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Colored Coins, what are they?

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There are projects that exploit a particular internal protocol of the Bitcoin Blockchain for the representation of material assets. The use of these particular protocols give rise to Tokens which are called Colored Coins.

As mentioned, these tokens can represent material assets, but more precisely they confer the ownership of a right of use or ownership.

Let's assume that a cinema matches each seat with a Token to see a certain movie at a certain time.

To distinguish them, since the Token represents the ticket, it must have a distinctive element, for this we can combine a color.

If I have purchased a green Token, I can go to the X show at 20:00, and only that.

Where is the utility?

The convenience is inherent in all the features of the Blockchain: transparency, advertising (in the public sense), uniqueness: my Token is mine and that's it, once used it can no longer be reused.

Of course, I can transfer it to another person before it is used.

Not only - this is the focus of the whole discussion - to originate these tokens it is not necessary to validate a block but they are metaphysical data that can be written at the beginning of the block.

The technologies used are based on two types of protocol, one of which has been superseded by the more technologically advanced one.

What is very important is that these Colored Coins can only originate from the Bitcoin Blockchain; therefore it is an exclusive prerogative of BTC.

The protocols used for the creation and transfer of these "Colored Coins" are 2

EPOBC and the Script that uses the OP_RETURN instruction.

EPOBC protocol

This protocol uses two types of transactions: genesis transactions and transfer transactions.

Genesis transactions are implemented for the generation of Colored Coins, while the transfer transactions, as the word itself says, are used for the transfer of Coins.

As with all instructions understandable by computers, the two different types of transactions are identified with two different and unique hexadecimal codes.

OP_RETURN protocol

With this protocol, the two types of transactions are always available (genesis and transfer).

The real strength that derives from the use of the OP_RETURN function lies in the possibility of storing the references to a Torrent file in the block metadata.

Obviously, everything is protected by encryption, but the real importance of this possibility lies in the fact that the size of the files where Colored Coins transactions are recorded can be unlimited.

In fact, being saved on a torrent, the file has no size limits, and does not weigh down the blockchain.

Starting from the example I gave above, the Colored Coins can also be used in a car rental company. In this case each car is paired with a "colored coin" and can only be started by confirming the possession key of the appropriate Token.

Yet, we can represent an entire building with Colored Coins, and each holder of a Coins, owns an apartment. The situation would be great, as there would be no need for a Notary to confirm the veracity of the purchase and above all the costs would be really reduced to the bone.

But…

Unfortunately, there are some negative notes in this rosy picture.

First of all is that Colored Coins, representing real material assets, are created by companies or by an individual who may be in breach of obligations.

The exact same thing that can happen in normal life without necessarily bothering the Blockchain.

Therefore, any investment must be regulated from the competent Authority with the due limitations of the issuing jurisdiction and the receiving jurisdiction.

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 11/8/2020

Digital & Hitech

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