ADSactly Crypto: Fungibility And Confidential Transactions
Governments around the world are starting to feel threatened by what cryptocurrency can bring to the world and how it could loosen their ability to control the masses or influence where currency and value should be driven. The drive to disrupt Bitcoin has always been focused on the ability to perform an illicit activity with the currency such as crime operations or terrorism.
But as we know Governments in different parts of the world can move the goalposts and declare things illegal. Since cryptocurrency has no third-party risk, it is censorship-free, and no government can shut it down.
One way to disrupt the appeal of Bitcoin to the masses is to make it seem as it is not safe to use as governments want to clamp down and seize coins they believe have been used for criminal activity. Being able to taint Bitcoin or any other cryptocurrency will make it harder for people to use and distribute and many investors could lose faith in the projects.
This is why there has been a surge in the price of Virgin Bitcoin and why privacy coins have been so stable over the last few months.
Maintaining fungibility
If we allow Bitcoin to be tainted, we lose a fundamental part of good money which is fungibility. Fungibility means that any individual units are virtually interchangeable, and each of its parts is indistinguishable from another part so any Bitcoin or piece of Bitcoin would be the same as any other.
Having tainted Bitcoin would ensure that it is not the case. So how would we be able to ensure that Bitcoin does remain fungible? When is it used on an open and decentralized blockchain where all transactions can be tracked and stored for life?
Through something called confidential transactions.
Confidential transactions
Currently, all Bitcoin transactions are open for all to see and if you wanted to do a private transaction you would need to exchange it for a privacy coin and then perform transactions but with confidential transactions, it could have you the hassle.
Confidential transactions or CT as it is sometimes called is a cryptographic protocol that results in the amount value of a transaction being encrypted.
The encryption is special because it is still possible to verify that no bitcoins can be created or destroyed within a transaction but without revealing the exact transaction amounts.
This essentially means the network takes a bunch of transactions of similar value and jumbles them up so you don't know which was which and then sends it to the correct recipient.
Doing this will make it harder to track to a specific purchase and keep Bitcoin from being labelled differently from one another.
Bringing CT to the Bitcoin network
To have confidential transactions added to the Bitcoin network it will require a soft fork consensus change to be added to bitcoin, although they could be added to a sidechain too.
It has been announced that Litecoin will be looking to add it very soon and if that is done correctly it will make it easy for the Bitcoin Network to adopt it in future.
Do you use privacy coins like Monero or ZCash? Would you like privacy transactions to be made available on the Bitcoin and Litecoin network?
Authored by @chekohler
Previous ADSactly Crypto posts
- ADSactly Crypto: A Break Down Of Bitcoin Value
- ADSactly Crypto: How Many Bitcoin's Have Already Been Lost Forever?
- ADSactly Crypto: What Is the Bitcoin Halving?
- ADSactly Crypto: What Is A Bitcoin Paper Wallet
- ADSactly Crypto: The Importance of Private Keys
- ADSactly Crypto: How Bitcoin Futures Could Affect The Future Of Bitcoin
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What is called "fungibility", as you point out, seems to me to be one of the characteristics of crypto coins found very interesting. I don't know to what extent the introduction of so-called "confidential transactions" could diminish or jeopardize this quality?
Thank you for your precise information, @chekohler.
Fungibility is what makes a currency tradable as anyone would accept it knowing its no different from any other unit. So if someone did a drug deal with your dollars and you got the dollars later down the line because the drug dealer buys a cooldrink at your store the dollars are not tainted. Confidential transactions allow Bitcoin to keep that characteristic for example if we were sending BTC to a group in a country that doesn't allow funding to speak the truth it could be ceased if tracked or blocked but now the BTC is kept secret and the receiver can then use the BTC as they please
It makes BTC even more censorship-resistant
Well, I'm not an expert but I always thought that having all the transactions of Bitcoin being out in the open is a feature that shouldn't be "corrected."
Yes all transactions will still be out in the open and visible on the blockchain but what CT will do is obfuscate who the wallet addresses are that are being used adding to the anonymity of using the chain
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