A much shorter conversation would probably be what doesn't degrade case color. Case colors just aren't that durable. The surface hardening was the important benefit, the color was just an added bonus and isn't particularly attractive as it ages. Increasing the carbon on the surface allowed it to harden the outer millimeter or two. I believe the colors are just a semi-translucent layer of carbon that was surplus to what the steel could absorb. The color we see is light waves bouncing off the surface. A prism separates light waves and this surface layer from the hardening process may do the same. Light waves are very short, ranging from around 400-700 nanometers which may be the approximate thickness of the carbon on the surface. Like any reflective surface, once it's degraded it doesn't look the same. I'm not sure if any of this is accurate and am certainly open to correction.
Mostly correct -- the colors are a very thin layer of iron oxides. "Rust" has several colors depending upon how it is formed, and the exact chemistry involved. It's fairly impervious to solvents, but handling and cleaning will wear it off.