Colored Coins and Coinprism takes Bitcoin to a whole new level

[Peter R]

It's unlikely the FED does anything like this, but a company could easily do it, by either accepting USD deposits and issuing USD-coins in exchange, or simply allowing people to deposit BTC, convert it at the Bitstamp rate, and in the backend, convert the BTC to USD in order to cancel out the exposure.

I expect we will see USD-tokens in the not-so-distant future from credible third-parties.  I think these will be useful, however, they still have problems, for example:
   (a) the issuer cannot easily prove his reserves of USD,
   (b) the issuer cannot easily post a "proof-of-intent" bond that acts as reserves for settlement of the options contracts.

The USD/BTC put/call idea with settlement in bitcoin could allow one to hedge against the BTC/USD exchange rate completely outside of the traditional banking system and with 100% transparency.  The counter-party risk, although not zero, can be made very small by using colored coins + multisig with neutral third parties + proof-of-intent reserves.  

[rpietila]

So now Counterparty A has shown they have sufficient reserves to make good on the put options.  Next, we must somehow force transfers from the reserve address to the outstanding colored coins, should the puts expire “in the money.”  I don’t think this process can be entirely trustless because we need to agree on the bitcoin/USD price; however, I think by using multisig with keys held by neutral third parties, that we could at least make it completely transparent.   Any fraud should be obvious and provable.

There is no need to agree on the going rate when using PUT options, if the options are actually settled (and not contract-for-difference). I don't know which kind of options the market participants would prefer, but every time I offer to issue PUTs, I want them to be settled in an actual trade at the strike price, or expire worthless.

Building a synthetic derivatives market on top of something as fickle and easily manipulated as the USD/BTC exchange rate is a call to even more short-term manipulation and volatility.

[Peter R]

So now Counterparty A has shown they have sufficient reserves to make good on the put options.  Next, we must somehow force transfers from the reserve address to the outstanding colored coins, should the puts expire “in the money.”  I don’t think this process can be entirely trustless because we need to agree on the bitcoin/USD price; however, I think by using multisig with keys held by neutral third parties, that we could at least make it completely transparent.   Any fraud should be obvious and provable.

There is no need to agree on the going rate when using PUT options, if the options are actually settled (and not contract-for-difference). I don't know which kind of options the market participants would prefer, but every time I offer to issue PUTs, I want them to be settled in an actual trade at the strike price, or expire worthless.

Building a synthetic derivatives market on top of something as fickle and easily manipulated as the USD/BTC exchange rate is a call to even more short-term manipulation and volatility.

You bring up a good point.  I too wonder if this would increase or decrease volatility.  The fact that everything is fully transparent might help to mitigate whales from painting the tape near options-expiration dates.  I don't know what would cost more: painting the tape or making a few more bucks on the options.

What I'm trying to do here is brainstorm the lowest-risk decentralized method for hedging against the USD/BTC exchange rate.

[rpietila]

So now Counterparty A has shown they have sufficient reserves to make good on the put options.  Next, we must somehow force transfers from the reserve address to the outstanding colored coins, should the puts expire “in the money.”  I don’t think this process can be entirely trustless because we need to agree on the bitcoin/USD price; however, I think by using multisig with keys held by neutral third parties, that we could at least make it completely transparent.   Any fraud should be obvious and provable.

There is no need to agree on the going rate when using PUT options, if the options are actually settled (and not contract-for-difference). I don't know which kind of options the market participants would prefer, but every time I offer to issue PUTs, I want them to be settled in an actual trade at the strike price, or expire worthless.

Building a synthetic derivatives market on top of something as fickle and easily manipulated as the USD/BTC exchange rate is a call to even more short-term manipulation and volatility.

You bring up a good point.  I too wonder if this would increase or decrease volatility.  The fact that everything is fully transparent might help to mitigate whales from painting the tape near options-expiration dates.  I don't know what would cost more: painting the tape or making a few more bucks on the options.

What I'm trying to do here is brainstorm the lowest-risk decentralized method for hedging against the USD/BTC exchange rate.

Futures (forward contracts) need to be in place before you can build an options market upon them. Just check the gold/silver market in Nymex/Comex.

