Fungi-what? You may or may not have heard of this term. To put it in layman terms, fungibility basically means something which can be exchanged for something else of the same kind. Here are some examples of fungible commodities:
A kilogram of pure gold has the same value as a kilogram of pure gold coins, ingots, or jewellery. A barrel of crude oil produced in Saudi Arabia would have a similar value as a barrel of crude oil produced in Venezuela.
What does this have to do with cryptocurrency then? For a currency to function as a reliable means of transaction, it needs to be fungible. A dollar’s worth is the same across the board – whether it’s found in a prime minister’s wallet or whether it’s found lying somewhere on the ground doesn’t change its value. However, the same cannot be said about Bitcoin.
Not all cryptocurrencies are equal
Take Bitcoin for example. Due to the transparency of transactions, a bitcoin’s history can be easily traced. You’ll be able to tell which Bitcoin was once stolen and which was used in illegal transactions. This could easily taint or impact the purchasing power of a particular unit of bitcoin. Individuals or companies may not want to accept a unit of bitcoin which has a shady history and might even choose to block your address if you so happen to own bitcoins involved in illicit activities. When a lack of fungibility happens, it becomes problematic for Bitcoin to become a reliable mainstream means of transaction. Fungibility is a vital feature of money.
Doesn’t Bitcoin give you some level of anonymity?
You do get some level of privacy with Bitcoin because all that is revealed in the public ledger is your cryptocurrency address and amount transacted. However, as Bitcoin started to gain popularity, many Bitcoin tracking companies began to surface. With extensive tracking, they’ve managed to map out a good portion of the blockchain. This would make it easy to identify the history of each bitcoin unit.
Using cryptocurrency tumblers
The lack of anonymity has led many to use cryptocurrency tumblers. These are services whereby coins are sent to be mixed up with other coins and in return, you will get back coins which are not related to your original coins. However, there are some risks involved in using cryptocurrency tumblers. If you use an unreliable platform, you might fall victim to theft. Having vigilance and doing research on reliable platforms are important.
Enter privacy coins
Privacy coins like Monero employ ring signatures in its blockchain which ensures optimal privacy. Other privacy coins, like Zcash and Dash, have an in-built tumbler in its blockchain to ensure that transactions are untraceable and anonymous. This means that privacy coins can prevent the history of transactions from tainting or reducing the purchasing power of different coins. No one Monero will be deemed a lesser value than another Monero. Although privacy coins get quite a lot of bad press for being associated with illicit activities, the privacy it provides has the ability to restore fungibility to cryptocurrencies.
Read more about privacy coins here.
Due to the importance of fungibility, privacy and anonymity is an important development in cryptocurrency. No doubt, it is still in its early phases and many privacy coins have a reputation of being a kind of “criminal’s currency”. Tumblers, on the other hand, also have various flaws. Another way in which fungibility can be imposed on cryptocurrency is through legislation and regulation. However, cryptocurrency is still relatively new and governments are only just starting to grapple with this new mode of digital payment. Only time will tell whether these regulations can be successfully put in place.
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