Crypto Fungibility and the Rise of Anonymous Coins

The fundamental properties of what makes "good money" have been known to mankind, whether outlined officially or understood intrinsically, since the dawn of money itself.

The ideal money should function as a medium of exchange, a unit of account, and a store of value.

Some detractors of cryptocurrency may argue that assets like BTC are not a true "store of value" due to their volatility, but the exponential rise in both price and adoption would beg to differ - even when considering its recent price correction:

BTC's price chart when measured in a logarithmic scale

However, there is one often overlooked quality of money that some cryptocurrencies are at serious risk of violating, and that is fungibility. Merriam-Webster defines fungibility as:

"Being something (such as money or a commodity) of such a nature that one part or quantity may be replaced by another equal part or quantity in paying a debt or settling an account."

You may be thinking to yourself, "Hey, Exodus, what gives? 1 BTC is equal to 1 BTC, so why is it not a fungible asset?" I'm glad you asked, hypothetical reader!

Enter colored coins.

Simply put, colored coins are a way to tag specific coins with extra metadata, but what this metadata is (and more importantly, how it is used) is a topic of much debate.

There has been something of an effort to "rebrand" colored coins as little more than an innovative manner of cooking metadata onto the blockchain for unique physical-world attributes like verifying property ownership, mortgages, or legal title. To be sure, colored coins can be used for these applications and it would be great to see this technology mature!

That being said, this is not the only application of colored coins, as this metadata can effectively be used to "mark" specific coins or addresses with any kind of information, including transactions that certain entities may not like. Imagine, for example, that you donate funds using cryptocurrency to a wallet of a political campaign or ideologically-minded organization not deemed "appropriate" by a centralized exchange or government and colored accordingly.

Your crypto is now at the mercy not of market forces, but the arbitrary will of its "color" and the metadata attached to it. Compare this to gold - yes, a State or private entity can mark the precious metal with an arbitrary insignia banning it from certain types of commerce, but gold can easily be melted down and re-cast to maintain its fungibility.

Thankfully, there are coins designed specifically to combat fungibility issues inherent in cryptocurrencies, affectionately known as anoncoins. As cryptocurrencies march forward to a world of mass adoption, perhaps now more than ever it is important to be aware of the teams striving to keep coins anonymous, private, and fungible.

DASH

Founded by Evan Duffield, DASH has been around, in some form, since 2014. Originally launched as X11Coin, rebranded as DarkCoin, and renamed yet again as DASH, the project's history and focus has shifted many times since its inception. Throughout every iteration of DASH, however, has been a focus on privacy and fungibility.

DASH in the Exodus Wallet

The feature previously known as DarkSend (now PrivateSend) is effectively an implementation of Gordon Maxwell's CoinJoin. DASH achieves anonymity and fungibility via mixing services powered by MasterNodes, which are incentivized with a portion of the block reward to continue their operation.

Detractors of DASH's privacy model have noted that an "anonymity as a choice" privacy model can never be as fungible as "anonymity by default." Furthermore, some have drawn attention to the fact that MasterNodes are centralized largely with a few cloud hosting companies, like Amazon's AWS and Microsoft's Azure.

This doubtlessly makes DASH's method of privacy more fragile and less fungible than the next coin in our list, but one fact cannot be argued: Some anonymity functionality is better than none at all.

These concerns are further compounded when one considers the now-infamous instamine scandal. While the DASH Foundation ensures us that these instamined coins have been largely sold off since the days of X11Coin, some still desire more conclusive proof to this end.

Monero

Arguably the most anonymous coin on our list, Monero is also the only coin under examination today that has as a stated goal fungibility. It is also the only anoncoin herein which applies anonymity universally - an anonymous transaction is not a choice in Monero, it is the de-facto standard.

Monero achieves this through a combination of Ring Signatures and Stealth Addresses. Ring Signatures mix the input of spenders with others transacting on the network - this makes it increasingly difficult to link transactions with each subsequent mix. Monero's unique RingCT technology not only obfuscates the amount of funds being transacted, but the recipient's addresses as well.

Stealth Addresses are a novel way of obfuscating public addresses even further - a public Stealth Address can be shared openly, but incoming payments to a Stealth Address will automatically be paid to a fresh address behind the scenes.

