A Brief History of Colored Coins – What Made them Special

Beginner’s Guide / 12.06.2020

The Origins of Colored Coins

On the 4th of December, 2012, a paper was released by cryptographer, mathematician, and President of the Israeli Bitcoin Association, Mr. Meni Rosenfeld. The paper was titled “Overview of Colored Coins,” wherein Meni explained a mechanism to take advantage of Bitcoin’s “fungibility” by segregating a certain number of coins from the rest for special purposes. Meni argued that adding “specialty” to coins by segregating from the rest could help form niche applications within the Bitcoin blockchain. By “coloring coins,” as he called it, we can assign a specific task to a particular set of coins and eventually build applications that cater to those specific coins. This meant that Bitcoin was not just a general cryptocurrency, but a place for developing as well.

But why did Meni come up with the idea of Colored coins, and what applications did he have in mind? What happened to the idea, and what repercussions did it have in the 8 years since its inception?

To know all that, let us first thoroughly understand what Colored Coins are.

What Was the Idea All About?

In the simplest sense, Colored Coins are basically regular Bitcoins, but with a mark on them, that determines what it is going to be used for. In essence, it is like having four different piggy banks at home and assigning a goal for each of them. The money you put in each piggy bank is the same. But since it is assigned a particular task, for example, Piggybank no. 1 is for buying the next iPad, PiggyBank no. 2 is for saving. So on, the money becomes segregated and special.

The idea for making Colored Coins on the Bitcoin blockchain came up as a realization by developers like Meni, who understood that they could add data on each transaction on the Bitcoin Blockchain. Since the blockchain is immutable and transparent, the data will always be linked to that particular transaction and all future transactions that follow. This meant that we could have a particular set of coins represent whatever we wanted them to be on the blockchain.

These coins can then have special properties supported by either an issuing agent that gave them an independent value along with the underlying bitcoins. Such colored bitcoins can be used for alternative currencies, commodity certificates, smart property, and other financial instruments such as stocks and bonds.

How Do Colored Coins Work?

As explained in the original paper, “… a ‘colored coin’ is a Bitcoin transaction that has been customized by adding metadata to it. Within Bitcoin’s structure, the ColoredCoin framework makes it possible to add information to a transaction and differentiate one coin from the rest. A coin that has been customized through the addition of metadata can be used to represent a real-world asset.”

Even though it was only designed to be a cryptography-based currency/collectible, Bitcoin’s scripting language came with the ability to store small amounts of metadata (additional information) on the blockchain. Initial developers of Colored Coins realized that this data could represent or segregate a particular set of coins. By that, they meant that Colored Coins could be virtual bridges to a real asset, thereby allowing for asset manipulation (trading, transaction, etc.).

In theory, Colored Coins could be used to represent

  • Property
  • Stock
  • Commodities
  • Bonds
  • Contract
  • Or any other type of asset that needs a Virtual representative

Why Have Colored Coins Lost Interest?

Quite possibly, one of the oldest proposed applications for Bitcoin, Coloured coins, has lost the craze they once had. When it came out in 2012, Colored Coins was all anyone would talk about in the Bitcoin Community. They represented a Quantum leap in Blockchain-based thinking. It represented a concept that elevated a mere cryptocurrency like Bitcoin from a fungible collectible to a ground zero to find and build applications. Rapid Experimentation with Colored Coins began, with developers and even regular community members etching to build something out of the idea.

One can even argue (quite successfully) that colored coins are the first domino in a decade long domino effect that culminated in innovations like Specialized Blockchain Networks, Rapid Tokenization, Sub-Chain Networks, Smart Contracts, and so much more.

Since the emergence of more general-purpose and feature-rich networks, Colored Coins have lost their interest. Their idea was immensely simple and innovative; it laid the groundwork for further experimentation, resulting in more interesting designs, leaving behind the original idea.

When Meni Rosenfeld showed the world how, by using the Bitcoin Blockchain’s simple characteristics, one could develop features and eventually applications with dozens of different use-cases. It truly sparked the “experimentation era” of the Blockchain market. One can say that Colored Coins have lost their appeal and interest, as innovations have come up that exceed in their features and usage. But if it weren’t for Colored Coins, the Domino Effect would not have got the first fall it needed. The concept died out, but the legacy it built will stay.

For more information on what Colored Coins are, here are a few interesting videos and resources:

Sudarshan M is a long time crypto-enthusiast. Pulled in by bitcoin early on, it did not take long for Sudarshan to divert all of his academic attention from business studies to blockchain by doing his Masters and eventually pursuing his PhD in the subject.