Colored Coins and Coinprism takes Bitcoin to a whole new level

[iraszl]

it seems the announcement is premature. the site is not working yet

It was meant to start Today, but at the last minute it was pulled to fix a few small issues. I tested it and it works well already. It will be public before the end of this week.

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[Peter R]

coinprism is 100% premine right?

Colored Coins are 100% 'premine'. Coinprism is the name of the wallet that creates and holds the Colored Coins.

It is a misnomer to even apply terms like 'premine' to coins that have been colored.  The meaning of the color is whatever the issuer decides, so colored coins aren't really even "coins" in the usual sense.  They're more like bearer bonds that represent promises made by the issuer.  The open-assets protocol that Coinprism uses is a way to track the color as the promises are freely traded on the blockchain. 

The issuer of a class of colored coins can create as many as he wants at will.  He could issue 1,000 today, and then issue 10,000 three days later, and 1,000,00 the week after that.  But this is not a problem at all and is in fact necessary, as the color just represents promises.

Open-assets protocol: https://github.com/OpenAssets/open-assets-protocol/blob/master/specification.mediawiki

[Peter R]

Question:

I'm a farmer and have 100 apples. Am i correct in that I can issue 100 shares for my apples?

When I sell an apple colored coin what happens to the coin when the apple is eaten? Does the time-stamp just act like a receipt?

When the apple is eaten, the counterparty assigns it to another apple or recolors it.

So for clarity, the buyer destroys the coin upon taking possession of the apple? or only after the apple has been eaten?

The colored coin was an apple future. He exchanged it for the apple.

He's not describing a futures contract, he's describing a voucher.  Just use Groupon if you want to sell vouchers

Colored coins can represent vouchers, futures contracts, or many other things; it's up to the issuer to decide.  Colored coins are unlike anything that has ever existed before.  They allow people to create and trade assets like apple futures contracts, shares in a company, or IOUs for gold stored in a vault, just to name a few.  The open-asset protocol is what allows these assets to be subdivided and freely traded without the need for the issuer to record and account for the trades--the protocol does this for him.  Colored coins will be an exciting addition to the bitcoin ecosystem.   

[twiifm]

Question:

I'm a farmer and have 100 apples. Am i correct in that I can issue 100 shares for my apples?

When I sell an apple colored coin what happens to the coin when the apple is eaten? Does the time-stamp just act like a receipt?

When the apple is eaten, the counterparty assigns it to another apple or recolors it.

So for clarity, the buyer destroys the coin upon taking possession of the apple? or only after the apple has been eaten?

The colored coin was an apple future. He exchanged it for the apple.

He's not describing a futures contract, he's describing a voucher.  Just use Groupon if you want to sell vouchers

Colored coins can represent vouchers, futures contracts, or many other things; it's up to the issuer to decide.  Colored coins are unlike anything that has ever existed before.  They allow people to create and trade assets like apple futures contracts, shares in a company, or IOUs for gold stored in a vault, just to name a few.  The open-asset protocol is what allows these assets to be subdivided and freely traded without the need for the issuer to record and account for the trades--the protocol does this for him.  Colored coins will be an exciting addition to the bitcoin ecosystem.    

I understand what colored coins are and they sound cool.  However the apple seller doesn't sound like he wants to write a futures contract.  He wants to write a voucher.

But since his business is a startup Groupon is better for him since they can also distribute the vouchers to their user base so he doesn't need to do his own marketing.

I don't know if he really wants to sell apples or its just an example.

Personally I think its a terrible business plan to secure financing by selling vouchers.  He's better off using a presale model like Kickstarter if his goal is to raise capital.  Either that or just take out a business loan

The other thing to consider is even you can color coins for futures contracts why would you want to?  Most people who trade futures prefer cash setlled and trade them for speculation.  What they care about is liquidity.  If the colored coin transaction takes 10 mins, the market makers will be forced to widen the spread which will make them unattractive for trading.  Plus there's already mature exchanges for futures.  What is the advantage to using blockchain compared to what we have now?

It has the same problems of bitcoins.  Why bother using it when there are superior options like credit cards and ATMs everywhere.  

[solimi]

Problem:
How to determine the exchange between Bitcoin and Colored Coins? As you said, Colored Coins can represent real dollars, so when the currency values ​​fluctuate a bit, how to ensure that the value of Colored Coins?

