Colored Coins

So until now, you have seen how to exchange Bitcoins on the network. However you can use the Bitcoin network for transferring and exchanging any type of assets.

We call such assets “colored coins”. As far as the Blockchain is concerned, there is no difference between a Coin and a Colored Coin.

A colored coin is represented by a standard TxOut. Most of the time, such TxOut have a residual Bitcoin value called “Dust”. (600 satoshi)

The real value of a colored coin reside in what the issuer of the coin will exchange against it.

Since a colored coin is nothing but a standard coin with special meaning, it follows that all what you saw about proof of ownership and the TransactionBuilder stays true. You can transfer a colored coin with exactly the same rules as before.

As far as the blockchain is concerned, a Colored Coin is a Coin like all others.

You can represent several type of asset with a colored coin: company shares, bonds, stocks, votes.

But no matter what type of asset you will represent, there will always have a trust relationship between the issuer of the asset and the owner. If you own some company share, then the company might decide to not send you dividends. If you own a bond, then the bank might not exchange it at maturity.

However, a violation of contract might be automatically detected with the help of Ricardian Contracts. A Ricardian Contract is a contract signed by the issuer with the rights attached to the asset. Such contract can be either human readable (pdf), but also structured (json), so tools can automatically prove any violation. The issuer can’t change the ricardian contract attached to an asset.

The Blockchain is only the transport medium of a financial instrument. The innovation is that everyone can create and transfer its own asset without intermediary, whereas traditional asset transport medium (clearing houses), are either heavily regulated, or purposefully kept secret, and closed to the general public.

Open Asset is the name of the protocol created by Flavien Charlon that describes how to transfer and emit colored coins on the Blockchain. Other protocols exist, but Open Asset is the most easy and flexible and the only one supported by NBitcoin.

In the rest of the book, I will not go in the details of the Open Asset protocol, the GitHub page of the specification is better suited to this need.