How Is Fungibility Tied To Privacy?

What do you think about the fungibility of a bitcoin?

Let’s talk about fungibility. So one Euro is one Euro is one Euro. if you receive a Euro, it doesn’t matter where it came from. It doesn’t matter if you trace it back two people before you, and it was robbed from a bank.

It’s a euro upon presentation that Euro is the same as every other Euro, and no one can say: “I’ll take this euro but I won’t take that euro. That is not simply a matter of practice, that is a matter of law, and this law was settled in the 16th century, where someone said:

Actually this Euro was stolen, and they took someone to court, some who was not the person who stole it, someone who was person who received it several transactions later, and claimed how that was stolen property.

Okay, wasn’t a euro. It was a franc, no, it was pound sterling actually. And it was taken to court and the court said: “You can’t do that.”

So money is the one type of property that cannot be stolen and then recovered by the original owner. If you steal money, you can’t say “that’s my money, give it back,” two people later. You can say it to the person who stole it, but you can’t just walk into a shop and say “I’m going to sue you because you have the money that was stolen from me.” That’s fungibility.

The reason we have fungibility in the currency is very very simple. Otherwise it wouldn’t work.

If every time you received a Euro, you had to open a list or database and say okay, “serial number 1 3 1 3 3 7 7 2 – is that a good euro or a bad euro? Is it a medium – not good but not bad Euro? Is it the kind of naughty Euro? Is it a bit cocainy? Is it a bit terroristy?

Because then it’s not one Euro. It’s 0.72 euros. It’s 0.76 euros. This one’s a bit too cocainy, so it is 0.53 euros in value, right? Oh this one was touched by Elton John, so it’s 1.6 Euros.

We don’t accept that as a model for using currency, and the reason we don’t accept it is because it wouldn’t work. If you had to check the provenance of every system of money that you receive, you couldn’t make currency work.

And the reason you couldn’t make it work is not just because you would have to track a database that had to be perfect and always updated with every coin in it, but the most important thing is that no Euro would be worth one Euro. Every Euro would be worth a different value weighted by how liquid it is, how circularable it is.

Whether you could use it, right? So if you can use it in some places and not use it other places, automatically its value drops, and now you have to keep track of what the value of one Euro is in Euro.

That’s fungibility. It’s the understanding by law, understanding by practice, and technological fact that every unit of currency is indistinguishable or is treated as indistinguishable from every other unit of currency.

In old time, same coins could actually have different values, because people would scrape some gold or silver from the coin and make it smaller, in hope that the seller will not notice how significantly smaller it is. That is why even today metal coins have notches aside – the legacy of the past.

Bitcoin is fungible-ish. Somewhat fungible.

In Bitcoin you can trace the provenance of every coin by practice, by custom. We don’t do that. We are beginning to see some companies do that, that is a problem.

If you go to Bitstamp, Coinbase, Zappo, and you say here’s my bitcoin, and they say: “Well three transactions ago, this bitcoin came from Bitfenix, so we’re gonna freeze your account because of that.” You have a problem.

That’s fungibility being destroyed right now in Bitcoin.

However at the same time, we’re seeing a lot of technologies being developed to improve fungibility. Because fungibility also has to do with privacy and Anonymity which are really important characteristics that we’re trying to strengthen, and at the same time preserve within bitcoin. That means ensuring that transactions are private, that you don’t know who is who in a transaction, that you don’t know what value is being transmitted.

There’s a number of technologies being developed for that which make bitcoin extremely private, where you can’t even see the value of the transactions being made, you can’t tell who is the Sender and who is the recipient, you can’t tell how much money is being paid and it really fixes fungibility because you simply can’t track coins from one to another.

And this is the point where most people go, but what about criminals, but what about drug dealers, but what about Terrorists? Aren’t they going to use this to do that?

Yes. They’re going to use this to do that, and if you didn’t do it in bitcoin, they’re going to use another cryptocurrency that already does that. There’s half a dozen available that already do that. And if you say you can’t use those, I’ll invent two. I’ll write one this weekend that can do that.

The bottom line is that criminals will use technology, even if it’s illegal. POW, Incredible idea!

Banning technology only effects the people who aren’t criminals. This is the wild philosophy I know.

You can’t actually ban technology, especially open-source technology because the only people who will be affected by the ban are the innocent and the idiots – the people who couldn’t figure out how to use the technology that actually allowed them to hide the sources of their money.

So fungibility is something we’re fixing in bitcoin because what it does is It helps everybody, the innocent, the well-meaning, the people who pay their taxes and want to educate their children and feed their children and buy homes and cars and operate in society… but which protect their privacy from predators, from corporations, from tyrannical governments, from oppressive governments.

We need to do privacy for them, and criminals will also use it. That’s my answer for fungibility.

About the author

Satoshi Nakamoto

We developed bitcoin.

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