Privacy, Fungibility, Anonymity
Even though Bitcoin is the worst privacy system ever, everyone in the community strongly values privacy [src]
This isn’t unique to us, Bitcoin developers. This is a well-known and well-researched phenomenon called the privacy paradox. People claim to highly regard their privacy, yet they are observed to neglect it instead.
However profound it may be, the privacy paradox is just the tip of the iceberg. Deeper reflections on personality and society await us when setting out to dive into the ocean of nyms and identities.
Privacy is an essential ingredient for self-development. Global privacy trends will revolutionize governments. And fungibility of the world’s next reserve currency will shape humanity’s progress forward.
In this essay, I’ll discuss the concepts of anonymity, fungibility and privacy; and examine some surprising psychological, geopolitical and economic implications of the technological advancements those are about to sway the future of privacy.
Anonymity
Let’s start our in-depth exploration of privacy in the land of mathematics, because that’s where the concept of anonymity lives.
Anonymity was first formalized in a 1998 research paper titled Protecting Privacy when Disclosing Information: k-Anonymity.
The authors presented two methods — generalization and suppression — to k-anonymize data. What does the k stand for? You are k-anonymous if there are k-1 others who could have also done the same action you did, thereby hiding you in a k sized crowd. This crowd is formally called your anonymity set. The larger the k is, the more anonymous you are. And k = 1 represents a unique identity. Consequently, anonymity is teamwork. Anonymity loves company.
We can use anonymization through generalization in Bitcoin by creating collaborative transactions.
For example, Wasabi Wallet often brings together 100 individuals to make collaborative and shared transactions, namely coinjoins. A Bitcoin transaction comprises inputs and outputs, where the role of inputs is to spend unspent transaction outputs (UTXOs) and the outputs are anew UTXOs.
Wasabi users k-anonymize their unique UTXOs such that the result of the coinjoin is ideally 100 distinct, yet k-anonymous, outputs, where k = 100. These k-anonymized UTXOs are indistinguishable from each other. This is how anonymization, a mathematical tool, realizes the indistinguishability — also known as homogeneity or fungibility — property of a currency.
Fungibility
Money is the most successful story ever told. It has no objective value… but then you have these master storytellers: the big bankers, the finance ministers… and they come, and they tell a very convincing story — Yuval Noah Harari [src]
For humanity to thrive, it is paramount to improve the technology of money.
Advancements in human cooperation — pointing, speech, storytelling, writing, money — are a major reason for our success as a species.
Leaving the trees behind, our ancestors learned to point to the same target. Later, they learned to point with their mouth. Then, they realized it’d be a shame if these hunting stories remained untold and unwritten. At last, they found the holy grail of human cooperation: Money. It allowed us, for the first time in history… Hey hey hey, slow down!
Stories are prevalent in every area of our lives. They aren’t only in books, movies, and games, they also come up when you think, talk, write, or code. They even make their way into the most logical and rigorous scientific research papers. We’re biologically hard-wired for stories because knowledge and wisdom was passed down through generations using storytelling. The invention of stories scaled human cooperation over one’s lifespan.
Then money came along: “the most successful story ever told.” Harari identifies money as the only story that everyone believes in. We share no belief in God, we share no belief in Democracy, we share no belief in Human Rights, but we all share a belief in money. Why?
Money allowed us, for the first time in human history, to abstract away the fruit of our labor — the point of our stories — to its purest form: value. Then, we could preserve it and even exchange it for other goods and services. The more securely stored our worth is and the less friction is required to exchange it, the better the quality of the money. Therefore, it’s crucial for the progress of humanity to build increasingly improving money technologies.
What is the best money we might conceptualize?
Thousands of years ago, an Athenian gentleman, Aristotle, identified the Properties of Good Money. Although economists are still debating the details, the basic idea is this: money must be durable, divisible, scarce, stable, acceptable, portable, and fungible.
Bitcoin — or another cryptocurrency, but most likely Bitcoin — will flippen the USD and become the most valuable currency. With the exceptions of stability, acceptability, portability and fungibility, Bitcoin fulfils the properties of good money. I regard stability and acceptability as meta properties. As the market capitalization of a currency grows, these properties get satisfied. Portability is also something well incentivized to be taken care of, although the challenges of making Bitcoin cheap and fast are far from trivial, the brainpower⚡ directed towards achieving these goals is extraordinary.
This leaves us with fungibility as the primary property to focus. The most important thing one can choose to work on is Bitcoin’s fungibility.
Money in its various guises derives its usefulness from the fact that one can be relatively certain that a dollar received is a dollar able to be spent without friction or uncertainty — Alastair Berg [src]
Fungibility contributes to the quality of money.
