bitcoin 2.X (aka Colored Bitcoin) – initial specs

eToro

We believe that a new economic framework requires a new form of digital currency (aka the good dollar). The bitcoin protocol is perfect as the underlying technology just as HTTP is the foundation of the web.

Below is the initial spec to build the new framework on top of the Bitcoin network, thus creating an economy of bitcoin 2.x, multiple currencies easily created by any community and deriving its value from the community and protected and secured by all communities.

About Bitcoin

Bitcoin P2P infrastructure for clearing payments has been established as secure, reliable and free way to transfer value between accounts. While the Bitcoin network (protocol) itself is secure and stable, service providers for the Bitcoin Eco-system has been down multiple times, causing damage to Bitcoin reputation and exchange value.
The correlation between the underling technology and the value of the currency is causing people to assume that the technology is not trustworthy and that the value is too volatile.

Overview

Bitcoin 2.x is an idea to separate the bitcoin network (technology) from the value of a currency (community) using the bitcoin network to clear transaction and avoid double spending.
bitcoin  2.x aims to provide an easy way to create different currencies on top of the bitcoin network

Concept

Genesis transaction

The idea is to use a Genesis transaction to create a new currency

The genesis transaction has a certain amount of bitcoin that was transferd in it. this BTC amount will be used to create all the value in the currency.
The currency ancestor is the address the amount was transferred to and will control the initial distribution of the currency

Thin “currency clients” are then created with a special method for calculating balance.

first we find all the transaction that their last address is the client address. we take each of these transaction and crawl the block chain to see if this transaction was generated from the genesis transaction.
if so we multiply the transaction amount with the initial split* and we get the user balance

* initial split: is the decision to split 0.00001BTC = 1Currency (example)

the distribution of this “currency client” than creates a community around a specific Genesis transaction.  this creates a separation of those “Colored bitcoins” from all other bitcoin and there for the mini-eco-system can have a floating value on top of the bitcoin network utilizing its infrastructure

Colored Bitcoins
Colored bitcoins are ordinary bitcoins that at one point at history where transferred in the Genesis transaction.
since all the history of the each bitcoin is save in the block chain it is possible to check for each bitcoin if he is colored or not.
(colored meas that this bitcoin in one of his previous transaction has been part of the Genesis transaction)

  1. now because these colored bitcoin are also regular bitcoin they can be transferred using the bitcoin network from address to address.
  2. because we have a method to identify the colored bitcoins they can be equivalent to rare coins and there for their value can very from the bitcoin value according to the demand of those rare coins



Initial Distribution

At the creation of the currency a single owner has the whole value of that currency.
At the end of the distribution all the value is transferred from the ancestor to the clients.
The process between the two stages is the distribution.
after the initial distribution is finish the ancestor has no centralized role in the economy and the clients can manage their economy in any way they see fit.
in the initial distribution stage the currency can gain its trust. and create the structure of the value distribution across the economy

Distribution  algorithm
the distribution algorithm is the method by which the ancestor chooses to give away his currency to the entities in his economy

a simple distribution algorithm is for example to create a currency for a group of people you know
and distribute it evenly. Than each one of the people installs the client. than the client sends the owner his address.
Than the owner send him (total genesis amount/number of people)BTC from the genesis transaction.
after all the people got their part the ancestor is left with no coins and the coins are distributed evenly between the clients

in a more real use case the owner won’t know the amount of accounts the currency will have.
In addition the owner will not necessarily know all the people he wants to participate in his economy. in which case he can implement some invitation system in which each new potential client is able to invite more clients to the system.
This can go a long way with social network authentication, social graph crawling, vouching systems, sms verification, unique ips, physical identification and so forth.
This methods could be used to minimize fraud in the initial distribution.

another possibility is that the each invitation will cost the new user a certain about of coins to create incentive to bring people that won’t try to manipulate the eco-system.


*Credit goes to Lior Hakim for writing this spec
Bitcoiners, would appreciate your thoughts and help set it up :)

About Yoni Assia

Founder and CEO of Etoro.com