If you want to decrease volatility, make a market with options that will be settled in the underlying (BTC) instead of $, and no "settlement date", only "expiration date" (I think this is called European style options but not sure). So the counterparty may exercise the option any day. Then it becomes counterproductive to paint the tape eg causing a flashcrash: with a CFD, you would profit, the lower it goes. With a real PUT option, you need to sell your stuff at the agreed price and buy back, which causes buying pressure in the market (first you need to sell to cause the cascade, then you sell the BTC amount in the PUT option you bought, and now you'd need to buy both of these back cheaper, to realize any profit.)

Ah, decentralized. That is the tough point I would start by removing the USD/BTC exchange rate from the system still, because that is the easiest to manipulate and in a sense the least meaningful part. You either have the coins or not.

[serenitys]

I'm not sure if this is considered on or off topic but asking anyway...mainly about the insertion of other information.

Is it already possible to add information other than just the value part?

To clarify, I'm wondering about why this isn't or couldn't be used to replace the way we do email...but then would that make the email or message be visible?

How does it work to include information or contracts or anything like this - colored though it is - from one to another?

Arrrgh I know what I'm trying to ask but apparently it's not coming out right.

[bassguitarman]

I dont get this..

[bluemeanie1]

So now Counterparty A has shown they have sufficient reserves to make good on the put options.  Next, we must somehow force transfers from the reserve address to the outstanding colored coins, should the puts expire “in the money.”  I don’t think this process can be entirely trustless because we need to agree on the bitcoin/USD price; however, I think by using multisig with keys held by neutral third parties, that we could at least make it completely transparent.   Any fraud should be obvious and provable.

There is no need to agree on the going rate when using PUT options, if the options are actually settled (and not contract-for-difference). I don't know which kind of options the market participants would prefer, but every time I offer to issue PUTs, I want them to be settled in an actual trade at the strike price, or expire worthless.

Building a synthetic derivatives market on top of something as fickle and easily manipulated as the USD/BTC exchange rate is a call to even more short-term manipulation and volatility.

You bring up a good point.  I too wonder if this would increase or decrease volatility.  The fact that everything is fully transparent might help to mitigate whales from painting the tape near options-expiration dates.  I don't know what would cost more: painting the tape or making a few more bucks on the options.

What I'm trying to do here is brainstorm the lowest-risk decentralized method for hedging against the USD/BTC exchange rate.

Futures (forward contracts) need to be in place before you can build an options market upon them. Just check the gold/silver market in Nymex/Comex.

If you want to decrease volatility, make a market with options that will be settled in the underlying (BTC) instead of $, and no "settlement date", only "expiration date" (I think this is called European style options but not sure).

American Options can be exercised at any time up until the expiration date, while European Options can only be exercised at the time of maturity.

So the counterparty may exercise the option any day. Then it becomes counterproductive to paint the tape eg causing a flashcrash: with a CFD, you would profit, the lower it goes. With a real PUT option, you need to sell your stuff at the agreed price and buy back, which causes buying pressure in the market (first you need to sell to cause the cascade, then you sell the BTC amount in the PUT option you bought, and now you'd need to buy both of these back cheaper, to realize any profit.)

Ah, decentralized. That is the tough point I would start by removing the USD/BTC exchange rate from the system still, because that is the easiest to manipulate and in a sense the least meaningful part. You either have the coins or not.

have you seen? :  http://www.altchain.org/?q=whitepapers/paper4.html

a basic and very simple way to introduce hedging into the block chain is just allow for credit instruments.  If you are long on the cryptocurrency, you loan- if you are short, you borrow(and exchange to another).

-bm

[NWO]

BTC is starting to play catch up to Ripple.

[Peter R]

I'm not sure if this is considered on or off topic but asking anyway...mainly about the insertion of other information.

Is it already possible to add information other than just the value part?

To clarify, I'm wondering about why this isn't or couldn't be used to replace the way we do email...but then would that make the email or message be visible?

How does it work to include information or contracts or anything like this - colored though it is - from one to another?

Arrrgh I know what I'm trying to ask but apparently it's not coming out right.

Think of colored-coins/open-assets as an accounting system for digital IOUs.  For example, a company could write a contract for a bitcoin-bond that pays a monthly coupon of 0.5% of the bond's par value, with a maturity date of June 1, 2015.  The company would then use a single bitcoin transaction to create, say, 1,000,000 colored coins to represent this bond, and embedded the SHA256 hash of the contract within the blockchain with the same transaction.  