A research paper published in part by members of the ZeroCoin/Zcash Team noted in 2017 that a majority of Monero transactions can be linked - however, this study examined only Monero transactions from 2014 to 2016, before the implementation of RingCT.

Unlike DASH and Zcash, Monero's codebase is also not based on BTC, LTC, or any other BTC-like asset. Proponents of Monero note that this ensures a strong foundation for crafting a fungible and anonymous coin, but it must be noted that this design choice also comes with baggage:

• XMR is increasingly difficult for other developers to implement as it is not based on common source code and tools developed for the BTC ecosystem
• By virtue of its uniqueness, XMR development has been sluggish - after four years, a Monero GUI wallet has yet to be released in stable form

Zcash

Released to the public in late 2016, ZEC is the "new kid on the anoncoin block," but its inception predates its launch by many years. The ZeroCoin protocol which powers Zcash has been long-awaited by the crypto community since the early days of Bitcoin and has been hailed by many as the closest thing to "perfect anonymity" yet to hit the crypto market.

Zcash in the Exodus Wallet

Zcash achieves this by a novel protocol known as zk-SNARKs, a form of zero-knowledge proof described by even studied mathematicians as "moon math."

Described in more pragmatic terms, Zcash splits its addresses into two formats: "t" addresses (for transparent transactions) and "z" addresses (or shielded addresses whose balance and transaction information is not displayed on a block explorer). In effect, this means a z-to-z address value transfer is effectively "ghosted," knowable only to the two parties involved in the transaction.

One of the primary reasons the ZeroCoin protocol is so exciting is that it is coin-agnostic. zk-SNARKs could theoretically be implemented in BTC, LTC, ETH, or any other coin, and there has already been talk of implementing zk-SNARKs atop Ethereum. It is also the only coin in this article whose anonymity is not achieved through some form of coin mixing, making Zcash and its zero-knowledge proofs a true breakthrough in cryptography as well as a fantastic "proving ground" for ZeroCoin overall.

However, Zcash (and zk-SNARKs more broadly) are not without their faults - like DASH, the anonymity model Zcash uses is completely voluntary and the amount of z-to-z address transfers is incredibly low. This means that privacy on the network at present is very weak.

Furthermore, the "trusted setup" inherent to Zcash has been hotly debated, and with good reason, as a backdoor at the time of this setup would render all Zcash's revolutionary privacy technology moot.

By virtue of Zcash's z addresses, such a backdoor could also allow for the unfettered creation of new coins that are hidden from the overall supply, effectively undermining the money supply of Zcash itself. For a coin whose supply is designed to be inherently deflationary, this is a rightful concern.

Finally, many have debated the funding mechanism of the Zcash Foundation known as the Founder's Reward by which 10-20% of the block reward is paid directly to the coffers of Zcash's developers - a hefty sum, to be sure, but this method of funding is arguably more transparent in nature than the premine or ICO models so common in other coins.

In Closing

It's worth noting that the privacy features of DASH and Zcash require functionality not included in most light wallet multi-coin clients, Exodus included. But such wallets are still great ways of acquiring and storing anonymous coins, using them as a staging area before sending them off to more full-featured wallet clients to take advantage of these unique privacy features. By merely holding these coins in an Exodus wallet, you are signaling to the market your intention to support fungibility and privacy in cryptocurrencies, and moreover, removing coins from the circulating supply.

Exodus supports all assets under discussion here with the exception of Monero - but were it to be added to Exodus at some point in the future, its anonymity functionality would also be in tow, unlike DASH and Zcash which require far more infrastructure to deploy.

Regardless of which fungibility model you are a fan of, the technology has an increasingly important role to play in the cryptocurrency realm. We would implore readers to explore these offerings by doing more research on them, and we at Exodus will be equally as diligent in supporting the anoncoin ecosystem.

Onward and upward, fellow cryptonauts!

Disclaimer
Header image credit: Descryptive

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This post first appeared on Steemit as an exclusive article but was also reblogged on the Exodus Movement Medium page. We give the <3 to our fellow Steemians first and foremost, but this article may appear elsewhere after its initial publication.