Fungible simply means “interchangeable”, legality has nothing to do with it [0] (especially, it seems to me, in regards to a system that doesn’t seem explicitly subject to legal constraints like bitcoin.)

One bitcoin is, in theory, interchangeable with any other without a loss of value. However, bitcoins with a dubious history of transactions can, and apparently are, being refused in some circumstances. Clearly some bitcoins have less utility, less value, than others.

The traceability of a bitcoin leads to it possibly being rejected in some transactions, not because ant given bitcoin is (again, in theory) no different than any other, but because one bitcoin’s history may be tainted.

The “blood diamond” analogy seems appropriate - such a diamond remains a diamond, and is technically no different from a comparable “clean” diamond, but reputable dealers and customers will avoid them. Effectively rendering these diamonds of less value than others.

In theory bitcoins are fungible. In practice they are not.

[0] https://www.merriam-webster.com/dictionary/fungible

So when you accept BTC, how do you know if you'll be able to pass it on again? Is there a blood coin list?

EDITED TO ADD:

Here's something interesting about tainted coins. The commenter took out a Blockfi loan on coins he's had since 2020. The person he bought them from used BISQ. Then Blockfi recalled the loan immediately.

https://old.reddit.com/r/CryptoCurrency/comments/skxpr7/bloc...

You hire a company like Chainalysis to do risk analysis for you.

yes because thats clearly how money should work.

Banks have rules to deal with money laundering indeed.

That's how diamonds and gold work. You wouldn't accept blood diamonds for example, it would reflect poorly on you.

You wouldn't accept diamonds, it would reflect poorly on you.

They are mostly a non-scarce fleecing operation backed by a marketing gimmick.

Diamonds are scarce. Manufactured scarcity still results in actual scarcity.

Let's say you happened to make a transaction with someone who you didn't know to be a criminal. He buys a nice ring for the girl on his arm and gives you $1K in marked bills (which are bills that have serial numbers recorded by some agency).

Now in that case, he's flashing around cash, which is not that uncommon say in certain locales (Las Vegas comes to mind). In that case, the cash you received doesn't lose any value. Though you may get questioned by the police.

Now ink stained bills and bills glued to each other should be rejected since they were likely from a bank or atm heist. But that makes it easy to spot.

Isn't that what BTC was trying to compete with?

I wouldn't accept diamonds at all, as they're not money like gold is (and definitely not fungible in either sense of the arguments).

"Diamonds are bullshit" and people only think they have value because of a De Beers marketing campaign in the early 1900s.

https://priceonomics.com/post/45768546804/diamonds-are-bulls...

Plus a ton of other discussion:

https://www.google.com/search?q=diamonds%20are%20bullshit

Well diamonds are fungible for any definition of the word you may choose and for the vast majority of the stones. Some of them are unique in that they're very large, very pure, have been worked on so much they are identifiable, have an IAG number engraved, etc. but the vast, vast majority of diamonds you can trade at any diamond shop in a very fungible manner, no questions asked.

Interesting. If I go to the website:

https://www.chainalysis.com/

Their big tag line is "Building Trust in the Blockchain". I thought BTC was above needing to do that.

Exactly. Any crypto system that doesn't have the ability to break the chain of custody of 'tainted' coins is doomed to irrelevancy. Think about it - on day 0 no coins are tainted. Let's say on week 1 5% of coins are tainted and effectively frozen, leaving 90% of coins in circulation. The illegal activity doesn't stop - it just taints more coins. Maybe week 2 5% of those remaining get tainted, week 3 5% of the remaining after that, etc... Eventually you asymptotically approach absolute uselessness. I think Monero and Ethereum have both thought about this and i'm sure others exist out there too. BTC is stuck in a development graveyard and can't think about things like this- it seems doomed to irrelevancy.

Aren’t the tainted coins cleaned by government seizure and subsequent auction? If you have a tainting and cleaning mechanism then all tainted is not inevitable.

The tainted coins are the same as lost coins. There's already a solution baked into bitcoin for that (divisibility).

The theoretical maximum number of satoshis in existence per person on earth is just short of 266,000. That's assuming all 21m coins are minted and that none are lost. I feel like this is already quite a small number if you want to represent a global currency, so can the system really afford to continuously burn away BTC at a relatively large rate?

You can always move the decimal point. It's all just software, it's all mutable if you can get enough people to agree.

(Not meaning to come off as a fanboy, I think bitcoin==beaniebabies. I just don't think the "bad coins" problem is actually a problem, even if you consider Gresham's Law. Physical currencies have been through similar things and survived).