If the company is deemed credit worthy by the market, investors will purchase these bonds to earn the interest payments.  The company will use the bitcoins to fund development (for example).  This allows smaller companies to take advantage of the same funding opportunities (bond issuance) of much larger companies.  

But the real beauty of colored coins is that investors can subdivide their colored coins (bonds in this example) and trade them as they see fit in a trustless manner.  The issuer doesn't know who actually holds the bond, but he still knows where to send the monthly coupon!  When the bond expires, the issuer doesn't need to recall the bonds or anything--he just pays out the par value to the bitcoin addresses that held his bonds on the maturity date (as defined by the original contract).

Colored coins therefore only have the value that the market gives them (which is in turn based on the creditworthiness of the issuer).  Bitcoin just solves an accounting problem with colored coins.  It doesn't do anything to prevent issuers from failing to deliver on their contracts because it can't solve this problem.  But it does make the process more transparent and open.  

[bluemeanie1]

we've also discussed elsewhere(Peter doesn't seem to be into addressing those points) that carrying such transactions on the block chain poses significant risks- to 1) the holders of the assets 2) the issuers of the assets 3) all the holders of bitcoin.

so before we get overwhelmed with the wow factor of color coins promises, these risks need to be examined.  I think at this point that the stakeholders in Bitcoin are concerned that alternative platforms are looking far more attractive, so are perhaps overly eager to incorporate these things at the risk of systemic issues.  Note also that NXT does all the things Peter mentioned.

NXT, for instance already has a short sale window, a working decentralized exchange, even a silver broker.

-bm

[Pluto]

Colored Coins Issuer - Farm Example

Example Situation:

• I have land I can lease to growers
• I want to issue colored coins as stock for ownership of the land
• I create a corporation with 10,000 shares and each share is represented by one "farm coin" (colored coin)
• The business plan would be to lease the land to a grower and the revenue from the lease would be distributed to the share owners in proportion to the number of farm coins they have
• To distribute the revenue I exchange the USD for bitcoin and send it to the addresses where the colored farm coins reside

Questions:

• Are there any fundamental misunderstandings on my part in the example situation above?
• What if a share owners claims to have lost their private key for their colored coin wallet?
• Can a lost colored wallet be verified? -I assume not...
• Can the issuer issue new coins to the lost wallet share holder?
• Can re-issuance of lost farm coins be done in a way that is fair to the rest of the share holders who would see the issuance of more farm coins as potential dilution of their equity in the farm?
• What if someone who lost a lost private key "finds it" after being issued more farm coins? Is their a way to prevent those old farm coins from representing a share of ownership after replacements are issued?
• If lost key = lost equity, how can I prevent from sending future bitcoin revenue to dead wallets?

[Peter R]

Colored Coins Issuer - Farm Example

Example Situation:

• I have land I can lease to growers
• I want to issue colored coins as stock for ownership of the land
• I create a corporation with 10,000 shares and each share is represented by one "farm coin" (colored coin)
• The business plan would be to lease the land to a grower and the revenue from the lease would be distributed to the share owners in proportion to the number of farm coins they have
• To distribute the revenue I exchange the USD for bitcoin and send it to the addresses where the colored farm coins reside

Questions:

• Are there any fundamental misunderstandings on my part in the example situation above?

What you described is a valid application for colored coins.  The only thing I don't like (and it's not really your fault) is calling them "farm coins."  I think "farm shares" is better because these shares are just riding on top of bitcoins that have been colored.  I don't want people to think of bitcoins that have been colored as "new alt coins" because it's not really accurate--they're not really coins at all anymore.   

• What if a share owners claims to have lost their private key for their colored coin wallet?

Since colored coins can be traded freely beyond the oversight of the issuer, ownership of the shares is proven by signing a message with the private key that unlocks the bitcoin address where the colored coins are located.  If someone purports to have "lost" his private key, how can the issuer know that he ever had the private key at all?  He might have just scanned the blockchain for an address that held farm shares and then came to you with a fake story about losing the keys. 

• Can a lost colored wallet be verified? -I assume not...

What can be verified is an accidentally-destroyed colored coin.  For example, if I hold 1000 of your farm shares as a colored coin at bitcoin address 1MyAddress, and if I use a non-color-aware wallet to make bitcoin transactions from this address and accidentally destroy my colored coins (remove their color), this will be a provable blockchain event.

