overview of colored coins 白皮书.pdf

Overview of Colored CoinsMeni RosenfeldDecember 4, 2012AbstractBitcoin [3] is the world’s rst decentralized digital currency, allowing the easy storageand transfer of cryptographic tokens. It uses a peer-to-peer network to carry ination,hashing as a synchronization signal to prevent double-spending, and a powerful scriptingsystem to determine ownership of the tokens. There is a growing technology and businessinfrastructure supporting it.By the original design bitcoins are fungible, acting as a neutral medium of exchange.However, by carefully tracking the origin of a given bitcoin, it is possible to color a set ofcoins to distinguish it from the rest. These coins can then have special properties supportedby either an issuing agent or a Schelling point, and have value independent of the face valueof the underlying bitcoins. Such colored bitcoins can be used for alternative currencies,commodity certi cates, smart property, and other nancial instruments such as stocks andbonds.Because colored bitcoins make use of the existing Bitcoin infrastructure and can be storedand transferred without the need for a third party, and even be exchanged for one another inan atomic transaction, they can open the way for the decentralized exchange of things thatare not possible by traditional s. In this paper we will discuss the implementationdetails of colored bitcoins and some of their use cases.Contents1 Introduction 12 Merits of colored coins 32.1 List of bene ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.2 Comparison with alternative s . . . . . . . . . . . . . . . . . . . . . . 42.3 Demerits of colored coins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Implementation overview 7Bibliography 10iChapter 1IntroductionBitcoin has revolutionized currency by creating a medium of exchange that can stored andtransferred digitally without reliance on any single third party, with overreaching implicationsfor e ciency, security and counterparty risk. The colored coins project aims to extend theseabilities to other assets; it would allow handling arbitrary digital tokens in much the sameway that bitcoins are handled, and in particular easily trading them for digital currencies.Some potential uses are1. Smart property Ownership of physical assets such as cars and cellphones can berepresented as a token, and the device will only respond to the owner of the token.[1]2. Company stock A company could issue tokens representing shares in the company.The plat would easily allow sending Bitcoin dividends to shareholders, and allowshareholders to cryptographically vote.3. Deterministic contracts A person or company can issue contracts specifying aparticular future payment, such as a mining bond or a commodity option.4. Bonds A special case of the above, bonds can be issued with a particular face valueand repayment schedule, denominated in bitcoins or some other currency or commodity.5. Demand deposits Similar to bonds, except the issuer guarantees to redeem thetoken for its face value at any time. This can be used as either an interest bearinginstrument, or as a way to handle physical assets more e ciently.6. Emergent currencies A community may want to use a local currency which issimilar technically to Bitcoin but detached from it monetarily. They can issue tokensfor this purpose and distribute them among themselves in some fashion, and have themgain value organically through use rather than through some concrete backing.7. Decentralized digital representation of physical assets This is a hypotheticaluse case that is not proven to be viable, but is eagerly anticipated by some groups. Over1time, a consensus could arise that a token is commensurable in value to some traditionalcurrency or commodity, without a speci c backer apart from a bootstrapping period.This will allow digitally holding value tied to physical assets.What characterizes colored bitcoins in comparison with other s to achieve the samegoals is that it is entirely built on top of the infrastructure of Bitcoin or some otherblockchain-based currency { the tokens are any bitcoins that can be traced back to a par-ticular output, and the transactions in which tokens are moved are Bitcoin transactions,recognized as normal transactions by oblivious Bitcoin nodes but must satisfy additionalrequirements to be considered legitimate by color-aware nodes.The structure of this work is as follows In chapter 2 we examine the advantages anddisadvantages of this system over alternatives. In chapter 3 we explain some of the detailsof tracking the color of coins.2Chapter 2Merits of colored coins2.1 List of bene tsThere are many use cases for colored coins, and many alternative s to satisfy them;it will be useful to rst list the potentially bene cial features of the colored coins .1. Colored coins are very general. Virtually any kind of asset or contract can be repre-sented using them.2. They