What is the difference between Bitcoin and Bitcoin? Fungibility is a hot topic at Milan Bitcoin Scaling Conference

It’s no secret that Bitcoin’s transaction capacity is limited, and the Scaling Bitcoin conference held in Milan today is aimed at addressing this transaction capacity limit.

Instead of focusing on elements that have received the most attention (most notably, the long-standing dispute over block size), the first day of the conference focused on the economic concept of可互换性（fungibility） , or the idea that Bitcoin cannot be used in a current context (such as the Coinbase exchange) based on its past use or ownership.

Bitcoin’s best value proposition is that it enables data secured by a blockchain to be exchanged like cash, an argument made in the day’s first discussion by none other than new Blockstream CEO Adam Back and Blockstream co-founder Matt Corallo.

“If you look at it from that perspective, Bitcoin’s fungibility is worse than PayPal’s,” Back said.

Back speculates that fungibility is perhaps Bitcoin’s greatest strength as a digital currency relative to other forms of digital currency. However, he also points out that for-profit companies are threatening the fungibility of the Bitcoin network by exploiting its current technological limitations.

Back said:

“Some exchanges and wallets use tracking services that will freeze your account if your trading activity is linked to illegal activity (up to four hops).”

Back said that if the lack of fungibility continues, it could eventually affect bitcoin’s “permissionlessness,” or the ability for any party to join and use the technology without being checked.

“It’s critical that Bitcoin function fungibility. If you receive coins and you can’t spend them, you start to question whether you received the money,” Back said.

The meeting was held at the Politecnico di Milano (sponsored by Deloitte, Blockstream and BTCC) and aimed to address the issue of interchangeability.

Other topics of conversation included JoinMarket, a marketplace that connects users of the transaction privacy method coinjoin, and Tumblebit, an anonymous off-chain payment hub, as well as the MimbleWimble proposal, an unusual alternative blockchain scaling design.

Elsewhere, privacy proved to be a major theme of the conference, with the afternoon session focusing on the topic of the Lightning Network.

The conflict between regulation and fungibility

When Back suggested that fungibility is a necessary option for Bitcoin to become a more ubiquitous technology, it was easy to see how companies and regulators view the issue differently.

David Vorick, Bitcoin Core developer and CEO of Nebulous, pointed out that regulated Bitcoin startups are the reason for the reduced fungibility of Bitcoin.

“For Coinbase and all the big companies, there’s been a growing concern about KNC (know your customer) and AML (anti-money laundering) rules,” Vorick told reporters. “The way things are going, it seems like if your bitcoin is tied to drug dealing, these startups might stop accepting it.”

Bitcoin Core developer Bryan Bishop noted that fungibility isn’t exactly new, but the conference provided more of a spotlight and allowed developers to air long-standing grievances.

Bishop went on to note that startups and enterprises should care about fungibility.

“Without fungibility, Bitcoin is dead,” Bishop said. “So, if Bitcoin is not fully fungible, there is no Bitcoin business.”

The panel has since discussed more than 10 potential proposals for improving fungibility, including ring signatures, coinswap, and the alternative blockchain Zcash.

Overall, the purpose of this meeting was to highlight the strengths and weaknesses of different proposals while respecting the community’s focus on protocol expansion.