I've seen the term colored bitcoins floating around and I'd love to know more about them. The purpose of this thread is to first summarize colored coins. Discuss their uses. And also aggregate links with more information.
The history of every coin in bitcoin is part of the permanent blockchain record. Coins can be split into multiple pieces and 2 or more coins can be combined (or both at once).
If a person designates a certain coin as a "root" coins, then those coins can be tracked by software. Thus the coins are marked, i.e. coloured. There would be one "colour" for each organisation that wants to mark coins.
If someone transfers a coloured coin to someone else, then that person now controls the coloured coin and can send it on to someone else.
For example, a company could designate a 100,000 satoshi coin as the shares in the company. You could buy and sell shares in that company by transferring the coins. If you have a 1000 satoshi coin that could be traced back to the root coin, then you would own 1% of the company.
This means that you can use most of the standard functions of the bitcoin system to trade in non-bitcoins. The coloured coins would have reasonably low value compared to what they represent. The extra value would depend on what was backing the root coin.
Care is needed to make sure that you don't accidently mix coins of a different colour. If you spend a red coin and a blue coin and only had 1 output address, the output is neither red or blue. There are rules for making sure you have enough inputs and outputs so that inputs and outputs always have a well defined colour.
If you sent 5 red, 10 red and 12 blue and had outputs of value 15 and 12, then that would be accepted as a 15 value red output and a 12 value blue outputs.