can be stored digitally without needing a third party. In particular, the fullforce of the Bitcoin scripting language can be mustered for their safe storage, such asmulti-signature transactions.3. They can be transferred digitally to a new owner with no need for central authorization,which has implications for ease of use, e ciency and availability.4. They can be exchanged for other colored coins or uncolored bitcoins in a single atomictransaction { meaning there is no counterparty risk, even without blockchain con rma-tions. And once again the entire range of scripting options is available to allow morecomplex trades, such as exchanging for coins of a di erent blockchain with a similarsecurity guarantee, or automated escrow.5. Properly used, ownership of colored coins can be made anonymous, while still enjoyingthe bene ts of ownership.6. The infrastructure of technology, software, hardware and services which powers Bitcoincarries naturally to bene ting colored coins. Technical challenges that are overcomewith Bitcoin translate to the colored coins plat; software for handling Bitcoincan be used, with or without patching, to handle colored coins; mining hardwarewhich synchronizes Bitcoin transactions automatically also synchronizes colored coinstransactions; and various Bitcoin-related services can be used in the context of coloredcoins, sometimes while remaining color-unaware.37. The intuitions behind dealing with Bitcoin translate to understanding the colored coinplat, and together they the \common language“, on both discussion andsoftware levels, to tie up the various applications.2.2 Comparison with alternative sMany of the use cases could be accomplished, to some extent, using s other thancolored coins. We will list some such s and emphasize the advantages that coloredcoins may have over them.1. Traditional stock exchanges. The traditional ecosystem of stock exchanges andbrokers serves today for the issue and trade of nancial instruments, and was provenin the test of time to be viable for this purpose. However, old established businessestend to su er from lack of innovation; these plats pose a signi cant barrier of entryto smaller issuers; and the lack of a truly digital representation for the assets has allthe usual disadvantages with regards to transaction fees, availability, self-su ciencyand so on.2. Modern central services. Start-ups such as GLBSE [2] attempted to use thepower of Bitcoin to provide a modern, international, low-cost alternative to traditionalmarkets. Such a lean plat could mitigate some of the disadvantages of centraliza-tion. However, it is by far more exposed to others As was widely suspected in the caseof GLBSE and eventually turned out correct, the lack of track record and regulatorycompliance exacerbate the risk of unclean shutdown, throwing asset issuers and holdersto limbo.3. Dedicated blockchain per asset. The Bitcoin technology allows the creation ofnew blockchains with relative ease, each representing its own alternative currency. Anissuer could create a new blockchain where the units of currency are tokens of his asset.If the di erent blockchains con to some standard, a single software could handleseveral of them with a convenient interface.However, this greatly increases the barrier to entry and misses an opportunity foreconomies of scale in the security of cryptocurrencies. Di erent cryptocurrencies workbest if they pool their hashrate, as each of them enjoys the security of the combinedhashrate. This can be achieved with merged mining; however, this still requires someamount of hashing native to the currency, as well as support of some miners from thehost blockchain such as Bitcoin. Smaller issues with few users will nd it di cultto enjoy protection from hashrate-based attacks. Also, the host blockchain will notbene t from the native hashing of the guest blockchains.Furthermore, for such smaller issues, there will be few nodes storing, verifying andserving blockchain data, posing a risk to network integrity and availability. Even ifenough nodes can be found, a software client handling several asset types will need toconnect to several nodes of each, increasing the networking overhead.4It also makes it more di cult to send dividend and coupon payments in bitcoins orother currency or asset to the owners of assets.By having the assets embedded in the Bitcoin blockchain, the entire existing infras-tructure of Bitcoin network nodes and miners can be utilized to bene t each and everyone of the assets. This allows creating a secure asset with no barrier to entry. Theextra burden on the host network can be paid for with a proper transaction fee system.The inclusion of arbitrary assets in the Bitcoin network will increase its total economicvalue, attracting more nodes and miners to strengthen it even further. Payments toasset holders can be done directly to the holding address in either the host or any guestcurrency.4. Separate