FAQ

What is ColoredCoins?
ColoredCoins is an open source community dedicated to build a universal framework for digital currencies on top of a Blockchain.
The Colored Coins protocol and implementation are built on top of the Bitcoin Blockchain and provide an easy way for issuers to issue digital currencies on the biggest and most secure blockchain in the world – Bitcoin.
ColoredCoins vision is to provide blockchain agnostic tools for issuers and provide the same functionality on other successful blockchains and also facilitate cross-blockchain functionality as part of being a “layer-2” solution for digital currency issuers.

What is the ColoredCoins protocol?
ColoredCoins is a protocol built on top of Bitcoin, which facilitates the creation and transfer of Digital Assets on the Bitcoin Blockchain, which doesn’t natively supports it. Essentially it’s a set of rules that all participants follow, called consensus rules, which allow all participants to agree on who owns which assets at any given time.You can learn more about the specifics of these consensus rules in the Protocol Specs.

What are Digital Assets?
Digital Assets are unique units of value that cannot be counterfeited, and can be moved freely by their users without asking the issuer for permission. Anyone can use our open source tools to validate their genuinity, and control these digital assets is strictly with the user who’s holding them. The issuer has no way of moving a user’s funds without that user’s approval. The validity of all transaction can be verified by all participants in the network, by using a ColoredCoins Core node.
The ColoredCoins protocol is focused on allowing the creation of Digital Currencies, backed by physical cash, held by the issuer. They are issued and transferred by adding special metadata to Bitcoin transactions, according to the protocol specs. After issuance, these assets can be transacted freely, just like you could transact with bitcoin – without requiring any involvement from the issuer.

What is ColoredCoins Core?
ColoredCoins Core is a “full node” software implementing the ColoredCoins protocol. It is used on top of Bitcoin Core, Bitcoin’s reference implementation, and parses the data embedded in Bitcoin transactions by other ColoredCoins nodes, in order to securely recreate the current state of all ColoredCoins assets.

What is the ColoredCoins SDK?
The SDK can be embedded into apps built by any developer, and features a simple interface for creating ColoredCoins transactions. In order to fetch the current state of the chain, it must be configured to communicate with a ColoredCoins Core node. This could be a node on the local machine, or remotely. You can use our own Community Hosted node to start, but for increased security we recommend using a node in your control.

What is the ColoredCoins Dashboard?
The Dashboard is a web app (built using our own SDK) that allows anyone to issue, transfer and manage Digital Assets with a slick and simple UI. The Dashboard is open source. You can try out our Community Hosted dashboard to start, but we recommend migrating to a dashboard in your control as soon as possible.

Is there a quick way to install all these tools together?
Yes, this guide (link to guide in docs) will show you how to use Docker to easily setup all these components together.

Why choose ColoredCoins?
When compared to centralized “digital currency” solutions, ColoredCoins puts power in the users’ hands, and enforces transparency. This should reduce costs for issuers, by simplifying the facilitation of trust with users, and by allowing regulators to easily gain insight into the usage of the currency.

When compared to other decentralized “blockchain” solution, ColoredCoins is the most popular protocol built on top of the most proven blockchain around – Bitcoin. ColoredCoins is able to leverage Bitcoin’s best practices and security and tap into the biggest and the most matured eco-system for digital assets in the world to provide all the tools a currency requires – wallets, hardware, exchanges, API’s and etc…- in a way not other chain can.

How does ColoredCoins compare to OpenAssets?
There’s another protocol similar to ColoredCoins that is built on top of Bitcoin, called OpenAssets.
The main advantages for ColoredCoins over OpenAssets include the wide array of open-source tools like the ColoredCoins Dashboard and SDK that can help anyone to quickly get started with managing assets using ColoredCoins. ColoredCoins protocol also includes a robust, decentralized, and low-on-resources approach for adding metadata to assets and transactions. You can read more about it in the protocol specs.
We encourage you to look into both protocols and pick the one that best fits your needs.

What’s a private seed?
In Bitcoin and in other Blockchain-based systems, users are identified by their unique keys, generated on their own devices. Each key has a public part and a private part. The public part of a key is your “address”, which is how other users will identify you. The private key is to be kept secret, and is used to authorize actions on assets in your control.
A private seed is a unique random number, generated on a user’s device, from which mand private keys (and matching public keys) can be derived. You can think of it as your “master key”. It’s represented in one of 2 ways:

  • Mnemonic – the preferred way, a random list of words
  • WIF – a random string of numbers and letters, used for backwards compatibility.

Keep it secret and safe! If you lose access to the seed, or if anyone else gains access to it, you will lose access to your funds.

What does it mean to “issue” a Digital Asset?
Anyone can create a new kind of asset, and issue any number of units of that asset. If the issued asset is a digital currency, it’s the issuer job to back it with real world physical cash or another financial asset. It’s also the issuer’s job to protect the private key used to issue that asset.

What is the cost for a ColoredCoins transaction?
Every transaction using the protocol, is actually a Bitcoin transaction. Transactions carry bitcoin-denominated fees that are paid to Bitcoin miners. The exact fees are determined by market forces, and the ColoredCoins tools will help you figure out the correct amount to pay. You must have bitcoins available in order to fund the transactions you create.
When building your apps, you can use Bitcoin’s “testnet”, which is a test network which uses test bitcoins, that are “free” and have no real-world value, to fund transactions.

Who can see my data?
Most data in blockchains like Bitcoin is transparent to all participants. This includes things like amounts, timestamps, and so on. Transactions are pseudonymous, meaning addresses aren’t strictly attached to a known public identity, but a motivated attacker could try to connect the dots and learn more about transactions. Improving the privacy in blockchains is an ongoing research for us at ColoredCoins, and for the industry as a whole.

Why are you using the Bitcoin blockchain?
Bitcoin is currently the only successful implementation of blockchain technology, and no other network comes close to offer the same security properties. Using bitcoin allows us to build on top of the best practices and industry standards that were built and improved upon over the years.
However, in the future we will be able to apply many of the concepts and tools of ColoredCoins for other chains as needed.

How is the project being managed and maintained?
ColoredCoins is a community project. We welcome contributions! Please check out our contribution guide (LINK) and join us at the ColoredCoins Slack team!

How will this work with a private blockchain?
ColoredCoins protocol provides a way to create digital currencies on the Bitcoin blockchain. In the process of creating the functionality that allows that on the Bitcoin blockchain we realized that a lot of the concepts are blockchain agnostic. The logic behind asset issuance, ownership tracking, cross-blockchain transactions and etc is universal for it’s most part. Of course this issue is a major part of our research but we are already interoperable with Multichain (multichain.com) with some effort and allow running our infrastructure on top it’s private blockchain solution. ColoredCoins also joined Hyperledger project (hyperledger.org)to research interoperability with enterprise oriented blockchains.

I issued a currency- Now what?
Congratulations! You can use our various tools to do things like send your currency to someone else with the SDK or the Dashboard, and analyze the currency’s distribution with the Block Explorer. Find more information in our Getting Started guide (click here)!