What are some of the advantages & disadvantages of the following: Colored Coins and Counterparty

Question

Seeing the release of coinprism wallet for colored coins and I'm also playing with Counterparty.

What are the main differences among these two competing decentralized asset managers?

I see that counterparty.co has their own currency XCP, but colored coins does not. Now the question is how many of these XCP coins does the developers control or the first few people that created them?

And couldn't colored coins adopt what Counterparty is currently doing and make them obsolete? If not, why?

Answer 1

Colored coins just "mark" coins with a "color". This is done by using unused data space in the Bitcoin transactions.

Counterparty on the other hand has:

• the same functionality as colored coins
• decentralized asset trading with automatic order matching
• assets that can pay distributions (dividends)
• assets can be customized (divisibility, callback, locked or issueable, total amount, description)
• peer-to-peer betting
• contracts for difference
• BTC and XCP trading
• Is fully open-source, and built to support higher level applications. (Such as SWARM, Vennd, Xbet aka countersports, etc.)
• XCP, which is a scarce (2.6 mil) and deflationary currency inside Counterparty that makes many of its features possible. It is not mineable and supply doesn't increase.
• Counterwallet, which is a client-side web wallet that provides access to most Counterparty features.

Answer 2

The main difference between these protocols is how they associate and store data about asset ownership. Colored coins at least as implemented by Coinprism, put data in the form of a transaction output that must be retained in later transactions involving the associated standard transaction outputs (spending money). If a colored coin is handled by a wallet which is not colored-coin aware, the output containing data would not be reproduced and the colored coins involved would be lost.

Counterparty takes a different approach in that all of the ownership, issuance, order, betting and other data is stored in the blockchain with no relationship between money spending bitcoin outputs and the existence of such data. Instead, each counterparty transaction adds data to the global counterparty history. If your address has 500 FOO tokens, it will continue to have those tokens until a counterparty transaction is signed by your address that sends them somewhere else.

The model Counterparty uses, makes it possible to do things like locking the issuance of a token so no more can be created in the future.

Another fundamental difference is that colored coins use the 40-bytes available after an OP return whereas Counterparty encodes its data in the form of additional multisig addresses. Each allows spent bitcoins to be reclaimed but Counterparty can store more data in this way as long as Bitcoin's fee structure and mining community allow it.

In regards to how many xcp the developers control, that is unknown but is related directly to how many bitcoins they burned during the 30-day proof-of-burn period. At that time ~2100 bitcoins were destroyed to create 2.6 million xdp.

Colored coins would basically need to restart itself under a new model to copy what Counterparty is doing including its own solution to the initial distribution of a valuable, native XDP-like token.

Answer 3

They basically let you do the same thing.

The differences are that:

• Counterparty relies on the XCP currency whereas colored coins work directly on Bitcoin, so you don't have to get price exposure or volatility risk with a new currency when you use colored coins.
• Counterparty uses a monolithic protocol where breaking changes are introduced about every 2 weeks. This makes it semi-centralized as the developers have the power to change the protocol as they see fit. For example, they can change the fees, disable features at will, change how orders are matched, etc... They even decided to add support for a "rock-paper-scissors" feature. On the other hand, colored coins (in particular open assets) are following a minimalistic approach, where it only does one thing, but does it really well. The protocol is final, so it is more robust and future-proof than counterparty.
• Colored coins is cheaper to use than counterparty as counterparty has specific fees you need to pay, in addition to the miners fees. Colored coins only has the miners fees.
• Colored coins being a thin layer on bitcoin, and working with outputs rather than addresses, can use features bitcoin offers out of the box, whereas counterparty can't: unconfirmed transactions, micropayment channels, SPV, etc...
• The customization of assets with colored coins goes well beyond what Counterparty can do (pictures, long description, full range of divisibility - not just 8 places or nothing).
• Colored coins use Proof of Authenticity to verify issuers, whereas it's very easy to create scammy assets with Counterparty.
• Counterparty is tied to an economic model because of the XCP currency. Sooner or later, a group of people unhappy with the current distribution of XCP will fork the code of Counterparty, and create a clone with a different distribution, but the same features. That will create two separate networks, and split the liquidity in two (this is basically what already happened with Mastercoin and Counterparty). This makes Counterparty a risky bet for the long term. This can't be the case with colored coins since they are independent from any economic model.