Litecoin founder Charlie Lee has stated that privacy and fungibility will be the next major turning points for the cryptocurrency industry.
Talking specifically about Bitcoin (BTC) and Litecoin (LTC), Lee pointed out that neither currencies allow users to transact in a confidential manner.
Fungibility is the only property of sound money that is missing from Bitcoin & Litecoin. Now that the scaling debate is behind us, the next battleground will be on fungibility and privacy.
I am now focused on making Litecoin more fungible by adding Confidential Transactions. 🚀
— Charlie Lee [LTC⚡] (@SatoshiLite) January 28, 2019
What is Fungibility?
For any commodity or good to be considered fungible, all individual units of it should be identical and interchangeable. Gold, for example, is the most common example of fungibility as one kilogram of it is indistinguishable from any other kilogram. Even though precious metals can be found in several forms — namely, their natural state, minted coins, jewelry, and ingots — they are a standard and unchanging substance that holds the same value.
Bitcoin and most other cryptocurrencies, on the other hand, are not entirely fungible — even though they may seem to satisfy the necessary criteria. While one bitcoin is equal in value to any other bitcoin, it is not identical to the other ones in circulation. This is because cryptocurrency transactions are permanently logged on a blockchain, essentially creating a digital trail for each unit of the currency.
Over the past few years, several companies specializing in blockchain analysis have cropped up — with some, like Chainalysis, working with law enforcement agencies to detect instances of money laundering, fraud, and illegal trafficking. To circumvent this limitation, users often use a Bitcoin mixing service, which is a third-party that anonymizes tokens in exchange for a small fee.
Privacy-focused tokens are not exactly new in the cryptocurrency space. Monero (XMR) and Zcash (ZEC) have existed for several years now and guarantee a greater degree of confidentiality than traditional digital tokens. However, they are nowhere near as commonly used as Bitcoin.
Lee has stated that a potential confidentiality solution for the Litecoin network could be developed by the end of 2019. He also said that confidential transactions would not require a hard fork or significant changes to the underlying blockchain protocol. For now, Lee believes that opt-in privacy may be the best way to implement the change — as it is more regulatory friendly.
Do you think cryptocurrencies should adopt mandatory confidentiality or make privacy optional? Let us know your thoughts in the comments below!