The fossilised remains were found in the north east of China and it's believed to have lived 161 million years ago during the Jurassic Period.
The scientists were able to match the shapes of the pancake-shaped melanosomes in Caihong with the shapes of melanosomes in birds alive today.
It could be that Caihong's "rainbow" feathers were used to attract mates, just like modern peacocks use their colourful tails.
It turns out, pigment isn't necessary to determine color if you are still able to see melanosomes, the cells that contain pigment.
An worldwide team led by researchers from Shenyang Normal University in China and the University of Texas at Austin studied the dino fossil, which was discovered by a Chinese farmer in 2014.
The creature has been named Caihong juji, meaning "rainbow with the big crest" in Mandarin.
"The tail feathers are asymmetrical, but the wing feathers aren't, a freakish feature previously unknown among dinosaurs and birds", saidXing Xu from the Chinese Academy of Science, a co-author of the study.
"Hummingbirds have bright, iridescent feathers - but if you took a hummingbird feather and smashed it into tiny pieces, you'd only see black dust", Eliason said.
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The new species of dinosaur was identified from a fossil discovered by a farmer in the Hebei Province in northeastern China.
All those colors are long gone to the human eye, but because feathers owe their color to microscopic anatomy, striking evidence of the dinosaur's plumage is still there to be found. "The pigment in the feathers is black, but the shapes of the melanosomes that produce that pigment are what make the colors in hummingbird feathers that we see", explains Eliason.
Although the scientists discovered that Caihong had colored feathers, but they could exactly specify the colors of the feather. While the Caihong juji now becomes the earliest-known creature to have pennaceous feathers, it's still not a clear sign that the dinosaur could fly. Researchers compared the melanosome impressions to melanosomes found in living birds and found that they most closely resembled those in the iridescent, rainbow feathers of hummingbirds. But these feathers weren't located on its wings - they were on its tail.
Based on different shapes of the cells, palaeontologists can predict the colouring of the dinosaurs' feathers, a technique that was first developed in 2010.
"This suggests that controlling flight might have first evolved with tail feathers during some kind of aerial locomotion", he said.
But while Caihong's feathers were a first, it had other traits associated with much earlier species of dinosaurs, including the bony crest on its head. "It has a rather Velociraptor-looking low and long skull with this fully feathered, shaggy kind of plumage and a big fan tail".
Julia Clarke, a professor in the Department of Geological Sciences at the UT Jackson School of Geosciences and the study co-author, informed that the iridescent coloration is linked with sexual selection and birds used those to attract females.
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