Fungibility in Bitcoin

What is fungibility?

Fungibility is viewed as the idea that every item in a set is worth exactly the same amount. In bitcoin, fungibility means that all bitcoins have the same value, regardless of who owns them or what their history is — and fungibility is extremely important to the success of a decentralized network.

Code is code

This idea follows the mindset that code is law. However, code is code and law is law. If you encounter a thief on the road, and he empties the cash you have on you, what do you do next? You go to a police station and inform them that your money has been stolen.

History of Fungibility

Fungible goods are goods that are sold by weight or measure such as oil, sugar etc. We can term this as physical fungibility where one member of the population is completely swappable with another. For ex-one kilo of wheat can be swapped with another kilo of wheat of the same grade without causing any relative change . Gold has physical fungibility because it can be melted down completely and recasted into whatever form necessary without losing value. Fungibility is an important characteristic of money and precious metals such as gold that cannot be earmarked or differentiated would find more usage as money. This is because you don’t differentiate between a gold coin coming from a thief or a gold coin coming from the richest merchant in town. Both hold the same value in your eyes.

Fungibility through law

According to Henry Dunning Macleod’s Economics for Beginners:

Privacy coins are abstract rights

Continuing from the book:

Bitcoin as currency

If Bitcoin is classified as a currency and a thief stole your bitcoin, if the police nabbed the thief in time while he still had your bitcoin, you can still recover them. However, if he had exchanged them for goods to a merchant, then you cannot recover your bitcoin from the merchant. This is because the merchant has gotten the money in good faith. You will have the right to obtain back the stolen property from the thief and he will be forced to compensate in a different fashion.

It is clear that Bitcoin can be used as money. It can be used to purchase goods or services, and used to pay for individual living expenses. The only limitation of Bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies, such as the US Dollar, Euro, Yen, and Yuan. Therefore, Bitcoin is a currency or form of money.

We should strive for Bitcoin to be termed as currency. We should embrace the legal construct of money and ensure that bitcoin is imbibed into the way the world works today. When the general public use Bitcoin as a medium of exchange, as cash, it becomes currency. And it carries the law along with it. Each transaction carries a history with it that can augment law as all contracts, all transactions are recorded on the blockchain. This leads to a case of minimizing friction and allowing businesses to accept bitcoin without worry. We should appreciate Satoshi’s design of bitcoin as he clearly understood the role of law in voluntary contracts and carefully created bitcoin such that it becomes the best form of money.



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