Fungibility is a term that gets thrown around quite a lot when you’re talking about bitcoin. And for good reason.
Firstly, it’s important to discuss and understand digital privacy. Digital privacy is something that everyone on this globe should be entitled to. It’s also something that a very scarce few actually enjoys.
The governments of Europe seem to understand the need for digital privacy and informed policy- as showcased by their use of GDPR (General Data Protection Regulations) and increased user interaction and control when it comes to personal data protection. However, few people seem to be keen to take the steps necessary to protect themselves and their privacy online.
Massive money is being made as huge stores of data and analytical info are being surveyed and stored in databases around the world. These databases are used by just about everyone, from big business to political interest parties, and even government officials. Analytics have become the lifeblood of industry at the expense of anonymity.
Bitcoin and Digital Privacy
Bitcoin is not a privacy coin. While bitcoin may have some degree of fungibility, because of protocol, it’s not actually fungible at the present time.
What is Fungibility
Fungibility is the concept that if you loan me a dollar, I can pay you back with a different dollar and it won’t matter. It’s being able to exchange like for like, no exceptions or exclusions.
In bitcoin’s case, one bitcoin is indeed worth the same as any other bitcoin, but as each coin or bit of a coin, has its own unique signature that is constantly tracked in the blockchain, any bitcoin you own can be traced back through its entire history of existence. Meaning that if your coin was ever used for nefarious activity, it could be flagged and you could be tracked.
Bitcoin is often regarded as “pseudo-anonymous”, and that’s largely because of the blockchain protocol. While you may not have to enter in identifying information during a transaction, it doesn’t mean that your wallet address can’t be easily tied to your personal identification.
Especially now that more and more governments are cracking down on the anonymity in fears of an anonymous coin promoting criminality. So as governments attempt and curb these problems by requiring wallet users to supply identifying materials like driver’s licenses and social security numbers, what they’re actually doing is making it easier for any analytics to tie your wallet address with your personal information.
Why Fungibility Matters
Fungibility, anonymity, and security all walk hand in hand. Thanks to these breaches, designed to protect users, many users have become far more susceptible to hacks, scams, and… kidnapping?
There have been reports of many large holders of bitcoin being ransomed for their holdings, or physically threatened. While it’s not guaranteed, and certainly not every whale is being held captive- the problem is it does happen.
Coins are also disappearing or being sequestered as they were once used for criminal activity- whether the current owner was aware of this history or not. So keeping your stash safe means keeping it anonymous. Keeping it anonymous, means keeping bitcoin fungible.
Bitcoin’s Hash ID
Bitcoin’s hash ID is the basis of how the blockchain functions, as well as what keeps bitcoin decentralized. The cryptographic hash was implemented to keep user ID’s out of the system. That’s why a wallet address for bitcoin looks so wild, and why the hash ID of any given coin seems to be a random series of numbers and letters.
The general idea behind cryptographic hash is that you give a computer a message, and it, in turn, gives you a random string of numbers and letters (a hash) that obfuscates that original message. Messages can be as small or as large as you want, but the hash will always be the same length.
To keep bitcoin honest- the cryptographic hash system that is used is called “deterministic”. Which is that any given input value must generate the exact same output hash value. This means that if you put in the message “Hello” and you receive the hash “xyz1” you will always receive “xyz1” anytime you input “Hello”.
In terms of bitcoin, this means that anytime you have input one specific bitcoin, you get the same hash for it. So unless measures are taken to change the original form of the bitcoin that is input, the hash that identifies that coin will always be the same. Identify the hash of one particular coin, and you can follow that coins transactional journey throughout the entirety of the blockchain. Where it’s been, what it’s been used for, and who it belongs to.
Measures Being Taken
There are a few measures that are being taken now, and a few more in the works to hopefully address this problem in the future. If you’re currently looking for fungibility and anonymity, there is no more appropriate action to take than using a bitcoin mixer.
Bitcoin mixers, bitcoin tumblers, bitcoin laundries… whatever you want to call them, the idea is the same. They are a quick and readily available way to sever your coin with any history it may have. Many have high levels of user controls, guarantees, and rapid turn around.
Coin Joins are basically watered down bitcoin tumblers. These are done among members of a community that fractionally trade their coins amongst one another. Coin Joins aren’t quite as effective as bitcoin mixers as they rarely have access to “fresh coins” and the trade pools are much smaller.
While not yet in operation, ZeroLink is a vie for change in bitcoin protocol that has been proposed to help secure the fungibility of the bitcoin network. Developers present the proposal as a “wallet privacy framework coupled with Chaumain CoinJoin” that would effectively run a type of bitcoin mixer each time bitcoin is transacted.