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Blockchain Semantics Blog What are Colored Coins?

What are Colored Coins?

By Swati Keswani | April 6, 2018, 7:52 a.m. GMT

The concept of colored coins comprises methods used for representing and managing real-world assets on a Blockchain. This concept is more closely associated with the Bitcoin Blockchain although several other Blockchains that are built off Bitcoin also employ this.

Colored Coin is an integral part of the extended application set of Bitcoin, loosely called Bitcoin 2.0. Think of colored coins as tokens that represent real-world belongings. For example, they can be used to represent ownership of land, houses, vehicle jewellery, etc. 

How do you do it?

You take a token and attach to it some amount of metadata that could include a unique identification number or identity of an asset. The real-world owner of that asset is the one accorded with the control (via a private key of course) of that token on the Blockchain. This is a feature that is now built into the scripting language of Bitcoin. Let’s say a parcel of land I own is represented by a colored coin that I safely store in my hardware wallet. If I want to sell it to you, all I need to do is to send the token to your Blockchain address from my wallet once I have received the appropriate payments from you for my land parcel. You could pay me in Bitcoins or even fiat for that matter. Thus, Colored Coins are a method of issuing and transferring assets on the Blockchain.

How do you think of the value of these tokens? Look, having the token representing a parcel of land sitting on my hardware wallet is useless unless it guarantees my ability to own and control the said parcel of land in real life. Thus, the asset issuer’s promise to redeem these tokens for the goods or services is paramount to there being an intrinsic value to these tokens.

Why colored coins?

Imagine all the benefits of Blockchain and now imagine all the inefficiencies- delays, charges, frauds, identity impersonations- in most real-world asset markets like real estate. Colored coins is a key way in which Blockchain can help solve these issues. Features such as immutability, ease of transfer, robustness, and transparency will lend a certain degree of peace of mind not just to buyers and sellers but also to the regulatory authorities or the government. Such systems do not necessarily have to be devised on the Bitcoin Blockchain. Other Blockchain networks like Litecoin can solve the need just as well. 

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