Pokémon Cards, Bitcoin, Monero, and Fungibility
Fungibility is arguably one of the more difficult properties of a store of value, or currency to understand. Even the word is odd for native English speakers. It is difficult to spell and conjures up images of mushrooms. Though both words are of Latin origin there is a lot of difference between fungus (mushroom) and fungi (to perform). Fungibility is from the latter and indeed it is of great influence on the performance of money.
Similarly, the definition and implications of the concept can be more difficult to grok than other monetary properties. In the context of a cryptographic asset such as Bitcoin fungibility is generally hailed as a positive feature. But unlike other properties of a monetary good (MG), or store of value (SOV) fungibility’s spectrum renders tradeoffs more nuanced than many other monetary properties.
Well, let us get the definition right out of the way, why not?
A monetary good is fungible if one unit of it is substantially equal to any other and can be exchanged one for another unit of the same value without regard to any of the properties of the thing over space and time. One US $10 bill is easily exchangeable for any other (that is not damaged, or counterfeit, etc.) and both have the same value. The Mona Lisa, and a picture drawn by my daughter when she was 2 are both “art” but I dare you to guess which I consider to be more valuable! See how sticky this gets very quickly?
Other monetary properties are far less nuanced. Consider divisibility. The more divisible a monetary good the better, right? Rai stones, with all their charm, were not divisible. Neither were whole shells really (because of fungibility!). But gold? Although it requires work and skill to melt and reform gold, it can be divided into small pieces. So gold is better money than really big rocks, or fragile shells, right? I just snuck another monetary quality, durability, in there… did you see that? That one is black and white as well. Bananas are not good money unless you can spend them TODAY.
So, the more fungible, the better, right? … RIGHT?
Well as far as CASH is concerned, yes. I do not want to have to evaluate whether your $10 bill is somehow not quite worth $10, or if you will want me to trade more of my goods for it since it was “special”. But we are isolating one purpose of a monetary good when we speak about exchange. What about value storage? Though the afore mentioned toddler art (spoiler alert) is more valuable to *me* than the Mona Lisa, it is not a good place for me to store value that other people would agree with me on. The Mona Lisa is not fungible at all… but it is exceedingly valuable.
Let’s look at a more down to earth example. Trading cards are somewhat un-fungible by design, as are many collectables. A rare Pokémon card may have more agreed upon value than a common one. And one in mint condition even more so. And yet Nintendo could also suddenly produce a lot more of the rare card, thereby bringing the value into question again. As stores of value non-fungible items create markets and add nuance to the assessment and appreciation of value.
QUALITIES OF MONEY
Aristotle isolated 4 properties money needs to have:
· Intrinsic value
As technology has advanced, we have been able to add further properties to this list:
Interestingly with the advent of fiat money, particularly in the digital domain, we have stricken the need for intrinsic value from the list, or at least we have begun to shift exactly where that value originates. And in the digital age both transmissibility and scarcity have become increasingly focal. We have increased the utility of the former and are beginning now to test the limits of the importance of the latter.
So, I am arguing that fungibility is a more nuanced monetary property than all the rest in either Aristotle’s or today’s list.
Fungibility is an example of a tradeoff. There are advantages and disadvantages to different points on the fungibility spectrum as we have shown with the examples of collectibles vs. common fiat currency.
The creator(s) of Bitcoin made specific design choices in every aspect of the software. These choices have rendered an Earth-shattering list of improvements over all other previous forms of money.
· Bitcoin is as durable as the universe itself, being made of math.
· Its ephemeral nature makes it as portable as an idea, or speech.
· It is divisible to eight decimal places.
· It is transmissible over a communications wire, satellite or radio.
· It is the FIRST absolutely, and PROVABLY scarce digital good.
· Bitcoin’s intrinsic value like fiat’s, is a function of the above properties and human psychology.
Each of these properties deserves a discrete essay. But at this point you will not be surprised that I believe Bitcoin’s fungibility is a little more nuanced. The rest of those properties, being polar, lie on a continuum that runs from best in class to useless. Bitcoin excels in them ALL.
Bitcoin has cornered the market being the first mover in the realm of digital scarcity. Much has been written about this aspect of Bitcoin, and it is, in my opinion, Bitcoin’s killer feature. But the tradeoffs required to ensure this aspect of Bitcoin have had an impact on the coin’s fungibility. Bitcoin has an entirely open and transparent ledger. You can trace the pedigree of a single satoshi (the ‘satoshi’ is the most granular amount of bitcoin, analogous to a penny) back to its block of origin. And doing so you will see each set of digital “hands” this speck of value passed through. The current amount of bitcoin in circulation can be calculated accurately and even proven with analysis of the blockchain. Similarly, this type of analysis may be used to determine what someone was purchasing, or how much the sender had in reserve, as well as how much the receiver had in their wallets. Yes, one can use difficult and arcane privacy strategies to limit the amount of information one leaks to the Bitcoin blockchain, but this is difficult to achieve. Yet it is this design decision that makes Bitcoin best in class in all other monetary properties.
So, what’s the big deal?”, you might ask. “I do not want to buy drugs on the darknet.” Well, what if someone who made their living selling cocaine on the darknet bought your car using bitcoin traceably linked to drug transactions? You might have no idea. But what if you did? What if you were able to look and see that these bitcoin came directly from a wallet that was linked to illicit trade? Would you have a hesitation about accepting them. Especially with the knowledge that powerful groups like the FBI have access to the same data and might come knocking on your door? These issues are already a concern for Bitcoin users and the businesses that accept, trade and custody it.
Boom. There’s the one monetary property that Bitcoin is not best in class in. It cannot be. Not and remain the open auditable world ledger it was designed to be. This is not to say Bitcoin cannot improve in this area, and I believe it will. Nor does this diminish Bitcoin’s value. It is this exact recipe that has launched Bitcoin to become, at the time of writing, a $1 trillion asset.
This is where one of the only crypto asset projects with (in my opinion) any value steps in.
Monero makes a different set of tradeoffs towards the maximization of the fungibility property. Monero’s blockchain is obfuscated at its base layer. This means no one can see the identity of anyone involved in a transaction or the amount. This privacy means Monero is ultimately fungible. You cannot say where Monero has been before it was in your possession. You would have no reason to refuse monero because it was used for something unsavory in the past. But this quality influences another aspect of Monero as a monetary good. Its scarcity is harder to verify.
So, Bitcoin is less fungible, and monero is less provably scarce. Each project offers a unique value at the base layer. Bitcoin will be able to achieve much greater privacy on higher layers, but it can never achieve the opacity the Monero blockchain has.
I would put forth the idea that there is place in the world for both crypto assets. While most experiments in the “space” are playing with properties Bitcoin has either outright refused, or can inherit on layers above the base, Monero has carved out something extremely rare in this oversaturated world of copies, ICOs, NFTs and other scams: Utility.
Monero is, in my opinion, possibly the most overlooked and undervalued crypto asset that exists aside from Bitcoin. This has been true since it’s inception. But we now stand on the cusp of trust minimized, decentralized, atomic swaps between the two blockchains (yet another essay). I would say it will not remain this undervalued forever.
Now for a bowl of tasty mushrooms!