Another
feature that has generated lots of excitement within the Blockchain 2.0 realm is
the ability to transfer assets using the blockchain. While bitcoins have
provided people with the ability to send money through the Internet, without the
fees of middlemen such as banks, the ability to transfer assets through the
blockchain would allow people to trade their houses, cars, or shares of stock
without using traditional middlemen such as realtors, stock brokers, or auto
salesman. This would also mean that assets would transfer immediately after
they were purchased, which would prevent incidents like this from
occurring. Colored coins and Counterparty are two technologies that I found
that seemed to be the most talked about among Bitcoin and blockchain forums.
Colored
coins function as regular Bitcoin transactions. To create a colored coin that
represents some asset, all one has to do is take a bitcoin and add metadata to this
“coin.” This added data would represent some asset such as one share of Ford or
a house in Florida.1 (Bitcoins do not actually exist because Bitcoin
is really just a ledger of inputs and outputs into somebody’s Bitcoin wallet.
When computers check to see if an account has enough bitcoins, they are just
searching for previous inputs into that account. Adding data to a bitcoin is
really adding data to some bitcoin transaction in which all parts of that
transaction are colored with this added data.2) This new coin
functions just like a regular bitcoin transaction. Here is a
link if you want to learn how to add this metadata to create a colored coin.
There
are some companies such as Overstock.com that have received SEC approval to
issue their publicly traded stock as colored coins.1 Most colored
coins are not backed by a legal contract and are based on trust that the other
party has the physical asset to back their colored coin.
From scrolling
through Reddit and Quora forums, it seems that many people are opposed to
colored coins because they believe they will cause blockchain bloat. Blockchain
bloat is classified as transactions within the Bitcoin blockchain that are not
used for currency transactions, like colored coins.3 While the added
data to Bitcoin transactions will increase the amount of information being
processed on the network, which could slow processing speeds down, miners who
process colored coin transactions are still receiving a processing fee from
these transactions.4 This view that blockchain bloat is akin to
email spam is held among some purists that believe that the Bitcoin blockchain
should be kept for only pure Bitcoin transactions.
Another
downside of using colored coins is that if one sends a colored coin to an address
that does not have colored coin capabilities, the colored coin will be lost
forever. There are specific computers within the blockchain that can understand
which bitcoin transactions are colored coins. This is how colored coin wallets
operate as well.4
In an article by Richard Gendal, he discusses how the
exchange process of colored coins works. When someone agrees to buy a colored coin
from another party, there needs to be a system in which the buyer is guaranteed
that they will receive this asset coin when they send their money. Colored coin
technology ensures this by having the seller put their asset coin into a escrow
account of sorts, which functions outside the blockchain.5 This goes
against Bitcoin ideology because there is now a third party that the individual
must put their faith in. The problem with trusting a third party is that if
this company failed while holding someone’s assets, those assets could be lost.
Counterparty,
a competing technology to colored coins, uses a bid/ask system to complete the
exchange process. A seller will make an ask price, and a buyer will make a bid
price. When these two offers are matched, the seller is required to honor the
price they said they would sell the shares at, and the buyer must honor the
price they stated they would pay for the shares. Like stock exchanges,
Counterparty locks these assets into place until the offer has expired. Coded
into the protocol is an automatic exchange system that forgoes a party outside
of the blockchain. But Richard Gendal states that the problem with this system
is that all these bid/ask prices are stored in the blockchain, meaning that
temporary transactions are stored permanently.5
Unlike Colored Coins, Counterparty uses its own currency
to digitize assets onto the blockchain. This native currency is called XCP. XCP
came into existence when individuals sent bitcoins to a Bitcoin wallet in
return for XCP. The bitcoins that were sent to this wallet were destroyed, so that
Counterparty and the creation of XCP would not be viewed as a get rich quick
scheme.12 The Counterparty website likens this to the process of
mining bitcoin as “Bitcoin
miners also destroy one resource [Energy] to get another [Bitcoins].”
While
Counterparty has its own currency, the transactions within Counterparty are
merged onto the traditional blockchain network. There is special computer code
that recognizes Counterparty transactions and establishes an independent
Counterpary ledger. Since the same nodes that mine bitcoin process Counterparty
transactions, there is a bitcoin fee for every transaction within Counterparty.
Besides the bitcoin transaction fee, it costs 0.5 XCP to create an asset token.
This 0.5 XCP that is used to create an asset token is burned (See issuance
strategy above), causing XCP to be deflationary.7
Bibliography:
1) Digiconomist. "Adding Metadata to
the Blockchain, Part 1 - Digiconomist." Digiconomist. 2015. Accessed
August 09, 2016. http://digiconomist.net/adding-metadata-blockchain-part-1.
2) "How Do Bitcoin Transactions Work?
- CoinDesk." CoinDesk.
http://www.coindesk.com/information/how-do-bitcoin-transactions-work/.
3) Wagner, Andrew. "Ensuring Network
Scalibility: How to Fight Blockchain Bloat." Bitcoin Magazine. 2014.
https://bitcoinmagazine.com/articles/how-to-ensure-network-scalibility-fighting-blockchain-bloat-1415304056.
4) "Beginners." Coloredcoins.
2015. Accessed August 03, 2016. http://coloredcoins.org/inner-page-3-1/.
5) Brown, Richard Gendal. "A
Decentralized Securities Trading and Settlement System Is Being Built Hidden in
Plain Sight." Richard Gendal Brown. 2014. Accessed August 02, 2016.
https://gendal.me/2014/06/10/a-decentralized-securities-trading-and-settlement-system-is-being-built-hidden-in-plain-sight/.
6) "Why Proof-of-Burn."
Counterparty. March 23, 2014. Accessed August 06, 2016.
http://counterparty.io/news/why-proof-of-burn/.
7) "Assets." Counterparty.
Accessed August 05, 2016. http://counterparty.io/docs/assets/.