asset-aware blockchain. This is similar to the above, except a singleblockchain unrelated to existing blockchain currencies will be used for all assets.This is in fact a variant of, not an alternative to, the concept of colored coins, ascoloring will still need to be used to track speci c assets within this blockchain. Itsadvantages are that it can spare the host blockchain from any real or perceived ille ects, and that additional features can be developed for it to make it more friendlyfor its intended purpose.However, this variant is slower to bring to market, as the infrastructure needs to bebuilt from scratch rather than leveraging the Bitcoin infrastructure.5. Open Transactions. Open Transactions [4] is a powerful plat that can satisfymost, if not all, of the desired use cases. However, its intuitions are di erent thanthose of Bitcoin, which means it will likely be more slowly adopted by the Bitcoincommunity who is the primary target market for the features we are espousing thana Bitcoin-based system. It can still exist as a viable alternative, with its own pros andcons, to a colored coin system.2.3 Demerits of colored coinsWe should also consider and in some cases, refute the suggested disadvantages of the coloredcoin system, speci cally when embedded in an existing blockchain.1. Blockchain bloat. The inclusion of the extra burden of colored coin transactionscan supposedly bloat the blockchain, increasing the cost of running a node. However,scalability is an issue for any blockchain even with only native transaction, and is anissue which should be solved rather than worked around. Every transaction carriesthe marginal cost of being received, veri ed and stored by every node on the network.These are all commodities, an transaction fees exist in part to pay for them. With aproperly chosen system for the distribution of fees to nodes, any additional transactionmakes it that much more lucrative to run a node, maintaining the balance of thenumber of nodes and their pro tability. In fact, since new economic activity can bear5above-cost fees, it can serve to actually strengthen the network. The overall level offees is a protocol-level decision to balance the number of nodes with the reductionof friction; whatever level is chosen, additional layers can be used to accommodatetransactions with a lower value than the threshold for both the native currency andcolored coins.2. Insu cient hashing fees. More di cult than the problem of funding network re-sources, is the problem of funding hashing. Since the cost of hashing is amortized overall transactions, it is essentially a bargaining game between miners and users, whichunconstrained would lead to a race to the bottom. As such it will be useful to haveprotocol-enforced s such as a limit on the total value of transfers per blockto make sure fees are paid by those who can a ord them typically senders of high-value transactions. With colored coins, the network is unable to determine the valueof the transactions and charge accordingly. This means what this economic activitycontributes to the hashing network is not proportional to, and typically lower than, thue it obtains from it. However, no actual harm will be done by colored coins; andwhile a system which does contribute fairly would be preferable, unless such a systemcan be come up with, this objection is moot.3. Legal concerns. With colored coins embedded in a host blockchain, any legal issuewith the guest assets, such as uncertainty about security trade regulations or speci cunsavory assets, might project into the host blockchain. This issue deserves moreexploration, but it is the author’s belief that the inclusion of multiple heterogeneousentities within the same blockchain will only reinforce its position as defying traditionallegal approaches.6Chapter 3Implementation overviewThe foundation of colored coins is the ability of an issuer to set aside some of his bitcoinsand declare that they have a speci c color, and state his obligations to owners of coins ofthis color. \Color“ is used metaphorically, of course - in practice a color will be identi edby a ticker symbol and a unique hash.The crux, then, is the to determine whether bitcoins held at some future timeare of this color or not. The issuer should be able to send these coins to another party whilemaintaining their color identity. That party should be able to send them to yet anotherparty, and so on. It should be impossible to have coins recognized to be of the color in anyother way to receive coins which were already of this color, following a chain of transactionsthat can be traced back to the color’s genesis.The fundamental unit of account in Bitcoin is an output { the issuer will declare oneor several of his outputs as belonging to the color, and then every output which can betraced back to them will also belong to this color. By default, bitcoins are fungible at theintra-transact