'Colored Coins' Startup Coinprism Is Shutting Down

Coinprism, an online wallet service for "colored coins" founded in 2014, is closing its doors this weekend.

The startup said in a message on its website that it would shut down on Saturday and advised users to "withdraw your funds and export your private keys before this date."

Coinprism was arguably ahead of its time. By using the bitcoin blockchain to create tokens representing other assets, its colored coins presaged the rise of ethereum and other networks built explicitly for such use cases.

But as founder and chief executive Flavien Charlon pointed out in an email to CoinDesk, much has changed since 2014, both on the tech and regulatory fronts.

"While we have been one of the first in the area of blockchain tokens, long before ethereum was even released, the ecosystem has since shifted towards ERC-20, which is more flexible and more powerful than bitcoin-based systems," he wrote, adding:

"The unpredictability of transactions fees and confirmation times in the past couple of years have also made it hard to argue bitcoin is a good platform for this."

Stepping back, Coinprism is one of a number of companies that sought to focus on colored coins, or bitcoins bearing extra pieces of data that give them a greater degree of uniqueness by way of the protocol's scripting language.

Colored coins can serve as digitized stand-ins for real-world assets, for example, or represent things like loyalty points.

Yet as Charlon pointed out, work in this area has largely shifted to ethereum and other platforms. Many such tokens in circulation today are based on ethereum's ERC20 standard.

Charlon also said the long-term business model of Coinprism was problematic, given the growing regulatory scrutiny of the ecosystem and around crypto assets in particular that have been sold through initial coin offerings (ICOs).

He told CoinDesk:

"We didn't see a business model that would have been viable long term. Regulators are starting to pay attention to the space, and activities around blockchain assets (tokens exchanges, ICO tools and services, etc.) are likely to become heavily regulated in the next 5 years. That means some of these services will have to shut down or restrict their activities, some might go to prison, and only a small number of well capitalized companies will successfully adapt to the regulator's demands."

Reality check

Past that, Charlon said another reason Coinprism was calling it quits is because the limitations of blockchain were becoming apparent.

As he put it:

"In 99% of use cases we're seeing, blockchain is unfortunately a sub-optimal choice as a technology. Blockchains have many disadvantages in terms of speed, scalability, costs and user experience. Unless censorship resistance is a critical requirement (which it rarely is, especially in the enterprise blockchain space where participants all know each other), blockchain is rarely the right technological choice."

The blockchain's vaunted transparency, privacy and cryptographic security can all be achieved "quite easily" with a traditional system, Charlon went on to argue.

"In the end it was about intellectual honesty. I didn't like having to support projects that were trying to use blockchain for the sake of using blockchain, when I knew a centralized, more boring architecture would actually do a better job," he concluded.

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