[Peter R]

Question:

I'm a farmer and have 100 apples. Am i correct in that I can issue 100 shares for my apples?

When I sell an apple colored coin what happens to the coin when the apple is eaten? Does the time-stamp just act like a receipt?

When the apple is eaten, the counterparty assigns it to another apple or recolors it.

So for clarity, the buyer destroys the coin upon taking possession of the apple? or only after the apple has been eaten?

The colored coin was an apple future. He exchanged it for the apple.

He's not describing a futures contract, he's describing a voucher.  Just use Groupon if you want to sell vouchers

Colored coins can represent vouchers, futures contracts, or many other things; it's up to the issuer to decide.  Colored coins are unlike anything that has ever existed before.  They allow people to create and trade assets like apple futures contracts, shares in a company, or IOUs for gold stored in a vault, just to name a few.  The open-asset protocol is what allows these assets to be subdivided and freely traded without the need for the issuer to record and account for the trades--the protocol does this for him.  Colored coins will be an exciting addition to the bitcoin ecosystem.    

I understand what colored coins are and they sound cool.  However the apple seller doesn't sound like he wants to write a futures contract.  He wants to write a voucher.

I think he wanted to understand what colored coins are and used a silly example of an apple farmer selling vouchers for apples.  Cbeast pointed out that by issuing futures contracts the example wasn't silly at all because it actually gives the apple farmer a useful way to fund his crop without involving banks.  

But since his business is a startup Groupon is better for him since they can also distribute the vouchers to their user base so he doesn't need to do his own marketing.

Apple farming aside, you might be on to something.  A promotional site like Groupon could create colored coins on behalf of their small businesses clients and sell/give away the colored coins as vouchers.  It would be trivial for the merchant to verify and redeem the vouchers and it would make the entire process more transparent and probably a better deal for the small businesses.  Consumers wouldn't even know they are using bitcoins.  

This actually seems like a really good idea!

The other thing to consider is even you can color coins for futures contracts why would you want to?  

To help fund your next apple crop, of course.

Or to fund the development of your new innovative device.  Instead of conventional "pre-sales" where a company just sits on your deposit, companies could create a sort of pre-sale future contract.  In the case of Butterfly Labs, people could have traded their ASIC pre-sales on the open market rather than being stuck waiting.  This would promote price discovery in the pre-sales market (which has been a problem in the bitcoin ecosystem to this point).  

The more I think about colored coins, the more I like them.  

Most people who trade futures prefer cash setlled and trade them for speculation.

Colored coin speculators do not need to take delivery on futures contracts they may hold--they would instead trade into cash (bitcoin) at the appropriate time.  For example, a trader may have bought-up Butterfly Labs pre-sales colored coins at a sharp discount after BFL made several delays in the production schedule, expecting BFL to get back on track and the price to go back up (at which point they would sell).    

What they care about is liquidity.

Liquidity is highly dependent on the size of the market.  Liquidity for BFL pre-sale miners would never be as deep as liquidity for pork-belly futures on the COMEX, but that's not the point.  The point is that the liquidity would be infinitely than not having any at all.  

If the colored coin transaction takes 10 mins, the market makers will be forced to widen the spread which will make them unattractive for trading.

Trustless exchange of colored coin transactions are as fast as bitcoin transaction (the network propagation time), but on-chain transactions would not be suitable for high-frequency trading like you pointed out.  For HF trading, you would send your colored coins to a centralized exchange and trade them there.  I think it would be several years until there was enough demand to create exchanges for high-frequency trading of colored coins, however.  

Plus there's already mature exchanges for futures.  What is the advantage to using blockchain compared to what we have now?

Has this thread not made it obvious by now?  You already said "I understand what colored coins are and they sound cool." 

The advantage of colored coins on the blockchain is because you can do things that are impossible to do otherwise!

[Peter R]

Problem:
How to determine the exchange between Bitcoin and Colored Coins? As you said, Colored Coins can represent real dollars, so when the currency values ​​fluctuate a bit, how to ensure that the value of Colored Coins?

The free market determines the value of the colored coins.  

Say Bitstamp issues a bunch of BitstampUSD colored coins.  As long as people believe that Bitstamp is solvent and honouring USD redemptions, then their colored coins will trade near par value.  But if something starts to smell funny (like we saw with MtGox in the fall), then the BitstampUSD coins will trade at a discount to real USDs.  