Historically, BTC has not been willing to make changes like this. The community is culturally (and I would argue pathologically) opposed to even minor changes, which I think would be even more true when more divisibility would lead to potentially lowering the value of existing user's token by reducing scarcity. I'm not convinced such a change would be feasible given those constraints and if it's not the maximum divisibility of BTC is quite low assuming it becomes some kind of world currency - if I can only have ~250k 'units' of currency the smallest amount of 'money' I can spend becomes quite large.

It puts a hard cap on income inequality!

That’s not how it works. Income inequality is not just the “number” of coins but what it’s worth as opposed to something - with inequality it becomes everyday goods and services. The cost of goods can easily continue to worsen inequality. There’s only one real world soft limit - a revolution that resets the clock.

Once all coins are tainted (or even some large %) then none of them are tainted.

"All $ bills have cocaine on them, hence no one cares if your bills have cocaine on them" [1]

[1] yeah, I get this is likely an urban myth, but the analogy holds even if it is a myth..

That assumes taint can never get diluted.

> Commentators are confusing fungibility and traceability. They are very different concepts.

No, I think the commentators and the author of the article are making a valid point that you’re missing: They may be fungible if you ignore everything else about the Bitcoin ecosystem and focus only on the blockchain ledger, but you can’t divorce the Bitcoin balances from their history. As regulations mount and exchanges become more active in recovering stolen coins, the practical reality of Bitcoin will mean that they’re not entirely fungible depending on the history.

I think many people in the comments are in such a rush to declare Bitcoin as fungible that they’re missing the point of the article.

This is something I would worry about. If a particular piece of bitcoin becomes tainted because it's associated with dirty money (or whatever), and I receive it as a payment, will it become harder to spend or of less value? What if it goes onto some sort of blacklist?

To use the recent parlance, can my money be "cancelled" by popular opinion?

Yes, and this popular opinion is one of the exchanges and online wallets. Not necessarily the miners or nodes running the network.

Yes, popular opinion can cancel you via forking the blockchain or software.

which kind of goes against the very philosophy of bitcoins in the first place, where there should not be centralized control of the currency. A blacklist of coins is a defacto centralized control.

On the other hand, the lack of centralized control means that each person can have their own philosophy of bitcoins. Literally every individual can have their own belief about what bitcoins are useful for. The only limitation is whether a particular philosophy makes sense in light of how bitcoins work and behave at any given moment.

The same could be said about the dollar. If I steal a large amount of money from a bank, or sell a bunch of drugs, I can't spend that money without laundering it first, but that has nothing to do with the fungibility of the dollar. The "practical reality" is irrelevant because tracibility is orthogonal to fungibility. They're different properties.

Unlaundered, ill gotten gains will be accepted as legal tender. The money itself will not lose its value because you've tainted it with sin--you'll just likely be caught if you spend too much of it at once.

You might notice the person at the 711 register isn't scanning bills to check their legitimacy.

In reality, few things are perfectly binary, there’s a spectrum between perfectly fungible and perfectly nonfungible.

And yes, a million dollars of stolen cash is worth strictly less than a million dollars because (leaving ethics aside) it takes a nontrivial amount of time, money and risk to launder it before you can safely spend it.

Fungibility must be perfectly binary because it's an intrinsic property of the currency. And it's essential that it be treated as such because there are huge implications to whether or not a currency has that property.

A million dollars of stolen cash is worth strictly less than a million dollars only because those bills cannot be exchanged for another million dollars. It does not mean that the dollars those bills represent is worth strictly less than a million dollars.

Think about it this way. To launder your million bucks, you pay someone $10k. Does that mean the million is worth less? No- because the $10k you paid someone to launder it is still worth $10k! It's just not yours!

No there isn't a spectrum. A stolen million is still worth a million. If a thief is laundering the money, he's choosing to spend it--no dollar just loses value all of a sudden.

You may be using cash once used to buy drugs or hire an assassin, but it doesn't get tainted and diminish your ability to spend it.

Restricted Bitcoin literally cant be used for transactions making the Bitcoin itself worthless even if it wasn't you who committed the crime that got it restricted. That doesn't happen with cash.

> The money itself will not lose its value because you've tainted it with sin--you'll just likely be caught if you spend too much of it at once.

So how is this different from, say, using a tumbler? The crux of TFA's argument is that Bitcoin is tainted with sin.

>Fungibility means that a given asset is legally identical to all other instances of the same thing.

There are a number of bitcoin addresses that the United States has blacklisted. If you interact with them (including receiving bitcoin that once passed through those wallets at any point in the past) those assets are subject to seizure.

https://home.treasury.gov/policy-issues/financial-sanctions/...

Legally identical is a nonsense metric: if I own bitcoin I cannot sell because it has a tainted history then it is obviously not equivalent and not as valuable as bitcoin which can be.

