http://news.diginomics.com/evolution-marketplace-collapse-violates-bitcoin-fungibility/Evolution marketplace is the latest online “darknet” trading market to close its operations. This time however, it wasn’t the authorities seizing the site as with the Silk Road scenario, but by the administrators of the website themselves. The drama that has been ensuing in the aftermath of this collapse, and large scale theft of customer & vendor funds, has been interesting to watch. Hundreds of thousand of dollars worth of bitcoin in the website’s escrow service have been taken by the administrators. The coins were then sent to BTC-e, the money launderer’s exchange of choice due to its location and the lack of information users must submit to use.
Beneath this unraveling of yet another tor marketplace, something very strange has happened. BTC-e has tracked those stolen funds via the bitcoin blockchain, and disallowed the withdrawal of those funds on behalf of any of their users. While their effort to halt the laundering of obviously stolen coins in the thousands is admirable, it is a scary precedent: bitcoin is clearly not perfectly fungible. Each coin has its own unique history of transactions and if a coin comes from a questionable or known fraudulent address, then services can be denied to that specific coin. A coin is not a perfectly identical currency unity, but is as unique as a piece of real property or collectible. The collapse of the evolution marketplace, and the denial of service to these stolen funds via services such as BTC-e demonstrates that bitcoin fungibility is not perfectly viable.
Again, Aristotle's definition of money:
1.) It must be durable. Money must stand the test of time and the elements. It must not fade, corrode, or change through time.
2.) It must be portable. Money hold a high amount of 'worth' relative to its weight and size.
3.) It must be divisible. Money should be relatively easy to separate and re-combine without affecting its fundamental characteristics. An extension of this idea is that the item should be 'fungible'. Dictionary.com describes fungible as:
"(esp. of goods) being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind."
4.) It must have intrinsic value. This value of money should be independent of any other object and contained in the money itself.
What kind of solution does bitcoin offer for retaining the identicality of its currency, and therefore its fungibility? There are known ‘tumbling’ and ‘mixing’ services, but the effectiveness of these technical applications has been called into question.
The open-source nature of blockchain technology that bitcoin has touted since its inception, makes it so that transactions are entirely transparent and naked to surveillance. There are however, other closed blockchain coins that do offer improved fungibility among their currency. A select few anonymous cryptocurrencies, for better or worse, have been in existence in various forms with different anonymizing properties for the last few years. Darkcoin is one such relatively anonymous cryptocurrency, and is seen as the front-runner in the market currently.
The price of Darkcoin (soon to be renamed Dash [Digital Cash]) has spiked ~30% from $3.30 to $4.50 a coin in the wake of BTC-e halting Bitcoin withdrawals for tainted bitcoins. Darkcoin is unique in that it allows for passive tumbling of your coins that is built into the wallet itself. This passive tumbling mixes your coins with those who running Darkcoin nodes so it serves two purposes: Anonymizing your coins and incentivizing those to run nodes by earning Darkcoins through running anonymizing nodes. Right now Darkcoin has more nodes than Bitcoin with a tiny fraction of the market cap.
Another coin that is a frontrunner for anonymity in cryptocurrencies is Monero (XMR). It is not a Bitcoin clone, and the wallet is only officially available via command line – no graphical user interface is available for this piece of technology yet.
Monero groups all transactions with everyone else who transacted on that block through what is called ‘ring signatures’, and obscures where the coins came from and went, by forcing them to become a part of a group of transactions. This promises a high level of anonymity. Monero is also enjoying a healthy increase in value in recent weeks.
There are highly anonymous currencies which have been on the radar of enthusiasts for a while now, but with exchanges choosing to treat stolen coins differently, and therefore violate perfect fungibility, anonymous digital currencies may be continue to gain traction and attract a viable market share from cryptocurrency enthusiasts.
I think
Peter Todd summed the situation up best, "Want your bitcoins to be valuable? Then treat them all equally. BTC-e is setting a terrible precedent."
