Unspent transaction outputs distort BTC fungibility — Litecoin founder
Charlie Lee, the founder of Litecoin (LTC), made an appearance at this year’s Proof of Work Summit in Frankfurt, Germany, to contrast Litecoin’s privacy-enhancing features with the nearly inescapable transparency of the Bitcoin (BTC) network.
Lee explained that the unspent transaction outputs (UTXOs), which underpin the Bitcoin ledger, carry a history of how the transactions were spent — potentially ruining the fungibility of the digital asset. Lee told the audience:
“Because of the history attached to every Bitcoin that is spent, each Bitcoin is not equal to another Bitcoin — which is something that I think is important for money.”
A hypothetical example of this would be an onchain analytics company attaching labels to a Bitcoin address believed to be associated with illicit activities. The label may dissuade investors or traders from accepting BTC associated with the address — lowering the market price of those particular coins and sats.
Moreover, if the Bitcoin in question passes through centralized exchanges or other institutions with Know Your Customer controls, the assets could be frozen or seized at the behest of government authorities such as the United States Office of Foreign Assets Control (OFAC).
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The fight for privacy comes into sharper focus
Privacy on the Bitcoin network is notoriously difficult, but not impossible. On Sept. 20, a mysterious group of developers announced a fork of the privacy-preserving Samourai Wallet.
The Ashigaru Open Source Project uses CoinJoin and other mechanisms to mask Bitcoin transactions and builds on the work of the original Samourai team — though the new Ashigaru team has denied any connection to the previous developers.
Paul Brody, the global blockchain leader at EY, recently told Cointelegraph at Token2049 that a lack of privacy was hindering blockchain adoption. The executive explained that privacy matters, especially for large institutions that must keep certain information private.
Businesses “Are very happy to tell you how many tons of carbon they save,” Brody stated. “They just don’t want you to be able to see that on a week-to-week or a day-to-day basis.”
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