Goods or items in a collection are “fungible” if all of the items have the same value and are mutually interchangeable. For example, one kilo of gold have the same value as another kilo of gold . Another example are stocks within a company that are interchangeable with each other without any kind of loss in value or meaning.
Why does fungibility matter?
Fiat currency, e.g. government controlled currency like the Swedish Krona or the US dollar , are generally not fungible.
For example, if I were to wire-transfer some dollars from an US bank account directly to Wikileaks, then my remaining dollars on the same account are likely to be censored or locked by the US government because of the association to Wikileaks, who they might think is a terrorist organisation. Because a censored bank account is useless, the remaining dollars on this bank account are not interchangeable with other dollars and thus worth less.
This is due to the fact that bank transfers are easy to trace and tie to companies and individuals.
However, cash money are generally fungible. This is because it’s hard, or sometimes impossible, to track from where cash money comes and who it belongs to.
The ability to freely transact with anyone without censorship or discrimination should be very important to a free and democratic society.
Are Bitcoin or Ether fungible?
Digital currency like Bitcoin or Ether are often marketed as “anonymous money” or money that can’t be censored by governments. But this is simply not true. In fact, by some measures both Bitcoin and Ether are even less fungible and easier to track than fiat currency due to properties of the underlying blockchain technology that these digital currencies are built on.
For example, if you know the Ether address of Wikileaks, then you will be able to trace every single transaction ever made to and from this address. From and to what address, and how much was transacted, this cascades through all transactions on the entire blockchain. Censorship through association is a real problem in this case.
And due to the way digital currency exchanges like Coinbase.com operate, you can tie personal identities to many addresses and transactions on these blockchains. So you are much less private than you might think when using digital currency.
In summary, we essentially have the same problem here – Bitcoin or Ether addresses can be blocked or censored if they are associated to activity or organisations that some other party does not agree with which in practice might render some addresses useless. Thus, Bitcoin and Ether are not fungible.
Money for a free society
However, there are digital currencies designed specifically for the purpose of being fungible – please meet Monero!
Monero is using advanced cryptographic techniques, such as ring signatures, to achieve true fungibility. This allows the Monero blockchain to store enough cryptographic proof of a transaction’s authenticity for settlement without revealing who sent the transaction or how much was transferred.
This means that I can freely and privately transact with Wikileaks without having to worry about being censored or banned by some authoritarian party for my association with the aforementioned organisation.
Monero is private, secure, fungible and practically useful with real applications. Today.
Monero does this without any fuss or big promises around smart contracts or wanting to be “the world computer”. Monero does a few things really well while also pushing the boundaries of new technology and cryptographic techniques.
Now, Monero isn’t perfect either. There are quirks (but supposedly well-intentioned) around the emission and total supply of the Monero currency. And the lack of user-friendly interfaces and tools makes it harder to adopt than e.g. Ether. But it’s still very interesting to see how long-standing problems around economics and democracy are being tackled.