Issuing assets with coloured coins

Posted by on Mar 6, 2015 in Code, Technical | No Comments

Today marks a milestone for Bitcoin Brisbane and one of our new clients project.  Coloured coins are a fantastic idea.

Tokens that represent assets already exist.  They are your frequent flyer points, your balance on your travel card or loyalty points at your favourite coffee shop.  All of these systems work fine today, so what’s the big deal? Why change?

There are a few problems with these systems that coloured coins can address.  These systems are generally internal and proprietary systems; thus not protocols.  Because these tokens represent value, and even a liability on the companies books, they must be secured.  This security comes at a finical cost to the company.

The second problem is interoperability.  As they are internal or proprietary systems and not protocols, its hard for these systems to exchange data.  They may not even want to.

Trading is also a generally not possible.  Recently I received an email from British Airways saying my frequent flyer points where about to expire.  I haven’t lived in the UK for over 6 years, so I have no need for them.  However, there would be someone in the UK just a few points short of a free flight that would probably buy them.

So what is the solution?  With the innovation of bitcoin, all of the above problems can be solved.  Bitcoin is a token, which represents “money”.  There is a cost to secure the network, but this is solved by miners, block rewards and fees.

One option would be to simply fork bitcoin, and create your own token.  Call it British Airways Crypto Tokens.  However, creating your own fork also requires infrastructure such as miners, pools, exchanges and enough nodes participating on the network.  Some people may have no need or desire to mine those tokens. The solution is coloured coins.

A field called OP_RETURN was added to the bitcoin protocol.  This allows arbitrary data to be stored in the bitcoin blockchain, that is secured by petahashes of computing power.  So essentially you get the security for free.

One use of that data is to store Open Asset or Coloured Coins to represent this information. An issurer can insert Open Asset information into the OP_RETURN field. That information is used to maintain asset balances, such as your Frequent Flyer points. However, because we are using the bitcoin protocol, anyone can then create services around this asset. Such as exchanges, wallets or what ever. Users could then trade assets as they see fit.