This year, two improvements to Bitcoin network will permit the “colored coins” implementation, Open Assets Protocol (OAP), to also scale, according to Nicolas Dorier, CTO at Metaco.

The two improvements, Segregated Witness and the new operation code OP_CHECKSEQUENCEVERIFY, will allow the Bitcoin network to scale to support more than 15 millions of users regardless of the number of transactions. The improvements will also permit the building of bi-directionnal payment channels which can be indefinitively open without parties needing to run full network nodes.

PH and LN Stack
Courtesy of Nicolas Dorier

Bi-directional payment channels are the building blocks of two new technologies, Payment Hubs and Lightning Network. Through these technologies, users can transfer bitcoin outside of the Bitcoin network in what is called off-chain transactions. These types of transactions should not be confused with on-custody transactions where users trust their bitcoins to a third party which only swap IOUs. In off-chain transactions, trust is minimized but users still transfer real bitcoins and not IOUs,and the Bitcoin network is not being used.

OffChain
Courtesy of Nicolas Dorier

As Dorier indicates, the OAP is designed to be fully compatible with bi-directionnal payment channels.Thus, digital assets or colored coins can be transferred off-chain with “quasi unlimited scalability” and cheap transaction costs while still being secured by the Bitcoin blockchain. The important limitation is that an Open Asset Payment Hub or an Open Asset Lightning Network can support only one kind of asset at the same time.

A Lightning Network is a completely trustless and decentralized way to transfer bitcoins or colored coins. However the technology is still not completely finished. Dorier notes:

…for colored coin we don’t need a completely trustless and decentralized way of transferring asset because we already have a trusted party: The issuer of the asset. We can round corners by using Payment Hubs operated by the issuer.

Payment Hubs act as an intermediary for transferring money from one point to another. People who need to exchange an issued asset in a scalable way only connect to a payment hub with a payment channel.

Dorier indicates that his mission is to convince others that the Bitcoin network is the best trustless and scalable way to transfer an issued asset. He concludes:

If the Bitcoin Blockchain is the internet, payment hubs are intranets, Bitcoin Protocol is TCP/IP and Open Asset is HTTP. I’m fully confident that the standard way of exchanging an issued asset in the future will be through Bitcoin despite not being designed for it, as much as phone lines were not designed for Internet.

OAP has been used by Overstock to launch its cryptobond, Chain to setup Nasdaq’s Linq plaform, and Fujitsu to test cross-border digital securities settlement for Mizuho.

Chain-Finance is covering OAP in its research on technologies in the Blockchain in Financial Services ecosystem.