Coinprism / Colored Coins Decentralized "Self Issued Credit" trustless?

[jordan.dev]

Lots of talk about the https://www.coinprism.com/ offering, but something I can't wrap my head around as people are pointing out how this concept might "decentralize" issuance of debt.

In the spec:

The asset address of an asset is the RIPEMD-160 hash of the output script referenced by the first input of the transaction that initially issued that asset. An issuer can reissue more of an already existing asset as long as they retain the private key for that asset address. Assets on two different outputs can only be mixed together if they were issued by the same asset address.

Now in example, say there were 5 "Colored Coin" exchanges and I had an "in-demand" asset, and controlled the private key to said asset. I could go around and issue myself more supply to sell on these exchanges, and the buyers would be none-the-wiser that they were just buying from me.

I mean the concept is great if you trust the exchange to control the private key (or a 3rd party). But you have to trust a 3rd party! Unless there is a mechanism that limits the future issuance "dilution" if you will of the original asset.

Maybe I'm just misunderstanding? Thoughts?


http://www.reddit.com/r/Bitcoin/comments/25my2d/colored_coins_open_the_doors_to_self_issued/

[Ron~Popeil]

Lots of talk about the https://www.coinprism.com/ offering, but something I can't wrap my head around as people are pointing out how this concept might "decentralize" issuance of debt.

In the spec:

The asset address of an asset is the RIPEMD-160 hash of the output script referenced by the first input of the transaction that initially issued that asset. An issuer can reissue more of an already existing asset as long as they retain the private key for that asset address. Assets on two different outputs can only be mixed together if they were issued by the same asset address.

Now in example, say there were 5 "Colored Coin" exchanges and I had an "in-demand" asset, and controlled the private key to said asset. I could go around and issue myself more supply to sell on these exchanges, and the buyers would be none-the-wiser that they were just buying from me.

I mean the concept is great if you trust the exchange to control the private key (or a 3rd party). But you have to trust a 3rd party! Unless there is a mechanism that limits the future issuance "dilution" if you will of the original asset.

Maybe I'm just misunderstanding? Thoughts?


http://www.reddit.com/r/Bitcoin/comments/25my2d/colored_coins_open_the_doors_to_self_issued/

I think it is like anything else. There will always be bad actors that will try things like that. In a truly free market there is risk and in this one there is no central authority to manipulate risk to the benefit of themselves and their associates. It is up to each investor to do their homework and make informed decisions.

[Peter R]

Now in example, say there were 5 "Colored Coin" exchanges and I had an "in-demand" asset, and controlled the private key to said asset. I could go around and issue myself more supply to sell on these exchanges, and the buyers would be none-the-wiser that they were just buying from me.

I mean the concept is great if you trust the exchange to control the private key (or a 3rd party). But you have to trust a 3rd party! Unless there is a mechanism that limits the future issuance "dilution" if you will of the original asset.

Maybe I'm just misunderstanding? Thoughts?

You are completely correct that the issuer can just keep re-issuing more and more colored coins.  It's seems like a weird concept if you imagine doing it yourself, but this is very similar to how companies issue shares or bonds today.  Corporation A can issue as many shares as it likes.  The money that it raises legally belongs to the company, but of course the president could probably find a way to use that money to pay himself a huge salary or an accountant could embezzle it.  

But the free-market will self regulate: if BTCorp keeps issuing new bonds and selling them on an exchange, it will drive its own bond price down and thus its effective interest rate up.  So BTCorp wouldn't do this because it just increases its funding costs (unless it is planning to sell as many bonds as possible and then default, but that would fraud and fraud is still a crime even if it's done with bitcoins.)

I really like colored coins because it makes the fact that they are promises obvious: bitcoins themselves have no counterparty risk, while colored coins are only as good as the promise of the issuer.  

[jordan.dev]

Now in example, say there were 5 "Colored Coin" exchanges and I had an "in-demand" asset, and controlled the private key to said asset. I could go around and issue myself more supply to sell on these exchanges, and the buyers would be none-the-wiser that they were just buying from me.

I mean the concept is great if you trust the exchange to control the private key (or a 3rd party). But you have to trust a 3rd party! Unless there is a mechanism that limits the future issuance "dilution" if you will of the original asset.

Maybe I'm just misunderstanding? Thoughts?

You are completely correct that the issuer can just keep re-issuing more and more colored coins.  It's seems like a weird concept if you imagine doing it yourself, but this is very similar to how companies issue shares or bonds today.  Corporation A can issue as many shares as it likes.  The money that it raises legally belongs to the company, but of course the president could probably find a way to use that money to pay himself a huge salary or an accountant could embezzle it.  

But the free-market will self regulate: if BTCorp keeps issuing new bonds and selling them on an exchange, it will drive its own bond price down and thus its effective interest rate up.  So BTCorp wouldn't do this because it just increases its funding costs (unless it is planning to sell as many bonds as possible and then default, but that would fraud and fraud is still a crime even if it's done with bitcoins.)

I really like colored coins because it makes the fact that they are promises obvious: bitcoins themselves have no counterparty risk, while colored coins are only as good as the promise of the issuer.  

Agree with both people. I just wasn't positive if there wasn't some mechanism by which "holders" of these outputs would notified / capable of stopping additional output generation.

[Peter R]

Agree with both people. I just wasn't positive if there wasn't some mechanism by which "holders" of these outputs would notified / capable of stopping additional output generation.

By using a colored-coin block explorer, holders of IOUs could determine the amount outstanding and observe any unexpected increases or decreases.

Although holders cannot stop the issuers from over issuing, there are at least two practical solutions if subscribers are concerned:

  -  The issuer can create a document that clearly describes the terms of the colored coin notes.  If he signs this document with the private key(s) used to create the colored coins, then I think the subscribers would have a strong case for litigation should the issuer breach the contract.

  -  I believe that the multisig technique can be used to create colored coins.  If I am correct, this means that the company could be setup with, say, 5 directors.  It could take, for example, signatures from 3 of the 5 directors to issue more notes. 

[jordan.dev]

I believe that the multisig technique can be used to create colored coins.  If I am correct, this means that the company could be setup with, say, 5 directors.  It could take, for example, signatures from 3 of the 5 directors to issue more notes.

Interesting theory.