Ordinals have renewed popular interest in NFTs, but the concept of making unique digital assets on the Bitcoin blockchain has been explored a full decade ago through what was called Colored Coins. In this article, we look back at the history of the Colored Coins protocol, which predates even Ethereum, and discuss its heavy influence on Vitalik Buterin’s creation of Ethereum and how we see NFTs today.

Colored Coin Origins: Vitalik and eToro CEO Working Together

Before Vitalik worked on Ethereum, he was actively involved in a project known as Colored Coins. The goal of Colored Coins was to create immutable digital artifacts on top of Bitcoin transactions.

To understand what Colored Coins are, imagine that you are marking different beads with colors in a jar. Each colored bead represents a unique digital asset on the blockchain, allowing for the identification and transfer of distinct assets within the system. In the context of the Bitcoin blockchain, a satoshi can be inscribed with unique identifiers (i.e., the act of “coloring” the coin), turning it into a non-fungible token in the process.

Vitalik worked with eToro CEO Yoni Assia, Lior Hakim, and Meni Rosenfeld to create Colored Coins, beginning with the release of the project’s whitepaper in 2012. In an article published in 2012 that discussed the project, Yoni explained that “Colored bitcoins are ordinary bitcoins that at one point at history whee transferred in the Genesis transaction. Since all the history of the each bitcoin is saved in the blockchain, it is possible to check for each bitcoin if it is colored or not.”

Colored Coin’s Problems and Vitalik’s Alternative

Upon its launch, Colored Coins was widely discussed in the Bitcoin community as a concept that elevated a mere cryptocurrency like Bitcoin from a fungible collectible to a technology that can suppot tokenization infrastructure. Explorers and wallets were being developed in support of this concept of customized satoshis.

However, the problem with implementing Colored Coins is that the issuer of the token holds all the data anchored to the chain that has been colored. This required nodes to backtrace and verify every transaction in the history of Colored Coins in order to make a new transaction. In effect, Colored Coins can be perceived as an inefficient way of making NFTs.

Learning from the lessons of creating Colored Coins, Vitalik has since moved on to build a new blockchain called Ethereum. He noted the idea for Ethereum is “to create an alternative protocol for building decentralized applications, providing a different set of tradeoffs that we believe will be very useful for a large class of decentralized applications.” In Ethereum’s whitepaper, Vitalik referenced the problems he faced with Bitcoin and Colored Coins in this statement:

“The Bitcoin-based approach, on the other hand, has the flaw that it does not inherit the simplified payment verification features of Bitcoin. And a fully secure SPV (simplified payment verification) meta-protocol implementation would need to backward scan all the way to the beginning of the Bitcoin blockchain to determine whether or not certain transactions are valid.”

Ordinals: Lessons Learned from Colored Coins and More

Although Colored Coins never completely took off on its own, the project introduced the possibility of creating NFTs on the Bitcoin blockchain. Meanwhile, more developers continued working on the possibility of creating unique tokens on top of Bitcoin blockchain. One such innovation was the launch of Counterparty in 2014, which made it possible for network effects to take place for unique tokens being created on top of the Bitcoin blockchain. Early applications of NFT technology started to appear, like the Spells of Genesis trading cards in 2015 and Rare Pepes in 2016.

Meanwhile, Vitalik’s blockchain alternative in Ethereum, which was created in 2014, fostered the rise of smart contract solutions that drove the growth of the cryptocurrency industry and spawned the creation of thousands of tokens. NFTs such as CryptoKitties in 2017 and the many well-known digital art and gaming-related collections today currently define what NFTs are in the public eye.

Back in the Bitcoin ecosystem, it would take until January 2023 for developers to introduce a major breakthough in NFT creation on the blockchain of the world’s top cryptocurrency. Introduced by Casey Rodarmor, Ordinals would take the good parts of Colored Coins and Counterparty and push them together in a very interesting way. Ordinals improve upon the previous NFT-related projects on Bitcoin in multiple ways:

• Standalone software

The Ordinals indexer is very similar to Counterparty, with its own software running in tandem with a Bitcoin node. This federated way of creating and indexing ordinals increased efficiency and took care of the scaling problems that Colored Coins faced in terms of having to verify each historical transaction.

• More efficient way to store metadata

A Colored Coins transaction is usually stored in one of the outputs using the OP_RETURN opcode. To improve upon this existing technology, Ordinal introduced the idea of Inscriptions, or the process to connect sats with arbitrary content. Inscription content is entirely on-chain and stored in taproot script-path spend scripts. Taproot scripts have very few restrictions on their content and additionally receive the witness discount, making inscription content storage relatively economical.

• Better indexing design

Ordinals’ codebase includes an indexer that suppors fast queries related to ordinals, a process that would otherwise have been slow to build whileconsuming large amounts of space. In contrast, a Colored Coinsn indexer would need to communicate with a Bitcoin Core node to track the location of all satoshis.

The combination of these advantages makes Ordinals a major step in the creation of Bitcoin NFTs. Summing up the impact of Ordinals on the NFT conversation, Stacks developer and Hiro CEO Alex Miller said, “It’s super core to the Bitcoin ethos in that they basically took several different things and pieced them together in a way the original creators did not foresee or expect.”

What If Vitalik Continued Working on Bitcoin NFTs?

The creation of Ordinals presented the possibility of creating Bitcoin NFTs in a more efficient manner compared to its predecessor in Colored Coins. However, while the Ordinals project has emerged with significant improvements and community support, it still faces key unresolved issues related to scalability. More importantly, this innovation was created in the midst of a crypto landscape where Ethereum has become the widely preferred platform for creating and launching NFTs.

Looking back in history, it is quite interesting to see Ethereum’s creator become heavily involved in the Bitcoin origins of NFTs before ultimately moving on to create his own blockchain. It’s reasonable to think that Vitalik’s previous work on Bitcoin and Colored Coins shaped the foundations of Ethereum, which now offers a better framework for NFT creation through ease of development, stronger light-client properties, and more. In an alternate universe, Vitalik may have done more to expand the use cases of Bitcoin as NFTs and other utilities. But ultimately, his decision to break off from Bitcoin is a major factor in the rapid growth that crypto has seen in the years that have passed since he co-wrote the Colored Coins whitepaper.

About us

We are members of Artech Club, dedicated to building a leading web3 education and media club. We are committed to contributing educational and valuable stories about the blockchain ecosystem and web3 world by Artech Media. We hope can deliver value and wisdom to this fascinating area and facilitate the flow of knowledge and value.

Make yourself heard

We welcome everyone to discuss any related questions with us, leave us comments on the topics you would like us to focus on, or join us in contributing content together. We believe that asking the right questions and finding solutions are equally important. Thank you for reading our first sharing.

Follow us on Twitter and Mirror is the first step to joining the Artech Club!