What If One Bitcoin Isn’t Like the Others? Fungibility Debated At Scaling Conference

While bitcoin’s limited transaction capacity is no secret, day one of the ongoing Scaling Bitcoin conference in Milan served to assert that there is perhaps another stage of development that needs to take place before the network is ready for increased volume.

Rather than focus on elements that have been given the most attention (most notably, the long-contentious block size), day one opened with discussions focused on the economic concept of fungibility, or the idea that no one bitcoin should be able to be deemed less valuable or less legitimate as a result of its past use or ownership.

That bitcoin’s best value proposition is its ability to enable blockchain-secured data to be exchanged like cash was an argument put forth in the day’s first discussion, led by newly appointed Blockstream CEO Adam Back and Blockstream founder Matt Corallo.

“If you look at it from this perspective, for fungibility, bitcoin is worse than PayPal,” he said.

Against other forms of digital money, Back inferred, fungibility is perhaps the greatest strength of bitcoin as a digital currency. Yet, he asserted that for-profit companies are threatening this attribute of the network by exploiting its current technological limitations.

Back remarked:

“Some of the exchanges and wallets are using tracing services, and [if there is a connection to illicit activity] up to four hops deep away from you, they will freeze your account.”

Back contests that a lack of fungibility, if allowed to continue, could ultimately “leak” into the system, affecting bitcoin’s “permissionlessness”, or the ability of any parties to join and use the technology without censorship.

“It is critical and you need fungibility for bitcoin to function. If you receive coins and you can’t spend them, you start to doubt whether you can receive money,” Back said.

Other sessions on day one, held at Politecnico di Milano (and sponsored by companies including Deloitte, Blockstream and BTCC), sought to emphasize work in the open-source community aimed at addressing fungibility.

For example, talks were given on JoinMarket, a marketplace that links users of the transaction privacy method coinjoin; Tumblebit, an anonymous, off-blockchain payment hub; and MimbleWimble, an unusual proposal that considers scalability improvements that could be achieved if bitcoin had an alternative blockchain design.

Elsewhere, privacy proved to be a major theme, coloring afternoon sessions focused on the Lightning Network, a top-level bitcoin layer for scaling.

Interests clash

But if Back put forward the idea that fungibility is necessary should bitcoin want to become a more ubiquitous technology, attendees were apt to see the transition as a more direct effect of how businesses and regulators are forcing the issue.

Bitcoin Core developer and Nebulous CEO David Vorick, for example, noted that fungibility is a response to actions taken by regulated bitcoin startups.

“It’s becoming more of an issue with Coinbase and all the major onramps, there’s more know-your-customer (KYC) and anti-money laundering (AML) concerns,” Vorick told CoinDesk. “Things are moving in a direction where it seems like if your bitcoins have drug money associated with them, maybe startups are going to stop accepting them.”

Among attendees, there was a particular distrust of Coinbase, one of the ecosystem’s most high-profile startups over practices that they allege have seen potentially innocent bitcoin users blocked from the service.

Still, others saw the situation as less about any developing us-versus-them dynamic in the industry.

Bitcoin Core developer Bryan Bishop noted that discussion on fungibility is not exactly new, but that the sessions offered a more public spotlight for a long-standing frustration shared by developers.

Bishop went on to argue that startups and enterprise firms should be concerned about fungibility, as a failure for the technology to achieve this could undermine the usefulness of the technology.

“In the absence of fungibility, there is no bitcoin,” Bishop said. “So you’re not going to have a bitcoin business if bitcoin isn’t completely fungible.”

Later workshops sought to categorize more than 10 available proposals for improving fungibility, with techniques including ring signatures, coinswap and the alternative blockchain Zcash seeing discussion.

Proposals examined

Overall, the supporting talks aimed to highlight the specific strengths and weaknesses of different proposals mentioned in the fungibility workshop, while respecting that the larger goal of the community now is to focus on scaling the protocol.

Discussion of proposals was often then divided into those that can be implemented today; those that would need a server or network of users to play a role as intermediary; and those that would require adjustments to bitcoin’s underlying consensus protocol.

But there was clear consensus that the scaling debate provides a suitable method by which proposals can be evaluated.

“Some methods of fungibility, in some implementations, actually increase scalability problems. Other methods decrease it,” Bishop explained.

For example, Bishop cited a proposal called Confidential Transactions (CT). Mentioned by Back in his talks as a poor way to offer privacy, Bishop agreed that the method is, in Back’s words, “terrible for scaling”.

Interestingly, those that would require protocol changes (or the success of a future bitcoin network powered by sidechains) seemed most able to address the issue.

Polestra, in his talk, highlighted how by reducing transactions to a combination “a list of block headers, a list of currently unspent outputs, and their range proofs”, each MimbleWimble-enabled transaction could be reduced to 100 bytes.

“Using MimbleWimble, we could get all the same privacy guarantees, with slightly different security assumptions, [and it would be] less than 5MB total for the entire blockchain history,” he explained.

Other options, like TumbleBit, are more immediately able to be implemented, but would require perhaps more activity from the end user than desired given the project’s emphasis on scaling.

If this all sounds complicated, however, attendees saw a clear goal in sight.

Pavel Kravchenko, founder of Distributed Lab, a startup aiming to build blockchain products for the financial sector, noted he believes there is agreement that fungibility should matter to all end users, even those who might not use bitcoin’s currency.

He further summarized fungibility by offering an example of what he considers the current catch-22 it creates, adding:

“Bad guys don’t join bitcoin because they think it will be legal, and good guys don’t join the ecosystem because they think it will be illegal.”

Image via Pete Rizzo for CoinDesk