The fact that no broker cares about which instance of the stock or dollar you own but can track it anyways proves that those things are effectively fungible. In Bitcoin it is obviously not true that exchanges don’t care in the same way - plainly obvious from the source material you are responding to.

When different bitcoin have different value by virtue of not being exchangeable at the largest liquidity pools, and your definition of fungible fails to capture that fact, you have the wrong definition.

Brokers do care about the specific stocks or dollars. There are a lot of anti money laundering laws and regulations that force due diligence in this respect. It seems like similar mechanisms are appearing in the crypto world as well.

The same can be true of dollar bills. A bag full of dollar bills from a drug deal is fungible with a bag full of dollars from your salary. But you can be arrested for the former, and not the latter. Dollars are fungible with dollars ($1+$1=2$), NFTs are not fungible with NFTs (1NFT+1NFT=1NFT+1NFT).

You can clone an NFT by forking the blockchain it's on, or making another one with the same data. People who respect NFT ownership won't be able to tell without research which one is real.

If I make a counterfeit Picasso and sell it to someone who doesn't know any better, that doesn't mean the original is now fungible, it just means I duped someone.

Etherium _is_ a fork already; Etherium Classic is the original. So it's like collecting real life objects where the newer version is more valuable.

Ha, well, I'd argue that the generalized version of what I said applies as well. Forking a currency changes nothing about the properties of the original currency because we're no longer talking about the original currency. That is not to say there aren't real world implications of that happening, but that's nothing to do with the intrinsic properties of a currency.

Ethereum classic had 9 hard forks. How is that the original chain?

A NFT isn't art or currency. At most, it's a record of ownership. When two ownership records exists, the value of the original drop steeply when the copy is accepted widely-enough.

I don't disagree, but I think that's still orthogonal to the discussion and, considering NFTs are non-fungible by definition, it's moot anyway.

But let's pretend we're talking about cryptocurrency, which does claim to be fungible. Bitcoin forked and so now you have BTC and BCH. One is more accepted, and the other lost value. But regardless of the relationship between the two, each individual currency is still fungible because you can still exchange 1 BTC for 1 BTC. Fungibility is an intrinsic property of a single currency, it says nothing about it's relationship to other currencies or it's place in the economy.

Or just screenshot it.

You basically just explained why dollar bills are not perfectly fungible either. Nothing is truly mathematically fungible in the real world.

I feel you're deliberately being pedantic. There's nothing legally dictating 1 pound of flour = any other 1 pound, but it is fungible, by the definition of them being indistinguishable.

1 NFT isn't the same as any other NFT. They're deliberately non-fungible.

Specific Bitcoin outputs have histories associated with them. While you dismiss this as related to traceability (which is also true), it still stands that one output with a favorable history is preferable to an output that was known to be mined in North Korea.

For these differences, as evidenced by the specific exchange action examples in the linked article, show that different output histories allow companies like Chainalysis, CipherTrace, TRM Labs, and Elliptic to add specific risk scores to outputs. Those with lower risk scores are worth more than those with higher risk scores. This is a breakdown in fungibility.

If 10% of $20 bills (by serial number) were not considered legal tender, then $20 bills would no longer be fungible.

The ramifications are the important part. If 10% of bills are essentially fake money, you have to verify every bill you handle, adding significant friction.

More than 20 years ago when I worked a retail job in college we did verify every bill >= $20. It was easy: a simple marker revealed if it was counterfeit, along with something that revealed watermarks etc. It wasn't much friction, it took a few seconds.

Fungibility has nothing to do with dollar bills and everything to do with dollars. You can't make a withdrawal from a bank after two years and ask for the same dollar bills back that you deposited.

but it does have to do with the dollar bills. The discussion centers on the technology as a currency and money. I think these things have bee separated in our general understanding of things, but in bitcoin they are melded into one. You control the outputs on the blockchain. The dollar bills on the blockchain. Sure, if you deposit your bitcoin at an exchange then yeah, you will get different bitcoin back, but the discussion isn't about that. It's about how the blockchain system works. And the way it works is that when you use bitcoin, and you own bitcoin, you do sorta ask for the same dollar bills back that you deposited. You don't really "deposit" them on the blockchain, but you kinda do. You deposit proof of ownership of a unit of account. Bitcoin calls it an output, a monero dev has coined the term e-note (or adopted the term i dunno) to try and better describe what it is.

maybe you know all this i dunno. if you do, slap me around a bit. if you don't, i hope this makes sense.

Haha well, no slapping necessary. I like to think I'm right but would love to be proven wrong.

It's important to distinguish between fungibility and tracibility because fungibility is an extremely important property for a currency to have, and without it it's all but useless.

