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Overview
Bitcoin is the forerunner and by far the most widely used cryptocurrency. In what follows we will use the customary notation of referring to the Bitcoin network/protocol as Bitcoin (Capitalized) and to the units of currency flowing in the Bitcoin network as bitcoins (lowercase). Sometimes we will be using smaller units called satoshis. There are 100 million satoshis in one bitcoin.
By design, bitcoins have several highly desired technical attributes
- Fixed supply
- Non-counterfeitable
- Divisible
- Easily transportable
On top of that, Bitcoin is decentralized. Decentralization adds an extra layer of robustness because the Bitcoin network has no single point of failure.
Any and all Bitcoin transactions are publicly available on the a ledger a.k.a “The Blockchain”, and are immutable [1].
While originally designed to be a currency, Bitcoin supports a limited scripting language that can be used to store metadata on the blockchain. The term “Colored Coins” refers to a protocol that uses the blockchain as a public ledger for asset manipulation.
The basic trick is to create digital tokens by associating metadata with a bitcoin transaction that can unambiguously represent the creation or transfer of an asset (hence “coloring the (bit)coins”).
The value of such digital assets is tied to a real-world promise by the asset issuers that they are willing to redeem those digital tokens for something of value in the real world.
The advantage given by using the blockchain as the backbone for such asset manipulation is that one can rely on the blockchain’s transparency, immutability, ease of transfer and non-counterfeitability to transfer and trade such digital tokens with unprecedented security and ease.
Over the past few years we have seen the appearance of several colored coins implementations.
Colored Coins are in fact a part of a larger theme in cryptocurrency development dubbed Bitcoin 2.0