• Can the issuer issue new coins to the lost wallet share holder?

The issuer of the colored coins can, at any time, issue as many additional tokens as he chooses (assuming he retains the private key).  In the above example of the accidently-destroyed shares, I don't see why I couldn't go back to you as the farm owner and say "I destroyed my colored coins and here's proof," and request that you re-issue me my shares (perhaps with a hefty fee to motivate me to be more careful in the future). 

• Can re-issuance of lost farm coins be done in a way that is fair to the rest of the share holders who would see the issuance of more farm coins as potential dilution of their equity in the farm?

Issuance (and destruction) of coins is always transparent.  For example, by scanning the blockchain, the total number of outstanding tokens for any particular asset type can be determined.  Earlier in this thread, Coinprism said they are working on a color-aware blockexplorer to do exactly this. 

"Fairness" is outside the scope of the open-assets protocol (colored coins).  However, if an issuer of colored coins breaks his contract, the shareholders may have blockchain proof of this fact, and could sue the issuer.

• What if someone who lost a lost private key "finds it" after being issued more farm coins? Is their a way to prevent those old farm coins from representing a share of ownership after replacements are issued?

Unless the issuer also knows the human identities of the shareholders (which defeats the purpose of colored coins), I don't see how you can really solve the "lost key" problem.  Decentralized trading of colored coins only works because asset ownership is proven by ECDSA signatures. 

Management of your private keys is critical!

• If lost key = lost equity, how can I prevent from sending future bitcoin revenue to dead wallets?

Because you can't prove that the key was lost, I think the contract you (as the farm owner) wrote when you issued your farm shares would require you to send the dividends to all share holders (even those you think might be "dead.")

That being said, I don't see why your "issuing contract" couldn't have a clause that allowed you to swap "old shares" for "new shares" under certain conditions.  If the contract allowed, you could announce that 1 year from now the old shares will no longer be valid.  Existing share holders can swap their old shares for new shares anytime between now and one year from now.  Any shares not swapped after one year would be worthless.

[JohnnyBTCSeed]

I have more questions regarding the farm share argument. I really want to know as I am in an agricultural community that grows large portions of its own veggies and might benefit from this. So in this example.

My area farm share program works with 10 small farms and helps with marketing and delivery. They each sell shares of their crop. Each issues 50 shares. These shares will all be similar with similar veggies but not exact as this is farming after-all. The farms all agree to sell shares at the same price. Everyone sells out. Farmer Brown just happens to make the best carrots. His carrots are much sought after; everyone wants them. However he still sells them at the same price as everyone else. Delivery on the shares isn't for 2 more weeks.

Some of the owners of Farmer Browns shares know that there is big demand for his carrots so decide to sell his shares to make profit. Since there is still 2 weeks before delivery of these shares, how would they go about selling these?

What is the best way for them to do this?

I assume I list the initial shares on my area farm share website. Past that how would anyone know where to go to find shares for sale?

Are there any tools to list or search for shares of Farmer Browns crop that are for re-sale? Or does there need to be a third party ebay or ticket scalper style site?

Is colored coins the best system for this? Would counterparty or mastercoin work better? Or Nxt?

Thanks

[bluemeanie1]

there are already TWO websites that feature the assets on NXT,

http://cryptoassetcharts.info/

http://www.nxtdex.com/

and another one is coming online very soon that has very nice features.

in the case of Farmer Brown shares(or any of the growers) the price of his shares will float on the exchange according to demand, so if he has a good product his shares will be valuable.  If he knows the demand is high, he can price them accordingly and make more personal income.

currently no one is curating agricultural assets specifically, and that would be a good idea for a web site!  People would be able to purchase your shares worldwide(even speculate on them).

I think you would fit into the NXT community quite well IMHO.  We have one person who made 'The First Decentralized Oil Painting' and you can buy shares in it, eventually the shareholders will vote on where it hangs.  It's called NXTDrop.  I own a few shares.

-bm

[SomethingElse]

So now there is Mastercoin, Colored coin, and Counterparty all on the bitcoin block chain making colored coins.

And NXT, Ripple, and Bitshares making colored coins possible on their own chains. 

