Q: What are Colored Coins? | [Paid #19]
Bitcoin Maximalists tend to shy away from NFTs and other well known features of Turing-Complete blockchains, but most of these ideas were first implemented on the Bitcoin stack.
Well hello, there!
This week, I’m digging deep into the archives for a topic - this particular technology isn’t very buzzword compliant these days, but it is relevant for a few reasons.
As I’ve discussed several times here in this newsletter, there are various tribal rifts within the blockchain sector, but very few are as prominent now as between the Bitcoin Maximalists and the rest of the cryptocurrency and blockchain world. If you’ve ventured into discussions regarding things like NFT or other cypherpunk-like applications of blockchain technology, you’ve likely run into knee-jerk reactions against anything like that, usually on the grounds that it’s just not bitcoin.
Part of why I don’t ascribe to that mode of thinking (and why I like to push this idea of “cypherpunk maximalism,” is I remember when early blockchain thinkers were pushing for exactly these types of technologies and business models built on top of the bitcoin stack.
Today we’re going to dive deep into one of those historical examples of that: Colored Coins, as well as what became of the idea.
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In this issue:
Blockchain Bulletin
Square is building a decentralized finance business platform. Mobile payments company Square is building a new decentralized finance business named TBD that will focus on Bitcoin, the company’s CEO Jack Dorsey announced on Twitter.
TikTok bans paid crypto shills from its platform. TikTok banned advertisements by influencers and content creators who promote “branded content” related to cryptocurrencies, according to CoinJournal.
PayPal increases the weekly purchase crypto limit to $100,000. PayPal is increasing its weekly crypto purchase limit to $100,000, up from $20,000, a fivefold increase, according to CNBC. The company also removed its previous annual limit of $50,000.
Blockchain Behind the Scenes
Blockchain-based fantasy soccer NFT company Sorare to raise $532M. The blockchain-based fantasy soccer nonfungible token card game company Sorare has plans to raise $532 million from Japanese investor SoftBank, sources close to the company said.
Blockchain audit firm CertiK raises $37M in Series B funding. Blockchain security firm which audits smart contract code to prevent exploits has landed $37 million in Series B funding to build its product.
Blockchain Deep Dive: What are Colored Coins?
The intellectual core of why Bitcoiners (maximalists, rally) are against these other technologies is a little difficult to pin down. Bitcoiners construct many reasons why Turing-Complete blockchain features are bad, but most of these ideas were first implemented on the Bitcoin stack.
The original paper on Colored Coins was written in 2012 by Meni Rosenfeld.
From a high level, the concept of colored coins are exactly what they sound like.
By “coloring” a Bitcoin, you turn it into a token that represents anything you want to trade.
In 2014, the USPS was considering this technology to issue what we’d now call NFT collectible stamps on the blockchain.
The marking (or coloring) of the coin usually happens in a centralized database of some kind, but can also be marked on chain in a way that can be recognized by a pre-defined standard.
The underlying currency still has the same value, but that value is ideally really small or really small relative to the thing stamped on it.
There were, for a time, several wallets designed on varying protocols for the concept of colored coins, but over time they lost out to other competing forms of technology.
On a technical level, there are a few colored coins that exist on Bitcoin natively, like the Bisq Network’s utility token.
Colored Coins largely have lost steam once the idea of Turing-Complete blockchains rose to dominance.
There are still several projects that build on the Bitcoin stack rather than migrate, notably RGB and Omnilayer.
Blockchain Bulletin
Square is building a decentralized finance business platform
Jack Dorsey, CEO of Square, hopped on Twitter to announce that the company is building a new decentralized finance business named “TBD” that will focus on Bitcoin.
“Square is creating a new business (joining Seller, Cash App, & Tidal) focused on building an open developer platform with the sole goal of making it easy to create non-custodial, permissionless, and decentralized financial services. Our primary focus is Bitcoin. Its name is TBD,” Dorsey said.
This announcement follows the confirmation that Square is going to build a Bitcoin hardware wallet for its business earlier this month.
The project will be led by Mike Brock, the strategic development lead at Square, who helped engineer Bitcoin acceptance for Square’s Cash App investment and payments app.
“Technology has always been a story of decentralization,” said Brock. ”From the printing press to the internet to bitcoin -- technology has the power to distribute power to the masses and unleash human potential for good, and I'm convinced this is the next step.”
