The fungibility of Bitcoin — Long Term

[BlackHatCoiner]

Disclaimer: I will delete low-quality posts. We all know what's a low quality post, I don't have to define it.
The fungibility of Bitcoin is a serious topic that requires discussion. I hope we all agree that having our transactions publicly announced won't make ours coins fungible. Truth be told, our beloved Bitcoin can't work same like as cash, because cash doesn't leave footprints. A dollar is equal with a dollar no matter who transacted it with who. On the contrary, a block chain analysis may be enough to prove that my inputs have a connection with a criminal activity and be censored for that. Recently, I read that despite the mixing and the coinjoining, there are centralized services that will decline “tainted” bitcoins.

It then comes to my mind that once there will be really less bitcoins left to be mined, like two decades later, the miners will have a better income from the transaction fees instead. Right now, every 10 minutes, 6.25 freshly mined and “whitelisted” bitcoins are brought into circulation. But, after we've mined most of them, we'll use the already mined bitcoins for our transactions.

If that's true, then the system will be filled with “tainted” bitcoins in the long term, as there'll always be criminal activity. Your thoughts.

[ranochigo]

Taint has a very broad definition and is almost always not uniformly enforced. There is zero grounds on suspending users, refusing services just because they were once mixed with "tainted" coins. It is just something that governments attempts to justify to curb the usage of Bitcoin on exchanges. The rationale behind rejecting "tainted" coins does not always hold true. CoinJoin will almost introduce some taint and even if they don't, it is obvious that it is a CoinJoin transaction and certain exchanges will block them anyways.

That being said, sooner or later, all of your Bitcoins will have some degree of taint. Should services start censoring that and lose loads of potential customers? If your exchange or your services are actively censoring your transactions, then you should certainly avoid that exchange/service in the first place, for reasons other than them not accepting tainted coins (intruding on your privacy by actively tracking your transactions).

[DannyHamilton]

Lightning Network leaves much less of a record of what has happened.

Additionally, even after all the bitcoins have been "mined" (more than 100 years from now), the block creation process will continue.  The transaction fees that a miner receives as reward are effectively released from their history since there is no way to tie any specific funds from the reward back to any specific fee.

[20kevin20]

It might turn into an issue at one point. If everyone's coins are coming from illicit activity at some point in their history, Bitcoin might lose in the long run as it's gonna be used as an argument against it.. because while cash can be easily moved from point A to B without having a proper history of its source, Bitcoin can't do the same..

But yeah, the "criminal activity" argument can be flipped all over to any side and still be viable for the average reader. So even if Bitcoins were fungible, we'd still have a criminal activity argument: "now that it's fungible, look! Nobody knows a thing about illicit txs no more!"

It's a double-edged sword.

[NeuroticFish]

The discussion on what is tainted and what is not can become very difficult. I guess that after some point there will be not possible to accept only clean coins for on-chain transactions. And then what's to be considered "bad"?
- will one input make the whole transaction bad or will "dilute" (become less bad)? Or will a service accepting also tainted coins will become "black sheep"?
- after how many transactions (the money containing) an old tainted input is no longer considered tainted/bad?
- if a miner is accepting tainted transactions, will the tx fees be considered good or bad?

It's difficult to foresee what's going to happen and I feel that it's very early to discuss.
However, I don't think that "all our bitcoins" will be tainted, ... just most of the ones circulating (and not locked for decades in cold storage).

[bitmover]

The fungibility of Bitcoin is a serious topic that requires discussion. I hope we all agree that having our transactions publicly announced won't make ours coins fungible. Truth be told, our beloved Bitcoin can't work same like as cash, because cash doesn't leave footprints. A dollar is equal with a dollar no matter who transacted it with who. On the contrary, a block chain analysis may be enough to prove that my inputs have a connection with a criminal activity and be censored for that. Recently, I read that despite the mixing and the coinjoining, there are centralized services that will decline “tainted” bitcoins.

ANtonopoulos has a nice video about this subject, tainted coins.

https://www.youtube.com/watch?v=BILcJ3WtdLQ

He basically says that tainted coin means that in the previous X transactions that coins were involved in mixing/casinos/criminal/etc.

The problem is that if you look back a lot of transactions you will discover that most of the coins are tainted. Most of the coins already have a lot of history: they have been in mixers, casinos and so on.

So exchanges will have to look for a number of about 4-5 transactions. If you sent your coins to a mixer/casino, and you are worried about it, jsut make a few transaction inside your wallet. You can even use 1 sat/byte, as you are transferring coins to yourself and you are not in a hurry.

[Lucius]

This is not the first time that someone has thought about what will happen if they really move in the direction of "this BTC is good and this is bad". The problem definitely exists if we take into account that users cannot know in advance what used to happen in the past with coins that they should receive in a transaction - unless we ask for a signed message from the address or addresses from which coins will be sent before each transaction - but this is not something that is practically feasible given the user's expertise and the total number of transactions.