Fungibility is a scale. It tells how interchangeable and indistinguishable individual units of a money are. In his 2019 paper, economist Alastair Berg states “That the fungibility of money reduces the costs of exchange is well explored (Brunner and Meltzer, 1971; see also Banerjee and Maskin, 1996, p.958; Menger, 1892)”.
This does not come as a surprise as contravening fungibility violates the fundamentals of money. It introduces friction in exchanges and makes people question their belief in the money itself. Berg continues, “Fiat currency derives its usefulness from the likelihood that it will be acceptable in some future exchange, rather than having any intrinsic value or secondary uses.”
Privacy
Fungibility of a currency ensures privacy of the individual.
Privacy is the individual’s ability to reveal themselves selectively to the world. The adjective private is often used synonymously with the adjective secret. However, the latter’s noun form, secrecy, fails to capture the meaning of privacy, which leads to confusion over the terminology. A more legal strand of definitions emerged in 1890, when privacy was first proposed to be a fundamental human right and defined as “the right to be let alone.”
A currency lacking fungibility takes away the individual’s freedom to keep their financial matters personal and define the boundaries of their financial life; therefore, lack of financial privacy is a direct consequence of inferior fungibility.
Privacy isn’t only a toy for lawyers or philosophers, since it encompasses an individual’s ability, it also has profound psychological relevance.
We all begin life by having zero privacy. Then, as we grow, we learn to define our boundaries; learn who we let close and who not. Studies on children illustrate this: as they grow, they develop their Self concept.
Studies of prison populations show that the opposite of privacy development occurs in these spaces. In such circumstances, the Self concept of inmates shrinks down significantly to their body, some immediate actions, and a few belongings.
It’s unfortunate when our privacy is taken away by force, but it’s more productive to concentrate on situations when we’re giving it up voluntarily, because this seems to occur frequently, too. In reality, we aren’t giving up our privacy for nothing: we’re trading it for something. It’s simply that the something we are trading it for is often so insignificant that it looks like we’re just giving away our personal information to whomever. This is also the explanation for the privacy paradox: poor cost-benefit analysis and risk assessment.
Although there is nothing inherently wrong with trading our Selves for money or other benefits, it’s important to know that if we aren’t making these decisions consciously, then our Self concept isn’t developed enough. We don’t have a good idea of where our own boundaries are. We don’t know our Selves well enough to decide what personal information we want to trade in exchange for using Facebook or for one of its third party application that can magically tell us what house we’d belong to in Hogwarts.
The fundamental political difference between people is: how many walls should there be around your stuff? The ultimate liberal answer is zero and the ultimate conservative answer is: “Bring on those walls!” — Jordan Peterson [src]
Currently, society is undergoing rapid developments due to accelerating scientific advancements. How will our privacy — our liberty, our individualism — be affected by these changes? What does the future hold? According to economist David Friedman, technological trends are pointing towards a world of strong privacy but not the way one might expect.
Technologies of anonymous communication, anonymous currency, and reputation systems have been invented. They cannot be un-invented. These are all the ingredients needed to build a circular economy with strong privacy in cyber-space. Simultaneously, in meat-space our privacy is eroding. How long will doors and curtains — which are currently cutting-edge meat-space privacy technologies — hold against the advancements of mass surveillance?
Technology extends human power. Maybe the only way to avoid catastrophes, where humans wrongly exercise their newly gained divine powers — like releasing deadly viruses to the world — is if everyone surveils everyone all the time? Maybe a transparent society in meat-space is necessary to balance the power that technology gives us after all?
But all this will be irrelevant. As cyber-space grows — including Virtual Reality, which is increasingly becoming more immersive — meat-space is losing its relevance, and for many it already has. Therefore, it won’t matter that we’ll be surveilled in meat-space because we’ll be just doing fine where it matters: in cyber-space.
Friedman’s speculation goes even further: in a world where the bulk of the economic activity happens outside of the control of governments — online — governments will become the equivalent of landlords. They’ll compete for citizens to maximize tax revenues, and sovereign individuals will be free to choose where they want to live.
Economic activity hidden by strong privacy cannot be taxed. If you think that the world would be a better place if government had more access to other people’s money, then you think it’s a bug, otherwise it’s a feature — David Friedman [src]
In Conclusion
Anonymity is a mathematical tool used to realize other values like privacy of the individual or the fungibility of a currency. In economics, fungibility is a contributor to the quality of money, which facilitates privacy of the individual. Privacy is essential for the development of the Self. This notion of the field of psychology is especially important, because our privacy — our ability to define our boundaries — has changed in the past, continues to change in the present, and is expected to undergo more radical changes in the future.
The privacy challenges of the future will not be the same as those of the past. I predict that we’ll have strong privacy in cyber-space and weak privacy in meat-space. As economic activity is moving from the offline to the online world, the relevance of meat-space will shrink; simultaneously, the relevance of the cyber-space will grow; therefore, we’re looking ahead to a world of strong privacy.
