The question is, since bitcoin is fungible, how do we know the color of these coins?
Via a special coloring rules/algorithm. See here: https://bitcointalk.org/index.php?topic=114571.0
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Furthermore, if someone mixes 1 Red coin and 2 Blue coins and makes a single output of 3BTC, what is the color of the output?
Uncolored. Essentially you're scrapping your colored coins for underlying BTC in this case.
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How about paying transaction fee with colored coins? Will the miner claim it with the coinbase input?
If you pay fee with colored coin miner will get this money fresh and uncolored, so don't do that with coins more valuable than underlying BTC
There are several solutions to transaction fees with colored coins:
- don't pay fee. some transactions are eligible to be included into blockchain for free
- have a small amount of uncolored coins and pay fees with them. presumably your client software will do that automatically
- find someone to pay fee for you: you'll pay him colored coins, he will pay fee with his uncolored coins
This is relieving the debt of the color coin issuer and sounds not very ethical. If the colored coin is linked to a smart property, the property is also lost to no one. I have a new proposal, which every single satoshi has unique color:
https://bitcointalk.org/index.php?topic=117224.0