If we take into account the fact that in ten years 99% of all BTC will be mined, fresh (virgin) BTC will become rarer - and thus more expensive, because they say that even today such coins are sold at premium prices. Consequently, it is very realistic that there will be coins that will be marked as tainted, those that will be 100% pure (virgin), and the vast majority of those that will be in some gray zone.

We all know that any tainted BTC can be washed, so the best example of this is the funds confiscated from Silk Road - at one point they were dirty, at another they were sold at auction and became clean. I wonder if there may be a digital cryptocurrency purifier in the future that will work in such a way that everyone will be able to pay a fee to clear their coins in case they have been involved in some illicit activity.

[o_e_l_e_o]

The transaction fees that a miner receives as reward are effectively released from their history since there is no way to tie any specific funds from the reward back to any specific fee.

The same is true of coinjoins, but that doesn't stop exchanges freezing deposits from coinjoin transactions. In their eyes, anyone who wants privacy must de facto be doing something illicit.

And then what's to be considered "bad"?
- will one input make the whole transaction bad or will "dilute" (become less bad)? Or will a service accepting also tainted coins will become "black sheep"?
- after how many transactions (the money containing) an old tainted input is no longer considered tainted/bad?
- if a miner is accepting tainted transactions, will the tx fees be considered good or bad?

Obviously I disagree with the whole "tainted" thing because you have absolutely no idea if the person sending you the coins was involved in the so called "illicit" activity or not, but what you have outlined is another reason I hate "tainted" coins. What if a coinjoin has 1 tainted input and 49 clean inputs? Are the 50 outputs all tainted? Are they 2% tainted each? How long does the taint hang around for? What about after 5 clean transactions? What about after 10? 100? 1,000? Look back enough transactions, and >90% of bitcoin in active circulation is tainted in some way or another. Look far enough in the future, and every bitcoin which isn't lost will be tainted eventually. What if I just move the tainted bitcoin through 10 addresses in my own wallet. Is it clean now? What if an exchange like Coinbase accidentally accepts a tainted transaction and sweeps it in to their hot wallet? Does the taint magically go away? Or is their entire hot wallet now tainted?

The entire "taint" metric is completely arbitrary and holds no relationship whatsoever to the real world. It is being used as a tool for government to control bitcoin, nothing more.

[dkbit98]

There is a movement going in bad direction with opac compliant mining pools, and we can see that some countries like Iran is not allowing usage of any Bitcoins that are not mined in their country,
they made mining totally gov-centralized and they are making a big profit with playing around international sanctions selling their Bitcoins.
I would not be surprised to see something similar from communist China after recent fud, because they are preparing to start their own nightmare centralized tracking coin like some other countries.

Imagine if all people would start to use mixing as standard, maybe with some new or existing open source wallet, than nobody will be able to make any distinction between coins,
but for now I think that it is very important of mixing services to exist.
Making better decentralized exchange without websites and servers to shut down would surely help in this process, and if majority of people want to use and accept Bitcoin there will be nothing that can stop that.

PS
90% of US dollars (and probably other fiat paper currencies) are tainted with cocaine and other drugs, and digital dollars on screen are tainted by stupid corrupt politicians.
Dollar is fungible because of that.

[DannyHamilton]

The transaction fees that a miner receives as reward are effectively released from their history since there is no way to tie any specific funds from the reward back to any specific fee.

The same is true of coinjoins, but that doesn't stop exchanges freezing deposits from coinjoin transactions. In their eyes, anyone who wants privacy must de facto be doing something illicit.

I understand, but the difference is that one CHOOSES to engage in CoinJoin specifically for the purposes of privacy, whereas the mining process is generally thought of as creating new coins rather than hiding the source.

The entire "taint" metric is completely arbitrary and holds no relationship whatsoever to the real world. It is being used as a tool for government to control bitcoin, nothing more.

Absolutely, but since it IS "being used as a tool for government to control bitcoin", it's important to discuss, understand, and consider how it might play out.  Hopefully logic, reason, and technology will win out, and this concept of taint will die.  If it doesn't then it will be good to be prepared with the necessary tools and knowledge to protect one's assets against devaluation.

[o_e_l_e_o]

I understand, but the difference is that one CHOOSES to engage in CoinJoin specifically for the purposes of privacy, whereas the mining process is generally thought of as creating new coins rather than hiding the source.

Sure, but given that we already have mining pools which are excluding "blacklisted" transactions from their blocks, there is nothing stopping exchanges or other centralized services from deciding that block rewards from blocks which include these "blacklisted" transactions are also tainted and refusing to accept them.

Hopefully logic, reason, and technology will win out, and this concept of taint will die.

I won't be holding my breath that either governments or exchanges will start to apply logic or reason to their arbitrary and draconian rules, which means we need the technology to make the improvements instead. If every user of bitcoin mixed all their coins regularly, then the whole taint thing would be useless. We need more on chain privacy by default, not just for the people who seek it out.