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Benefits
In this section we list some of the benefits of the new implementation of the colored coins protocol proposed by Colu.
- Decentralization
- [Coherent issuance policy](#Coherent issuance policy)
- Flexibility
- Metadata on every colored transaction
- Usability
- Support for zero confirmation transactions
- Support for thin wallets
- Efficiency
- Processing many assets in one transaction
- Low Prices & minimal bloat
- [Smart Contracts](#Smart Contracts)
Until today, This protocol specifies for the first time, a clear method of creating and storing the metadata for colored coins transaction:
Up to now, smart assets that were built on the Bitcoin Blockchain, used other Blockchains to hold the metadata or stored it in a centralized DB. ColoredCoins new Rule Engine will automatically store the metadata in torrents, where they can be freely accessed and verified. There are important advantages to this approach:
- Decentralization
- Robustness: Even if our servers go down, the data is not lost
- Ownership: No one owns the data
- Provable immutability: A SHA-256 hash of the metadata is (optionally) stored on the blockchain. This allows our code to verify that the data received from the torrent file is indeed the correct data.
The new colored coins protocol implementation allows for adding asset metadata on every transaction, not only during issuance, which is very useful when not all the relevant data is present at the moment of issuance.
For example, a movie theater has 500 seats. The theater can issue 500 units of a mission-impossible-10-premiere asset representing a ticket to the premiere of the new blockbuster in town. During the buy process of a ticket on the theater's website a client selects a seating position. Each single unit of the mission-impossible-10-premiere asset sent to a client's colored coin wallet already contains the metadata of the selected seat. Another example would be adding temporary data for stocks when there some kind of an event, like restrictions, stock splits etc.
The new colored coins protocol implementation enforces a coherent issuance policy by supporting two types of Assets, locked and unlocked:
Locked assets are an asset with a fixed amount set at the moment of issuance. Even the asset issuer cannot issue more units of his own locked asset.
For example, owning a fixed percentage of a company can be represented with locked assets. For example, a Venture Capital firm is interested in investing 2.5 million dollars in a startup, provided that it receives 25% control, even in face of future dilution of shares. The company can issue a locked startup-x-to-the-moon asset with an amount of, say, 1 million units and send 25% of the issued units to the VC firm upon receiving their investment. The VC can be completely confident that no dilution of it's shares is possible.
Issuers of unlocked assets can keep issuing more units of their asset.
For example, let's return to the company from our previous example. The company can issue 750,000 units of a new unlocked asset, call it startup-x-round-B. This time each unit is redeemable for its proportion in the total amount of the new asset out of the existing 750,000 locked startup-x-to-the-moon. Initially each unit of the new asset is redeemable for exactly one unit of the old asset, but in case of a new round of funding the new asset can be diluted by issuing more units.
As another example, a coffee shop brand issues each month 1000 units of a free-cup-of-coffee asset, each redeemable for a free cup of coffee. Each month, a 1000 new units of the same asset are issued.
The new colored coins protocol implementation uses a novel encoding for [asset transfer](Transfer Encoding). This encoding allows us to process many assets together in a single transaction (in some cases up to 18 colors, or more).
The new colored coins protocol implementation achieves a high level of data compression using the way [asset transfer instructions](Transfer Encoding) and [transfer and issuance amounts](Number Encoding) are encoded. This leads to lowering the price in bitcoins needed to support each asset manipulating transaction as well as reducing blockchain bloat.
Bitcoin transaction are confirmed every 10 minutes (on average). Waiting for confirmations gives a poor user experience, especially considering current standards of responsiveness expected from web and mobile applications.
The architecture of the new colored coins protocol implementation allows us to support asset issuance and transfer in zero confirmations (and in fact even within the same transaction).
While it is true that each confirmation of a Bitcoin transaction increases our confidence in it, for many real world cases involving small amounts of money (a cup of coffee, a movie ticket, etc..) most users and merchants accept zero confirmation transactions.
The fact that the new colored coins protocol implementations lends support to manipulating assets in zero confirmation is a big boon for user experience.
In order to allow colored coins wallets to run on mobile devices, the protocol must be able to verify colored transactions without the need to run a full Bitcoin node.
Thin Bitcoin wallets, a.k.a SPV clinets are nodes in the Bitcoin network that do not keep all the blockchain data but instead keep only the block headers and verify that those connect correctly and that the difficulty is high enough so that the chain can be reasonably trusted. Full data (and Merkle branch linking to blocks) are only requested for transactions relevant to the addresses in the wallet, thus using the Merkle tree structure to prove inclusion in a block without needing the full contents of the block. In particular, the thin client does not verify transaction validity but instead deduces that validity from the inclusion in valid blocks of the longest chain.
This general type of SPV clients cannot, in principle, support the colored coins protocol. The reason is that Bitcoin miners are color blind and thus treat color transactions as standard Bitcoin transactions and ignore the entire asset meta structure that can only be parsed and understood by nodes running the colored coins software.
In particular, miners do not verify the colored aspects of transactions. Therefore, any colored coins client must verify colored transactions on its own, and to that effect must keep extra relevant data about the history of transactions.
Thus, SPV support for colored coins is subtle and the differences between color aware SPV clients depend on how much extra data must be kept, and how it is handled by the client in order to process and verify colored transactions.
There are a few possibilities:
- The worst case scenario is keeping the full history of all the transaction supported by the colored coin protocol
- Next is the option of keeping all data about the blocks that are relevant to all the assets that you happen to own in your wallet
- The least expensive option, and the one used by the new colored coin implementation is that of keeping only all data about blocks relevant to colored transactions that your wallet takes part in. The thin client will then backtrack through blocks all the way to asset issuance and keep only that data.
The new colored coins protocol implementation includes a Rule Engine that operates on rules specified in the metadata of an asset. Rules may be Open or Locked, when Open any one issuing or transferring the asset may add to the rule-set, when Locked the rule becomes immutable.