea of tainting coins. It's a very bad idea for multiple reasons. God, use the search button and you'll find a lot of threads about tainting.

What we need is an add-on for the Satoshi client and for the usual mining software to allow people melt-mining coins. That way we prevent the next "visionary" to taint our coins.

Melt-mining: mine a block and add a selfmadetransaction with all the coins you want to "melt" as fees. You need a tweaked client that prevents the selmadetransaction to be broadcasted but in your brand new mined block.

BITCOINS MUST BE FUNGIBLE.

Thank you. Taint was the word I was looking for.

Bank notes being traceable is one of the problems with them. When you use cash it is supposed to not be traceable. Using bitcoins should be just like using cash anonymously, at least as much as possible.

[Jutarul]

Every now and then appears someone with the "new" idea of tainting coins. It's a very bad idea for multiple reasons. God, use the search button and you'll find a lot of threads about tainting.

What we need is an add-on for the Satoshi client and for the usual mining software to allow people melt-mining coins. That way we prevent the next "visionary" to taint our coins.

Melt-mining: mine a block and add a selfmadetransaction with all the coins you want to "melt" as fees. You need a tweaked client that prevents the selmadetransaction to be broadcasted but in your brand new mined block.

BITCOINS MUST BE FUNGIBLE.

I recommend, you read the technical discussion about colored bitcoins: https://bitcointalk.org/index.php?topic=106449.0
You will soon realize that coloring does not embed information with the coins. You have to conform to a strict set of rules for creating a color conforming transaction, which means that color information is very volatile. The apparent advantage of that is that the color information does not require additional bits or bytes. It uses the decreased entropy of the transaction in order to save the color state of unspent outputs.

[killerstorm]

Every now and then appears someone with the "new" idea of tainting coins.

Tainted coins are contagious: if you mix tainted coin with non-tainted one result is tainted.

Colored coin is counter-contagious: if you mix colored coin with non-colored one, or with a coin of different color, it loses its color tag, the result is uncolored.

So these things are almost unrelated.

There are existing tools which trace coin taints; "colored coin" tools won't help you with this at all.

[killerstorm]

This is relieving the debt of the color coin issuer and sounds not very ethical.

Well, sometimes coins are lost, you cannot do anything with it. You know, lost wallets and stuff like that...

Same is true for paper securities: some promissory note might be lost in fire, for example.