Fungibility in crypto: The missing piece

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3 months ago - 4 minutes read

Direct from the desk of Dane Williams.

Fungibility is the most critical attribute of cryptocurrency in 2023. I take a look at why privacy coins like Monero (XMR) are the future.

In the world of cryptocurrency, there's a term that has been gaining more attention recently: fungibility.

Fungibility is a critical attribute for any currency, as it ensures that all units of the currency are equal in value and can be easily exchanged for one another.

However, when it comes to cryptocurrency, not all currencies are created equal in terms of fungibility.

This is particularly true for Bitcoin, which is not truly fungible!

In this post, I’ll take a closer look at fungibility in cryptocurrency and explore why it's so important.

Let’s dive right in.

What is fungibility in crypto?

Fungibility refers to the ability of a unit of currency to be interchangeable with another unit of the same currency.

In other words, if you have two units of the same currency, they should be indistinguishable from one another and have the same value.

This is incredibly important for cryptocurrency, as fungibility is a key factor in achieving widespread adoption.

Without fungibility, cryptocurrency risks becoming fragmented and segmented, with certain units of currency being worth more or less than others.

This can create confusion and barriers to entry for new users, ultimately hindering the growth and potential of cryptocurrency.

In my opinion, fungibility is the essential missing piece required to build trust and confidence in the system, as well as ensuring its seamless integration into our current financial landscape.

Bitcoin is NOT really fungible

I know this might be a shock, but no...

Bitcoin (BTC), the most popular cryptocurrency, is not truly fungible.

This is because every Bitcoin transaction is recorded on a public ledger called the blockchain, which means that every coin can be traced back to its origin.

This lack of privacy means that some Bitcoins may be considered "tainted" or associated with criminal or immoral activity, making them less valuable or even unusable.

This is a problem for anyone who wants to use Bitcoin as a legitimate currency.

A scenario highlighting Bitcoin’s lack of fungibility

Let's say that a conservative business, like a luxury retailer, decides to start accepting Bitcoin as a form of payment.

They promote this to their customers, hoping to attract new buyers who prefer to use cryptocurrency.

However, after a few transactions, the business becomes aware that some of the Bitcoin they have received has been used to purchase unethical goods or services, like drugs or illegal weapons, on the dark web.

This presents a major issue for the business.

They pride themselves on their reputation and ethical standards and the thought of accepting currency that has been linked to criminal activity goes against their values.

They fear that if word gets out, it could damage their brand and turn off customers who don't want to be associated with a business that accepts "dirty" money.

In this scenario, could you see businesses only accepting certain Bitcoins due to their completely public spending history?

As soon as one Bitcoin becomes less valuable than another for whatever reason, you no longer have fungibility.

Without privacy features integrated into cryptocurrencies, this situation is an inevitability.

Monero (XMR) fixes the crypto fungibility problem

Monero (XMR), on the other hand, is designed to be completely fungible.

Its privacy features ensure that every unit of Monero is indistinguishable from any other, and that it's impossible to trace the history of any Monero transaction.

This means that Monero is a valuable asset for anyone who wants to use a currency that is private, secure, and fungible.

Can you see that if the luxury brand business in the example above used the more fungible Monero (XMR) for payments, there would be no problem?

Monero fixes this.

Monero's fungibility sets it apart from other cryptocurrencies and makes it a valuable asset for anyone looking for a truly private and secure currency.

As we move into a more privacy-focused future, Monero's unique features will likely make it an even more important currency.

The need for fungibility will make privacy coins like Monero (XMR) a staple

The fact of the matter is that fungibility is an essential attribute of any successful currency, including cryptocurrency.

Without fungibility, a currency cannot be truly interchangeable or uniform in value, which can lead to issues with trust and adoption.

Unfortunately, Bitcoin, the most well-known cryptocurrency, is not truly fungible due to its transparent blockchain system.

This lack of fungibility presents a significant problem for businesses and individuals who may be hesitant to accept Bitcoin, as they cannot be sure whether it has been involved in any unethical transactions in the past.

However, the good news is that there are alternative cryptocurrencies like Monero (XMR), which are designed to address the issue of fungibility.

With Monero's advanced privacy features, each unit of XMR is indistinguishable from another, making it a truly fungible currency.

As more businesses and individuals become aware of the importance of fungibility in cryptocurrency, it's likely that privacy coins like Monero will play a more significant role in the future of digital currency.

I’m firmly of the opinion that fungibility is the missing piece in cryptocurrency and it's vital that we pay attention to it if we want to see widespread adoption of digital currency in the future.

Best of probabilities to you.

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