Theoretically, if the US were to go to an all digital dollar, we would functionally have a blockchain (assuming all these transactions were reported centrally somewhere). This would not have changed the fungibility of the dollar, because the dollars you get in your paycheck are still the same as the dollars you get back as change or the dollars someone Venmos you for cocaine. Once they're in your bank account, there's no way to separate out which dollars came from which source. Now, you could pay someone to give you money with a "clean" history, but you're not paying more money for those dollars, you're paying someone for the service of giving you dollars with a clean history.

> Fungibility means that a given asset is legally identical to all other instances of the same thing.

No, it means it is practically identical (that is, for any potential exchange partner in the marketplace, any unit of the thing is indistinguishable in trade from any other unit.) Being legally identical is a powerful aspect of practical equivalence for anything primarily exchanged in legal markets, but not the whole of it, and pretty much irrelevant to trade in illegal markets (e.g., items which are legally in the same category of contraband and undifferentiated in law may be very distinguishable and different to the people trading them.)

What about "tainted" bitcoins? Those [0] would take some effort to "wash".

Because of serial numbering some dollar bills can be worth more than others; certainly there seems to be a 'market' for that.[1]

So, in the end it is more like: every "satoshi" is intended to be fungible but through its transparent chain can offer additional information which can be used to discriminate against ... or who knows maybe in the future bitcoins from some special address or with a special tx history are worth more ...

[0]https://whale-alert.io/transaction/bitcoin/77ad70fadfbbad519...

[1]https://rarest.org/stuff/dollar-bills

No, it's not. It depends on who's asking. If I see that the satoshis you're trying to give to me were part of (e.g.) a drug transaction in the past, I might not feel comfortable accepting your money. The problem with Bitcoin is that I can do that taint analysis, because the entire transaction graph is public.

I was confused by the use of fungibility too. But if bitcoins can be traced they're no longer the same as every other Bitcoin. They're history makes them unique. Therefore they might be valued differently or because workers based on their history.

For example, if someone robs a bank and they know the bank knows every serial number of every dollar bill they got then those dollars aren't worth as much as other dollars since there is risk with using them. So those dollars are non fungible with "clean" dollars. You're probably going to want then covered to clean dollars ASAP and it won't be a 1 to 1 exchange. Therefore it's the traceability that makes them non-fungible.

As well as bitcoin not being practically fungible as others have pointed out, traceability is actually a big part of that.

Bills are not traceable like bitcoin is. They have a serial number so they are identifiable, but only at the point you receive it so not very traceable and in practice impractical to identify in most cases. You can bet if the feds could feasibly blacklist bills that were stolen from a bank or held by a cartel or terrorist group, they would. But they can't. This non-traceability and difficulty to identify is what underpins their fungibility. Bitcoin's traceability is what causes its non-fungibility.

Bills are not traceable like bitcoin is.

Fungibility is a practical concept, not a legal one. Examples like crude oil, or a certain grade of steel, or yes, cash are considered fungible because there’s a market where buyers usually don’t care about the specific item’s history.

But that’s always a simplification that breaks down in edge cases, not a 100% mathematical truth.

For example, I worked on a software project where the goal was to trace a perfectly mixable material through a production chain to analyze the impact of slight contaminations that were found after the fact. The material in question would be considered fungible in most markets, but not for this specific purpose.

The author of the comment misunderstands that the sole purpose of crypto is uncensorable p2p digital cash.

Legality is irrelevant...if you are brave enough to take your freedom and actually use crypto (no kyc).

Fungibility is possible if the transaction history is hidden.

Monero and Gold are fungible.

Bitcoin is not fungible.

----

BTW also be aware of security risks if anyone can see your balance and transactions.

If a party may look at two different bitcoins and say "I'd pay more for this one" or "I'll accept that one, but not this one" then it seems pretty clear they're not fungible.

What does legally identical even mean in the context of Crypto?

The government can raid your house if someone sends you dirty/darknet/terror money and you deposit it on Coinbase. Bitcoin is absolutely not Fungible.

>Fungibility means that a given asset is legally identical to all other instances of the same thing.

The introduction is wrong but overall the problem is exactly what you have described. Some Bitcoins are not legally identical to other Bitcoins.

>Bitcoin is fungible.

Not if your Bitcoin comes from a sanctioned entity, then it is equivalent to 0 BTC because you can't use it... which is exactly the point of the article.

umm, no. just no.

fungibility means that two units are interchangeable/equivalent. Legality doesn't enter into it.

anything that makes unit A perceptibly different from unit B can cause humans to value unit A more less than B.

Some units may be perceived as "better" than average and carry a premium. Others may be perceived as "bad" or "tainted" and trade at a discount.

Such differences are generally considered undesirable in a money.

> legally identical to all other instances of the same thing.

Well they're not because they're traceable. Your comment is so oddly conclusive yet so insubstantial