Why P2P series - Chapter 2, Fungibility

Fungibility

Dear peaches, as you may already know, our app allows users to buy Bitcoin P2P (peer to peer, or peach to peach as we prefer). But, even if many people have heard those words before, have you ever stopped to think what that even means?

The basic definition is pretty obvious, but in the bitcoin space, many people are still buying Bitcoin using services that require verification of personal information, aka VEXs, thus tying the Bitcoin bought to your identity. Which makes us wonder: have we (bitcoiners) really understood what this is all about?

In this series of blog posts we will dive a little bit deeper into what it means to use bitcoin P2P, and some of its advantages.

In today's chapter, we want to briefly explore the concept of Fungibility.

In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable, and each of whose parts is indistinguishable from any other part.

For anyone who is not familiar with this concept, Wikipedia’s definition of fungibility is the previous one.

In the Bitcoin space, it is commonly said “1 Bitcoin = 1 Bitcoin”. While this should be correct, today it is not. When you use cash, a $1 bill is practically indistinguishable from another $1 bill, and no one will tell you they won’t accept your particular $1 bill. Unfortunately, we cannot say the same when spending bitcoin.

The Bitcoin blockchain is fully transparent. This is great for auditability, but it also allows companies and individuals to trace the history of your coins. If you’ve bought your coins at an exchange where you had to KYC (upload your ID) during registration, your identity can then be linked to any purchases that you make with Bitcoin.

A proposed solution is “mixing”; that’s essentially just getting together, throwing your coins on a big pile and grabbing a random (different) other coin from the pile. However, while this makes it so that your transactions cannot be traced back anymore, on the blockchain it’s pretty obvious that you did this. This has led some companies from blacklisting any coins that have interacted with a mixing service.

We believe that preventing a problem is better than solving it. By trading P2P, you never have to associate your identity with your coins, and that’s how it should be. Everyone should be able to spend some coins they received, without having to think if the previous owner did anything illegal or something that the government “doesn’t like”.

Fungibility in Bitcoin is important, but we won’t get it unless we stop tying the identity of the new users to each coin (UTXO) they purchase. Otherwise, we will end up in a surveillance scenario where KYCed and Non-KYCed Bitcoin will be two completely different markets, and we must ensure this does not happen.

Well, dear peaches, thank you for reading this far, this was the second of a full series of blog posts where we'll fall down the rabbit hole of p2p. If you want to receive updates about the next posts, feel free to subscribe to our mailing list.