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Author Topic: Colored coins will dilute Bitcoin holdings  (Read 894 times)
protocolized
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April 13, 2013, 05:40:19 PM
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Colored coins are fascinating from a Metcalfe's Law perspective. People say that competing cryptocurrencies will have a hard time competing with Bitcoin because of network effects... The more people in the Bitcoin network, the more valuable it is, and the crappier new startup cryptocurrencies look in comparison.

But because they are build on top of the Bitcoin infrastructure, new CC currencies actually stand to benefit from some of the Bitcoin network effects. They can use existing Bitcoin open source software, they benefit from growing hash rate, etc.

They can't take advantage of every Bitcoin network effect... For example, you may not be able to trade them on exchanges unless the exchange supports colored coins. But they are not totally isolated the way that, say, Google Plus is isolated from Facebook.

What that means is Bitcoin could grow very strong, and a new CC currency could emerge and be able to compete directly with "vanilla" Bitcoin for large segments of the Bitcoin market. When we talk about the possibility that the Bitcoin economy grows to a $100B or $1T or $10T market cap, that value could be split up unevenly between various colored coins. If the "Bitcoin" economy is worth $10T, but $9T of that value is colored coins which are denominated out of 1000 BTC, then the effective market cap for your "vanilla" Bitcoins is only $1T, and the price of your vanilla bitcoins will be a fraction of that lower cap.

Until recently, I saw my Bitcoins as a fixed share of the Bitcoin economy. But I realize now colored coins are a way to dilute that share.

Which isn't to say they are a bad thing. I think colored coins will "grow the pie" as they take a slice. Since colored coins rising in value contribute to the network effects of Bitcoin, they strengthen everyone's position. And because they allow new currency mechanics, they will allow Bitcoin to compete more effectively with new cryptocurrencies.  Fewer alternate blockchains is good for Bitcoin, I think.

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April 13, 2013, 06:13:02 PM
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That's a very provoking idea.
What we are discovering here is that once we get unchained from the fiat centralized currencies we are effectively discovering the real potential of money.
I agree with you that if this concept becomes successful it only would successful within the bitcoin network, I bet the outside is too stiff to handle this concept.

I envision service providers [similar to exchangers] that could provide trading with coloring verification, it is technically easy, but we need to bring it to the masses.

Eventually all merchants could use such a service so a potential client could see the price in different colors.

Now, I can easily imagine an explosion of colors which would compete with each other [I am treating the vanilla bitcoin here as a primal color] I wonder how easy could be to handle that complexity so it doesn't kill the concept.
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April 13, 2013, 06:24:00 PM
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The evolution of bitcoin, and possibly bitcoin itself might lead to the digital cashless currency. Just you can be sure that it will be very centralized and 1000% more controlled than any currency we have today when that happens.
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