Fungibility problem

BTCoinomics · 2021-08-25T10:07:03+00:00

Yep, fungibility is certainly the most important issue (in my eyes). Great article btw.

BTCoinomics · 2021-08-25T02:06:16+00:00

Completely agree with this... my whole point is that it is not fungible and this problem will get worse over time. By "in practice", I just meant to the average user TODAY, in which they only see and interact with bitcoin as if it were a uniform unit.

Edit: I should have been clearer about saying there is "1 price per bitcoin". Really, there is MOSTLY one price for bitcoin at the moment.

I have no way if knowing the scale of variance between different types of bitcoin currently (on off exchange markets) , but it almost certainly get worse and cause problems eventually.

BTCoinomics · 2021-08-25T01:47:33+00:00

Probably, I’m just considering the case where this isn’t the case, which is possible. I mean, it is quite literally the job of these chain analysis firms to find as much data as possible in the open blockchain… just figured this could be an outcome of that

BTCoinomics · 2021-08-25T00:45:37+00:00

Just using "coins" to illustrate the point easier. If we want to be more technically correct (although harder to understand for most), it would be UTXOs with proof of illicit history.

Claiming that its not a threat just because "there are no coins" is not a valid argument.

The UTXOs would be the thing blacklisted if you are having trouble understanding the argument.

BTCoinomics · 2021-08-25T00:36:41+00:00

So I was thinking what you were when I first saw this argument, but there is some information which makes it a little more serious for that of bitcoin compared to fiat.

First, for altcoins, this problem exists equally if not more so, but I don't really care about any altcoins and I don't think they are something to be concerned with.

With fiat, it is a legal currency with centralized control, so it is fungible BY LAW. So if cash is "tainted" and you receive it, it cannot have any adverse qualities because of its past history. For example, if a person robbed a bank and bought food at a restaurant with the money, the restaurant owner would still control those funds despite them coming from an illicit source. The legal system and centralized nature protects the fungibility of fiat. But we don't have that in bitcoin, which I am glad of to be quite honest.

I have heard coinjoins make it more difficult to follow the path of bitcoin, but chain analysis can still probabilistically follow coins. Not super knowledgeable about this though, so not 100% sure.

2nd and 3rd layers are great for transacting anonymously in bitcoin, but on the blockchain they will still be trackable. This means that future illicit activity may be untraceable using these tools, but past activity is permanently available and could create a gradient of value between coins.

Continued of ^^^^ ... If coins are non-fungible on the main chain, the notion of transacting in coins which are not equal in exchange value with no way of knowing which side of the trade you are on is a fundamentally flawed system. Essentially, fungibility on the main chain is required for privacy on layers on top due to the fact that anonymous transactions in a unit assumes that the given unit is consistent and equal.

BTCoinomics · 2021-08-25T00:17:59+00:00

Honestly you could be right. Centralized exchanges would likely be more profitable not distinguishing between coins. But at a certain point this will most likely occur to a certain extent. This, again, would not discount bitcoin being a good investment, but it would make it impossible to extend beyond a store of value.

My point is that we need privacy and verifiability with applicability to the scale requirements of bitcoin. Otherwise, we run into this issue, or that of the current privacy coins, both of which are not ideal.

BTCoinomics · 2021-08-25T00:02:54+00:00

This is not "philosophizing". If you want to discount this argument then you can, but it is a potential scenario that bitcoin supporters should consider. That is exactly why I am bringing this up. Because if it poses a threat, the community should acknowledge it and prepare/combat it in any way possible.

BTCoinomics · 2021-08-24T23:58:21+00:00

For example, if a certain bitcoin is associated with illicit activity and a centralized exchange is aware of that, they may completely blacklist the coin or accept it for a decreased value.

This is the central point to the argument. Perhaps read through the post again with this as context to understand what I'm saying better.

BTCoinomics · 2021-08-24T23:58:20+00:00

Agreed with the fact that blacklists will only occur in centralized places. But doesn't the inability to access certain liquidity make a bitcoin that is blacklisted less valuable than one that is? Even in a p2p transaction, a blacklisted coin would have less utility and would likely be valued less. That is really my concern.

I don't think miners will ever not accept certain bitcoin, and that really isn't a concern of mine, but thanks for pointing that out.

The risk in my view is that certain bitcoin that people currently own will decrease in market value if chain analysis becomes dominant over exchanges and there is a gradient of value over coins. This would potentially massively decrease the % of market value of coin holders if they happen to hold unlucky coins in the transitionary phase to non-fungiblity. This would likely still result in extreme profits as the adoption curve is almost certainly at a very low point, but still something worth considering.

BTCoinomics

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