The beauty is the market automatically takes care of this for us, and in fact provides helpful signals (e.g., warning signs).  If we see the price of BitstampUSD diverge from KrakenUSD, it will be a pretty good indication that something is up!  

[glub0x]

Ok so when i color some bitcoin, the amount of bitcoin colored is not relevant, right ?
To go back to the applecoin :

If i create 100 applecoin for my apple growing company, can i just color 100 satoshi to trade?
What is the difference if i color 100 bitcoin?


Am i missing something?

[Peter R]

Ok so when i color some bitcoin, the amount of bitcoin colored is not relevant, right ?
To go back to the applecoin :

If i create 100 applecoin for my apple growing company, can i just color 100 satoshi to trade?
What is the difference if i color 100 bitcoin?

Am i missing something?

The amount of bitcoins underlying each colored coin is irrelevant from the financial perspective--it is only relevant from the technical perspective because without a small amount of bitcoins the miners wouldn't register your trades and the accounting system wouldn't work.  

I am not sure how much bitcoin you actually need to make it work, but I assume it is larger than the dust limit but still quite small.  I would like more clarification here too.  

And since the bitcoins that are colored are still "real" bitcoins, when you redeem your colored coins, you should get back an equal amount of uncolored coins + whatever was promised.  So the value of a colored coin is:  

    Value of colored coin = value of IOU + value of underlying BTC

[glub0x]

   Value of colored coin = value of IOU + value of underlying BTC

Ok that is what i wanted to understand.
It might be a "problem" as the value of the dust today may be not so "dusty" tomorrow.

[trout]

    Value of colored coin = value of IOU + value of underlying BTC

I think it's rather
Value of colored coin = max {value of IOU, value of underlying BTC}
because you can either  use it either as IOU  or spend the BTC but not both

Also, on coinprism the minimal amount of BTC to creat a coloured coin is 600 satoshi,
which is rounded up from the 540 satoshi dust limit

[Coinprism]

Question:

I'm a farmer and have 100 apples. Am i correct in that I can issue 100 shares for my apples?

When I sell an apple colored coin what happens to the coin when the apple is eaten? Does the time-stamp just act like a receipt?

The investor can redeem his coin by going back to the farmer: the investor gives his apple coin back to the farmer, and the farmer makes physical delivery of the apple. The investor is now free to do whatever he wants with the apple (eat it?), and the farmer can either keep the coin or uncolor it.

Let's say I want to grow an apple tree. I need money for fertilizer, insecticide, and water. I can supply the seed, the land, and the labor. So to raise money for this venture I sell applecoins* expecting to get a yield of 1000 apples in a season (we have fast growing trees). I sell 100 colored coins to cover those costs and will give each colored coin owner 5% of the yield rounded down to the nearest whole apple and then will offer a discount on apple pie to the applecoin holders as well. To redeem the colored coins for the apples, you must send them back to me.

Yes, this is a very good explanation of how colored coins work.

To summarize, the colored coin comes into existence when the issuer issues it, and disappears when the issuer redeems it for a service or good.

[Hunyadi]

Excellent news! Yet again bitcoin ecosystem grows. Good job guys!

[twiifm]

Question:

I'm a farmer and have 100 apples. Am i correct in that I can issue 100 shares for my apples?

When I sell an apple colored coin what happens to the coin when the apple is eaten? Does the time-stamp just act like a receipt?

The investor can redeem his coin by going back to the farmer: the investor gives his apple coin back to the farmer, and the farmer makes physical delivery of the apple. The investor is now free to do whatever he wants with the apple (eat it?), and the farmer can either keep the coin or uncolor it.

Let's say I want to grow an apple tree. I need money for fertilizer, insecticide, and water. I can supply the seed, the land, and the labor. So to raise money for this venture I sell applecoins* expecting to get a yield of 1000 apples in a season (we have fast growing trees). I sell 100 colored coins to cover those costs and will give each colored coin owner 5% of the yield rounded down to the nearest whole apple and then will offer a discount on apple pie to the applecoin holders as well. To redeem the colored coins for the apples, you must send them back to me.

Yes, this is a very good explanation of how colored coins work.

To summarize, the colored coin comes into existence when the issuer issues it, and disappears when the issuer redeems it for a service or good.

Well thats good.  It works like traditional banking.

But why does it need BTC why not color dogecoin or litecoin?

