After reading an article about colored coins (
http://www.coindesk.com/colored-coins-paint-sophisticated-future-for-bitcoin/), I became concerned that the system, in spite of all its promise, has a fatal flaw. The problem is that any assets represented as "colored" coins will have value both in terms of the asset, and in terms of the underlying coins. So if I have a colored Bitcoin representing one unit of stock in my company, its value is the combined value of 1 unit of stock plus 1 Bitcoin. Thus it is a terrible way of representing non-Bitcoin assets because it always includes Bitcoins in the value.
The existing proposal is also unsatisfactory in how an asset class is originally issued:
The foundation of colored coins is the ability of an issuer to set aside some of his bitcoins and declare that they have a specific color, and state his obligations to owners of coins of this color.
The difficulty here is that Bitcoins must be transformed into colored coins. So if I start a corporation and wish to issue stock, it costs me
BTC1 for every 1 unit of stock I issue. Thus Facebook's IPO would have cost Facebook
BTC421 million. A key feature of stock issuance is that the value of the stock is tied to the value of the company, not to the currency itself.
The value of Bitcoins comes partly from the difficulty in minting them. The value of stock comes from the monopoly of a single corporation in issuing it. Mixing these two sources of value together doesn't make sense.
