Introduction to ColorTrace

ColorTrace is a practical solution to the colored coin problem. Colored coins set out to create distinction among a group of fungible assets by coloring individual coins, which can be thought of as the ‘marking’ of a bill of fiat currency. Each bill is equally spendable and yet you know unique characteristics about each based on their markings, such as who held them before, where they were printed, etc.

The original Colored Coin algorithm aimed to solve this through a lossless metadata layer on top of the bitcoin ledger, but more generally in EVM would be akin to keeping an infinitely large ledger list of every address of every possible colorer and their current balance per wallet. This is intractable in both storage and compute and, as such, has never been viable to implement- leaving there few good avenues for accurate onchain value attribution.

Introducing ColorTrace.

For a practical example of ColorTrace, we’ll walk through the implementation used by USDV in their recent launch of the stablecoin.

The problem to be solved was that much of the value of existing stablecoins were driven by the market participants themselves. Groups like Uniswap, Curve, Coinbase, and Binance have moved trillions of dollars of stablecoins and given immense utility to their underlying ecosystems and yet only one of those has ever been directly rewarded for it. Circle entered into a custom agreement with Coinbase to share the yield of USDC based on Coinbase’s contributions to the success of USDC. For this Coinbase currently earns almost $1B per year. The simple solution would be to create similar deals with all other major parties, but this is where the tricky part comes in. Imagine a world today where $24B of USDC sits in circulation, with the majority in EOAs. How much yield goes to each party? For the balance sitting in Uniswap, Curve, Coinbase, and Binance it’s easy to see how much each party has contributed, but for the more than $10B+ sitting in user wallets and EOAs it’s hard to know how much each group has contributed to that.

This is where onchain value attribution comes in. ColorTrace unlocks the ability for each entity to receive pro-rata attribution for the value they have created for the underlying ecosystem. In the case of USDV, this means that each token an entity has minted into circulation will be marked with their color and be attributed to them until it is redeemed for the underlying asset — a true onchain meritocracy.

Extending beyond USDV, ColorTrace can be used for things like onchain ref links, affiliate programs, and really any use-case that allows for protocols to reward participants fairly for any value accretive action.

For a deeper look at the design of ColorTrace and the other algorithms created along the way, read Solving Fungible Token Coloring — A Nerds Version