[zeetubes]

Someone had better come up with a better marketing pitch or it will fall on its arse. Im guessing colored coins are great. But I just suffered through this whole thread and no offense but I have no interest in colored coins so far. And stop using apples as your example object. Use something that means something to the average person. If you're talking about mortgages or shares or wills then fine but selling apples doesn't take anything to a new level. Plus they contain fructose which is a bigger killer than cigarettes. Again, no offense intended but I took nothing away from reading the thread.

[tbcoin]

I have a  doubt

Scenario:

I create 1000 colored bonds and sell it.

Q: How the bond holders can verify the total emission and that I don't emit more and more bonds?

[Peter R]

Let's say I want to grow an apple tree. I need money for fertilizer, insecticide, and water. I can supply the seed, the land, and the labor. So to raise money for this venture I sell applecoins* expecting to get a yield of 1000 apples in a season (we have fast growing trees). I sell 100 colored coins to cover those costs and will give each colored coin owner 5% of the yield rounded down to the nearest whole apple and then will offer a discount on apple pie to the applecoin holders as well. To redeem the colored coins for the apples, you must send them back to me.

Yes, this is a very good explanation of how colored coins work.

To summarize, the colored coin comes into existence when the issuer issues it, and disappears when the issuer redeems it for a service or good.

Coinprism, are you affiliated with https://www.coinprism.com ?  

Is there a formal publicly-visible mechanism to remove the color from a coin, or is it up to the issuer to keep track of redemptions?

Does the open-assets protocol support coinjoin transactions?  If the answer is "yes," this means that two entities that don't trust each other could trade colored coins for bitcoins without an escrow service.  This would be very useful.  

[rpietila]

Q: How the bond holders can verify the total emission and that I don't emit more and more bonds?

I was about to answer smugly that "blockchain.info shows if your bonds originate from the original emission or somewhere else". But that is probably not the only or even practically functioning way. What could be?

But why does it need BTC why not color dogecoin or litecoin?

Network security. Anything else but the largest coin is always at the mercy of the miners of the largest one. (Yes, I know they have different algo, but would still take Bitcoin for now)

[Peter R]

Well thats good.  It works like traditional banking.

Comparing colored coins to traditional banking is non-sensical because colored coins are not money.  Colored coins represent promises, agreements, IOUs, etc.  We have hundreds of years of case law for resolving disputes involving promising and agreements, but now colored coins makes them more transparent and implements an accounting system for tracking them.  

But why does it need BTC why not color dogecoin or litecoin?

It doesn't.  Colored coins are similar to ripple IOUs, bitshares, Nxt assets etc.  The value comes from the underlying promises, not the method used to "write the contract."  It would be like saying "why are pens useful for writing contracts if I can use pencils?"

The answer is that both pens and pencils allow you to write contracts, but pens are better because ink is more difficult to erase than lead.  The analogy is that since colored coins are secured by the largest single-purpose computing network ever created (70 quadrillion hashes per second), writing your contracts using bitcoin is like writing them using permanent and unforgeable ink.  

So yes, colored coins secured by dogecoin would still work, but there are two weaknesses:

1.  The colored coins are only as secure as the dogecoin network (which will become highly insecure within 8 months unless changes are made)

2.  Assuming coinjoin transactions are possible with the open-assets protocol, it is advantageous to issue your colored coins on the most liquid cryptocurrency because the assets can only trade in a trust-free manner against that underlying cryptocurrency.  If you issued DOGE colored coins, you would need to use a third-party (e.g., an escrow service or centralized exchange) if you wanted to trade colored coins for bitcoins with someone who you didn't know or trust.  

[Peter R]

I have a  doubt

Scenario:

I create 1000 colored bonds and sell it.

Q: How the bond holders can verify the total emission and that I don't emit more and more bonds?

You can emit as many bonds as you like, but people will see that you are doing so and won't buy them if they don't trust you (and they may start selling the bonds they currently have thereby limiting your ability to sell the newly-issued bonds).  This is no different than how a company can right now issue as many bonds as it likes: what stops them from doing so?  Potential loss of credibility and the fact that no one will buy them unless they are sold at a high discount (larger effective interest rate).  

Colored coins make no attempt to solve the problem of issuer credibility.  If the issuer is a scammer or just a business that got unlucky, the colored coins will lose their value.  The open-assets protocol is just a way to track color and allow decentralized trading of the assets.