Quote from: Peter R on April 30, 2014, 07:29:09 PM

Quote from: cbeast on April 30, 2014, 06:19:52 PM

He's talking about colored coins that only use bitcoin micro-transactions to secure them. For instance, if a bitAmero were created, it might only cost one Satoshi to generate, but be worth thousands of times more. To spend them, you would still need a Bitcoin client. What it does to the price of Bitcoin itself is anyone's guess.

I hadn't given coloured coins much thought till just now. I suppose a coloured coin is a sort of a bearer bond, kind of an IOU payable by some third-party upon demand. A regular bitcoin has a value equal to its trading value, while a coloured coin has a value equal to its bitcoin value + the market value of the implied IOU.

It seems that coloured coins could be used to create decentralized exchanges (emulate the only useful feature of ripple while avoiding all the ripple trolls Cheesy

). BitStamp, BTC-e, BTCChina, Kraken, etc could all create "coloured USD". We'd have StampBucks, BTCeBucks, etc. We could probably trade StampBucks for regular coins in a decentralized and trustless way using coinjoin¹ transactions. In fact, StampBucks could trade directly against BTCeBucks and deviations away from 1:1 may be indicative of solvency problems. This would eliminate all counter-party risk against the BTC side of your trade and this would allow you to trade with anyone in a peer-to-peer fashion. Your only risk when using the decentralized trading system is the credit worthiness of the issuers of the coloured coins.

The exchanges then simply become "gateways" in the Ripple sense. I may deposit a 0.1 BTC coloured coin at BitStamp that had an implied IOU value of $5,000 USD. The exchange would give me back a regular 0.1 BTC and then perhaps wire my personal bank account $5,000 upon my instructions.

So this is bitcoin + ripple but entirely within bitcoin and without counter-party risk against bitcoin assets (unlike ripple where bitcoin assets are IOUs).

¹We'd need a higher-level accounting system to control and track which output the "colour" of the coin follows, but upon first glance I think this is all doable.

EDIT: this might make 3rd party audits of the exchange/gateway easier too. The auditor can inspect to the blockchain to determine the number of outstanding StampBucks, for instance. All it needs to do is verify that the exchange/gateway actually has this much US dollars in reserve. I think it becomes difficult to hide the amount of IOUs issued...

Those are only a small start to what can be created by coloring coins. While they do incur counterparty risk, they also make any financial instrument and contract available online with maximum security. Colored coins can create decentralized stock exchanges, derivatives, rental agreements, leases, or almost anything you can think of.