TikTok bans paid crypto shills from its platform
The social media giant TikTok took measures to ban paid advertisements by paid influencers and content creators who promote “branded content” related to paid ads related to cryptocurrencies, according to CoinJournal.
The news comes out of a change to the social media’s updated policy documents, which now includes a section that directly calls out cryptocurrency.
TikTok also bans influencers from promoting other financial products such as loans, credit cards, forex trading, commemorative coins, and get-rich-quick schemes.
“These policies are designed to ensure a safe and positive environment for our users,” the policy note reads.
This policy addition comes after many influencers on the platform began promoting meme-based coins and had begun encouraging young followers to get into the new class of investments.
TikTok is not alone in banning this sort of paid promotion among users. Facebook has similar policies restricting initial coin offerings and other promotions.
PayPal increases weekly purchase crypto limit to $100,000
PayPal has increased the weekly crypto purchase limit to $100,000, up from $20,000, a fivefold increase, according to CNBC. The company is also removing its previous annual limit of $50,000.
“These changes will enable our customers to have more choice and flexibility in purchasing cryptocurrency on our platform,” Jose Fernandez da Ponte, PayPal’s vice president of blockchain, crypto, and digital currencies.
The company started with these limits when it began allowing customers to purchase cryptocurrencies on its platform initially in October 2020. The company now allows users to also buy, sell, and trade crypto on its Venmo app as well.
This has led to increased mainstream participation in the cryptocurrency ecosystem. Although currently, users are only able to buy, sell, and trade crypto within PayPal’s apps, the company is currently working on allowing users to transfer their cryptocurrency out into their own third-party wallets.
Blockchain Behind the Scenes
Blockchain-based fantasy soccer NFT company Sorare to raise $532M
A report from Business Insider suggests that soccer NFT collectibles platform Sorare is on the verge of scoring the biggest-ever funding round from Japanese investment firm SoftBank.
Unnamed sources are cited by the report but when contacted Sorare had no comment on any upcoming funding -- which has been reportedly denied by Sorare’s CEO Nicolas Julia.
Participation from European venture capital firm Atomico is also expected.
Sorare was founded in 2018 and focuses on a soccer collectible trading card game that now has 142 licensed teams around the world.
If confirmed, the funding round would put Sorare on the map amid many other NFT trading card companies such as NBA Top Shot -- which features collectibles of basketball’s top moments.
In the press release announcing Sorare’s Series A funding, the company noted that users traded more than $4 million worth of cards in January alone.
Blockchain audit firm CertiK raises $37M in Series B funding
Blockchain audit firm CertiK has raised $37 million in Series B funding, co-led by Coatue Management and Shunwei Capital, according to The Block.
CertiK provides blockchain protocol and smart contract security audits in order to discover exploits so that code can be fixed before hacks or bugs can cause losses. In recent months, decentralized finance and the increase in demand for tokens have created an increased need for audits of smart contracts to prevent hacks and reduce thefts.
CertiK claims to have secured over $70 billion worth of digital assets since its launch in 2018.
The company currently has a team of 100 employees and plans to use the newfound funds to double its workforce. It also hopes to use the cash infusion to continue to innovate its products and services.
Aside from offering enterprise-ready services, it also offers a public-facing service called Skynet that allows everyday users a view of projects. This provides a security score for DeFi projects along with security alerts as they happen, allowing users to know if exploits have occurred, adding extra transparency to the entire DeFi economy.
Blockchain Deep Dive: What are Colored Coins?
A lot of Bitcoin Maximalists like to complain about the NFT craze (just as the complained about the rise of utility tokens and the rise of altcoins and the rise of tokenization) as a distraction from the core of crypto.
The intellectual core of why Bitcoiners (maximalists, rally) are against these other technologies is a little difficult to pin down. The whole “If it’s not a bitcoin, it’s a shitcoin” is a nice meme, but there seems to be a loophole for that ironclad rule for technologies built on top of or in conjunction with Bitcoin; there’s not much backlash against Tether, or Omnilayer or Lightning Network, even though these things are very clearly not Bitcoin.
But this tendency to criticize blockchain technologies built on other stacks seems to lend itself to criticizing trends themselves that could have just as easily occurred on the bitcoin stack had events in crypto unfolded slightly differently.
