What's coming: colored coins could allow P2P exchanges and value stability on the bitcoin network.
· Originally published on Reddit
I see very often here people asking for P2P exchanges or open source P2P servers, but since there are many bitcoin newbies I think it's valuable to share with everyone a few innovations happening right now that could help bring those things.
Colored coin is an innovation on "smart properties" the concept of taking a few of your satoshis and giving it some value that is bigger than the nominal value of bitcoins on them. Because all coins can be tracked to their origin, anyone can keep check of ownership of those coins. For example a bank can issue a bunch of promises saying "I promise I will give the owner of this satoshi an ounce of gold" and then sell those colored coins at however price other people are willing to pay.
Or, for example, Bitpay could whenever someone asks to convert their bitcoin payments in dollars could instead of just adding it to it's internal database, give the owners colored coins that were worth bitpay credits, redeemable for a fixed amount of dollars.
This is where P2P exchanges get in. Imagine that whenever you open an account and deposit money in Mt Gox, instead of that credit being stuck inside MtGox servers they gave you back in colored coins worth "MtGox Dollars". As long as you can find someone that trusts in MtGox, you can exchange those MtGox dollars for any amount of bitcoins you could agree on, just using your own bitcoin client.
If someone is willing, he or she could also accept MtGox directly for a payment for a service, or exchange it for colored coins of other denominations, like BitInstant Euros, Silk Road Pounds Or Shady Pirate Gold.
Thus along as you trust the issuer, you could never hold bitcoins, but hold any other currency you wish. You might not trust the value of bitcoin longterm but if you can still use cryptocurrency innovations to hold a diverse portfolio of gold, dollars, euros and bitcoins.
Even if you don't trust completely the issuer, you can still use the system. Say you owned $100 worth of BitFloor credits in colored coins. Even if Bitfloor is shut down by it's corporate banks, if some other entity is willing to assume it's bill – say the completelly unrelated Bitfloor Cayman Islands Inc – they can accept that credit and exchange for something else. Or you can request that any "colored coin" is worth at least an x amount of satoshis – so if Shady Pirate Gold Corporation just disappears, you still have a minimum amount of bitcoins.
If this sounds like reinventing fiat money, this is exactly what it is: a 21th century reinvention of 18th century non-governamental private banknotes. It might not be your cup of tea but those are very welcome innovations and could really be useful for everyone.
How can you help?
If you're a bitcoin client developer, build colored coin support in your client.
If you host a bitcoin related service, try seeing how you can integrate colored coins on your project
If you own an account on any exchange or fiat money conversion service, write them and ask them for colored coin support
If you are a bitcoin holder, help with bitcoin bounties by chipping in for a colored coin related bounty
If you are just a bitcoin enthusiast: look for clients and services that support colored coins, and inform others of these when you see any discussion on the matter.
If you're neither of these (what are you doing in this subreddit??): check Ripple.com an alternative cryptocurrency that tries to solve the same problems of holding multiple currencies in a very different approach