Overview of Colored Coins

Bitcoin ([3]) is the world’s first decentralized digital currency, allowing the easy storage and transfer of cryptographic tokens. It uses a peer-to-peer network to carry information, hashing as a synchronization signal to prevent double-spending, and a powerful scripting system to determine ownership of the tokens. There is a growing technology and business infrastructure 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 of coins to distinguish it from the rest. These coins can then have special properties supported by either an issuing agent or a Schelling point, and have value independent of the face value of 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. Because colored bitcoins make use of the existing Bitcoin infrastructure and can be stored and transferred without the need for a third party, and even be exchanged for one another in an atomic transaction, they can open the way for the decentralized exchange of things that are not possible by traditional methods. In this paper we will discuss the implementation details of colored bitcoins and some of their use cases.