I see how it is cool, but basically it is IOUs from a party you don't really know.  This is a hard sell.  I am not saying it won't work, but there is a lot of competition now and all are clamoring for the same clients, who are actually few in number. 

This might all change.  Somebody had to be the first person to use a computer, or smartphone, or bitcoin.  To me, all of those seemed like common sense.  As for colored coins though, it seems like Ripple has the best model by far.  And it is far from doing well. 

[crazy_rabbit]

So now there is Mastercoin, Colored coin, and Counterparty all on the bitcoin block chain making colored coins.

And NXT, Ripple, and Bitshares making colored coins possible on their own chains. 

I see how it is cool, but basically it is IOUs from a party you don't really know.  This is a hard sell.  I am not saying it won't work, but there is a lot of competition now and all are clamoring for the same clients, who are actually few in number. 

This might all change.  Somebody had to be the first person to use a computer, or smartphone, or bitcoin.  To me, all of those seemed like common sense.  As for colored coins though, it seems like Ripple has the best model by far.  And it is far from doing well. 

It's not always an IOU, they can be used to delineated other things like smart property, shares of a company, tokens, coupons, anything really. They don't have to be a 'currency'.

[bluemeanie1]

a new Asset Exchange Explorer was released today:  http://nextblocks.info/#section/market

you can view the assets here: http://nextblocks.info/#section/assets_exchange/14347250558295845059

-bm

[Coinprism]

So now there is Mastercoin, Colored coin, and Counterparty all on the bitcoin block chain making colored coins.

And NXT, Ripple, and Bitshares making colored coins possible on their own chains. 

I see how it is cool, but basically it is IOUs from a party you don't really know.  This is a hard sell.  I am not saying it won't work, but there is a lot of competition now and all are clamoring for the same clients, who are actually few in number. 

This might all change.  Somebody had to be the first person to use a computer, or smartphone, or bitcoin.  To me, all of those seemed like common sense.  As for colored coins though, it seems like Ripple has the best model by far.  And it is far from doing well. 

The major flaw in NXT, Ripple, Bitshares, Mastercoin and counterparty is that they require people to buy a separate currency from Bitcoin. Bitcoin is by far the most used crypto-currency today, and also the most liquid. It is a risk to go and buy and alt-coin when your objective is not speculation.

[bluemeanie1]

So now there is Mastercoin, Colored coin, and Counterparty all on the bitcoin block chain making colored coins.

And NXT, Ripple, and Bitshares making colored coins possible on their own chains. 

I see how it is cool, but basically it is IOUs from a party you don't really know.  This is a hard sell.  I am not saying it won't work, but there is a lot of competition now and all are clamoring for the same clients, who are actually few in number. 

This might all change.  Somebody had to be the first person to use a computer, or smartphone, or bitcoin.  To me, all of those seemed like common sense.  As for colored coins though, it seems like Ripple has the best model by far.  And it is far from doing well. 

The major flaw in NXT, Ripple, Bitshares, Mastercoin and counterparty is that they require people to buy a separate currency from Bitcoin. Bitcoin is by far the most used crypto-currency today, and also the most liquid. It is a risk to go and buy and alt-coin when your objective is not speculation.

Bitcoin simply doesnt offer the possibilities that other platforms such as NXT do.

-bm

[Peter R]

I see how it is cool, but basically it is IOUs from a party you don't really know.  This is a hard sell.  I am not saying it won't work, but there is a lot of competition now and all are clamoring for the same clients, who are actually few in number.  

Who is trying to sell anything?  There is nothing to sell!  Coloring coins is a process and Coinprism is a tool.  If you are a bitcoin user you can already use colored coins should they be useful to you.  All it really is is a trustless accounting system for "user-defined tokens."

Patrick Byrne (Overstock CEO) mentioned in Amsterdam that he would like to have Overstock assets trade in bitcoin space in addition to on the NASDAQ.  Would you trust colored-coin assets issued by Overstock?  I probably would.  Would you trust colored-coin assets issued by a Newbie with an activity level of 2?  I probably wouldn't.  Would you trust colored-coin assets issued by a promising bitcoin start-up looking to raise money?  Well, if I knew and trusted the management and if I believed in the business model, then I might.  This could in fact be a new funding mechanism for bitcoin projects.  

Coinprism: if my business has 3 executives, can we create a class of colored coins that requires signatures from 2 of the 3 private keys in order to issue shares?