ColorTrace: Fungible token coloring and attribution

Abstract: We formally define the fungible token coloring problem of attributing (coloring) fungible tokens to originating entities (minters), and present, to our knowledge, the first practical onchain algorithm to solve it. Tracking attribution of colored tokens losslessly using existing approaches such as the Colored Coins protocol is computationally intractable due to the per-wallet storage requirements growing in proportion to the number of minters. Our first contribution is an elegant solution to the single-chain token coloring problem, where colored tokens are atomically burned and minted to ensure each wallet only contains tokens of a single color. Our second contribution is an extension to this single-chain token coloring algorithm to allow safe and efficient crosschain token transfers. We present ColorTrace, an onchain algorithm to achieve globally consistent, economically feasible, fungible token coloring.