IOTA colored coins allow ‘private, unforkable blockchains’

• IOTA colored coins are not only a way to tokenize things, but they also create a “consensus on data”.
• The technology can be used to implement “private, unforkable blockchains” or oracle solutions.

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One of the most eagerly awaited features of Chrysalis, also known as IOTA 1.5, are probably the colored coins. These are expected to be introduced with phase 2 of Chrysalis at the end of October, along with the new UTXO model, atomic transactions, reusable addresses (Ed25519) and better hardware support for all major architectures through more standard cryptography (EdDSA).

The IOTA colored coins are earmarked coins that can represent real-world assets in a tamper-proof manner. In other words, the IOTA colored coins work by assigning an existing IOTA token to an object by means of “coloring”, i.e. a marking in the hash. The IOTA token is used as a carrier, which can have a different meaning in certain contexts.

As Dan Simerman, Director of Financial Relations at the IOTA Foundation, explained in an interview with Crypto News Flash, the best use cases are in the area of tokenization of physical assets but also in the industrial sector:

Because we’re so focused on industrial use cases, I’m sure we will see plenty of examples where tokenized assets represent devices on an IOT network. Companies will probably get really creative, like tie a token raise to the output of a non-fungible token tied to a physical device. We will likely also see a lot of coupon/crediting systems on the IOTA protocol once more complex scripting capabilities come with UTXO and Smart Contracts.

IOTA colored coins create a “consensus on data”

However, as IOTA developer Hans Moog pointed out in a series of tweets, colored coins have potentially a much wider range of applications. According to Moog they are probably also “the most misunderstood upcoming feature of the IOTA protocol”. Thus, many people see colored coins only “as a competitor to ERC-20 tokens on ETH” and thus as “a way to tokenize things on IOTA”. In fact, according to Moog, they are much more important because they allow for a “consensus on data”:

By creating a single uniquely colored coin that you can spend over and over to yourself, you can create a chain of spends that is secured by consensus. By submitting data with these spends, everybody in the network will not only agree on the order of the published data but would even agree on which data to use if conflicting information where published. This is incredibly important for several use cases beyond tokenization.

Moog also explained that IOTA’s smart contracts will use the features described above to enable “private, unforkable blockchains”. Further, numerous other use cases are also conceivable, such as oracle solutions or the Unified Identity Protocol (DID):

In fact, IOTAs upcoming smart contracts will heavily use this new ability to build “private unforkable blockchains” that can only be updated by the owner of the colored coin. But smart contracts are just one example for such a use case that requires consensus on data and its order and there are many more (i.e. oracles, digital twins and the DID protocol).