For instance, there was a movement very early on in the lifecycle of Bitcoin (I’ve found discussions of it dating back to around 2014-15, but the original paper on them was written in 2012 by Meni Rosenfeld.) to create something called Colored Coins.
From a high level, the concept of colored coins are exactly what they sound like. By “coloring” a Bitcoin, you turn it into a token that represents anything you want to trade, such as company stocks, gold bars, a house, or a car (very similar to how we now understand NFTs to work).
Just like the HTTP protocol turned the internet into the user-friendly, colorful environment we know today, the colored coin protocol potentially added a new layer to Bitcoin that made it useful beyond it’s core function in many of the same ways we seen Turing-Complete blockchains being used.
I covered Colored Coins with my friend Kyt Dotson at SiliconANGLE back in 2014, and many of these early use cases were already in discussion. At the time, the USPS held an open forum that was raided by members of the Bitcoin community, which suggested “acting as a brick-and-mortar location where people could exchange BTC for local currency (i.e. act as an in-person bitcoin exchange) as well as if the USPS could use “colored coins” to represent postage to increase adoption.”
A slightly more technical explanation.
So as you may have gathered, colored coins are not a specific technology, but more of a concept, and it's implemented in a number of different ways. There are a number of implementations that implement the concept of colored coins.
To “color a coin,” you take a very small amount of Bitcoin, usually in the hundreds or thousands of Satoshis and you “mark it” in some way that can be recognized by a wallet with “colored coin” functionality, so that that information can be tracked forward through transactions. The marking of the coin usually happens in a centralized database of some kind, but can also be marked on chain in a way that can be recognized by a pre-defined standard.
What’s important to understand is that the underlying currency still has the same value, but that value is really small or really small relative to the thing stamped on it. It’s important that this paradigm is maintained, because otherwise people will spend it, and then it's lost in general circulation, and clawing it back can be difficult (if not impossible).
When you take something like this, a conceptual usage of an existing technology, and you codify it into new utility, it’s called designing a protocol for usage.
There were, for a time, several wallets designed on varying protocols for the concept of colored coins, but over time they lost out to other competing forms of technology.
So what happened to Colored Coins?
Ultimately, colored coins natively on Bitcoin turned out to be an idea doomed to failure, primarily for reasons of fees and bandwidth. There are a maximum number of possible transactions that can be shoved into a block, and with the cost of securing the network (mining) and hashrates rising at a predictable rate, it was only a matter of time until the idea faded from prominence.
Jimmy Song, a noted and prominent Bitcoin Maximalist, was an early dev on the Colored Coins project, and has talked a bit about why he think it died off.
“Colored Coins was kind of a big project,” said Song. “It's the first open source project in Bitcoin that I contributed to, and I do have very fond memories of that.”
But Song believes that colored coins didn’t really totally die off, but just transformed into other things.
“Omni and Counterparty are both built on top of bitcoin, and they’re sort of like colored coins protocols,” said Song. “There were also others like ChromaWay and Colu and a bunch of others with names I don’t remember, but none of it took off in the same way Ethereum’s tokens did.”
He attributed this failure to launch largely due to Ethereum sucking the oxygen out of the room, and the general disorganization of the Colored Coin movement.
“You had multiple implementations, you had lots of different people,” said Song. “It was too many people doing too many different things; nobody could really standardize. With Ethereum, you had Vitalik saying, "Okay, well, this is what it's gonna be.”
So what’s the state of the modern Colored Coin movement?
There are a number of ways colored coins continue to live on. As mentioned above, a lot of the activity that was happening around the Bitcoin blockchain moved over to Ethereum, but the structure of that work on a technical level is so different from Colored Coins, it is only thematically and operationally similar.
On a technical level, there are a few colored coins that exist on Bitcoin natively, like the Bisq Network’s utility token. As Song said, arguably Omnilayer and the related projects are technically similar enough to colored coins. There also seems to have been significant work in and around a project called RGB. RGB is not a colored coins project, but a smart contract standard built on top of the Lightning Network. Still, it seems to have subsumed a great many number of the functions that Colored Coins were previously considered candidates for (NFTs, Tokens, etc).
Based on some of the research I updated in the course of writing this, I think it’s a fair bet to say that we should expect to see much more functionality we typically expect to see on Turing-Complete blockchains come back to the Bitcoin stack.