Issuing assets based on BTC has always been a hot topic. From the earliest Colored Coins in 2011 to the recently popular Ordinal protocol, the BTC community has consistently been able to come up with new players and consensus, but few have stuck around. However, Lightning Labs has unveiled ambitious plans to develop stablecoins based on Taproot Assets. Tether also announced that it would utilize RGB protocol for minting USDT on Bitcoin's layer 1.

This means that once-famous OmniLayer (formerly Mastercoin) is no longer the biggest player in the BTC ecosystem. And client side validation (CSV) assets protocols are beginning to enter everyone's vision. These protocols not only maintain the integrity of traditional Bitcoin asset protocols but also enhance scalability. However, with an array of asset protocols within the Bitcoin ecosystem, it raises pertinent questions: How do they differ from one another, and how should one navigate and seize opportunities within this landscape?

This article aims to guide readers through a comprehensive review of the various asset protocols that have emerged in the history of Bitcoin. Furthermore, it seeks to delve into the potential trajectories for the evolution of Bitcoin-based asset protocols in the foreseeable future.

Colored Coins

The Colored Coins concept was first articulated by Yoni Assia, now the CEO of eToro, in his seminal article "bitcoin 2.X (aka Colored bitcoin)" on March 27, 2012. The article posited that Bitcoin's underlying technology was as foundational and flawless as HTTP is for the internet. Therefore, the Colored Coins token protocol was designed on top of BTC.

Yoni Assia envisioned the creation of BTC 2.0 economies through this innovation, enabling any community to generate multiple currencies in this manner. Utilizing Bitcoin's underlying technology for transaction settlement and prevention of double-spending was, at the time, a pioneering idea.

Colored Coins is a protocol designed for issuing assets on the Bitcoin blockchain. It operates by "coloring" a specific fraction of bitcoins to signify other assets. These marked Bitcoins still retain their original functionality, but they also represent another asset or value. The pressing question, however, was how this idea could materialize on the Bitcoin network.

On July 3, 2014, ChromaWay made a significant stride by developing the Enhanced Colored Coins Order-based Protocol (EPOBC), which greatly simplified the creation process of colored coins for developers. This was the inaugural protocol to employ the OP_RETURN function of Bitcoin Script.

The result looked like this:

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Such an implementation is very concise, but it also brings many problems:

  1. Fungibility and minimum binding value issue By binding 1000 sats in the genesis transaction for a colored coin, the minimum unit of that colored coin becomes 1 sat. This means the asset or token can theoretically be divided into a maximum of 1000 units (but in practice it is lower to prevent dust attacks. For example, the minimum satoshi value was once set at 546 SATs, and for Ordinals, it's even higher).
  2. Validation challenges In order to determine the authenticity and ownership of a colored coin, its transaction history needs to be traced back and validated from the genesis transaction to the current UTXO. Therefore, dedicated wallets, full nodes and even scanner need to be developed.
  3. Potential miner censorship risk ColoredTransaction has distinct characteristics, such as writing metadata in the output, this brings the possibility of miner censorship.

Colored Coins are essentially an asset tracking system that uses Bitcoin's validation rules to track asset transfers. However, in order to prove any specific output (txout) represents a particular asset, you need to provide the entire chain of transfers from the origin of the asset. This means validating the validity of a transaction may require a long proof chain. To address this, proposals like OP_CHECKCOLORVERIFY were made to help validate Colored Coin transactions directly on BTC, but the proposal was not adopted.

The first ICO in crypto: Mastercoin

The concept of Mastercoin was initially proposed by J.R. Willett. In 2012, he published a whitepaper titled "The Second Bitcoin Whitepaper," which outlined the idea of creating new assets or tokens on top of the existing Bitcoin blockchain. This concept eventually came to be known as "MasterCoin," which was later renamed to Omni Layer.

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