Litecoin founder Charlie Lee has been talking about the importance of fungibility for quite some time. Even during his exclusive interview with Crypto Insider, Satoshi Lite has decided to bring up the issue and give us an insight on his recent thoughts: “So, having something like confidential transactions will get us closer to good privacy and good fungibility, and that is something that I am currently thinking about exploring for Litecoin.”
The underlying idea is very simple: if one coin becomes more valuable than another thanks to its history of transactions, or if there are monetary units that face restrictions due to their whereabouts, then the currency isn’t fungible. And when making a transaction reveals the entire balance, it becomes a problem for people who are cautious about their financial privacy, which may deter shoppers from spending their cryptocurrencies (just like someone taking a $20 bill at the cash register wouldn’t want to also reveal how much money he has in his wallet).
Therefore privacy and fungibility are two essential aspects that are intertwined: if nobody knows that the dollar bill in your pocket once belonged to either Pablo Escobar or Brad Pitt, then every unit is equal and can be exchanged for any other. In order to enable this ideal scenario of non-discriminated trades, Charlie Lee has been considering the addition of Confidential Transactions since the fall of 2018.
But it wasn’t until January 28th, 2019 that the Litecoin founder has officially announced that Confidential Transactions would get added through a soft fork. In Mr. Lee’s words, he is now “focused on making Litecoin more fungible by adding Confidential Transactions”.
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 are Confidential Transactions and why are they good news for Litecoin?
Confidential Transactions, also referred to as CT, refer to a technology invented by Bitcoin Core developer Gregory Maxwell, which allow both the sent amount and the receiver’s address to remain hidden. It’s a great way to obfuscate transactions and enable Litecoin traders to benefit from greater fungibility, but it’s not a perfect privacy method.
Furthermore, using Confidential Transactions will be optional, and will cost a lot more due to increased data flow and the requirement for other confidential addresses to be created in the process, consequently occupying more block space. Tom Elvis Jedusor, the creator of the Mimble Wimble protocol proposal, has referred to the technology as being data-hungry: “These solutions are very good and would make Bitcoin very safe to use. But the problem of too much data is made even worse. Confidential transactions require multi-kilobyte proofs on every output“.
Nonetheless, the technology is already being used with success on Blockstream‘s Elements platform, a hard fork of Bitcoin that retains many of its properties. It’s a nice testbed for this new technology which eased the creation of the Liquid federated sidechain (which uses Confidential Transactions as a default feature). However, there’s a big difference between adding features to a project like Elements whose purpose is mostly experimental and which provides small scale tests, and a cryptocurrency that people transact with on a daily basis and whose trading volume amounts to hundreds of millions of dollars. That’s why Litecoin’s experience is still valuable to determine if this upgrade is safe for king Bitcoin.
For quite some time, Litecoin has been known as a testnet for Bitcoin – and it was its successful adoption of SegWit that marked a turning point in the scaling debate, potentially contributing to the scrapping of the SegWit2X project. Once again, the digital silver spearheads a risky decision and opens up the treasure chest of uncertainty to see how a new technology will function on a larger scale. And it will definitely be interesting to see how successful this experiment turns out to be.
For a more in-depth technical analysis of Confidential Transactions in relation to Litecoin, please refer to ecurrencyhodler’s article on the topic.
What are the downsides of Confidential Transactions?
If hiding the sent amount and the recipient is such a brilliant idea for privacy, then why hasn’t this years-old discovery been implemented sooner? Well, there are two big concerns: the first one deals with the extra block space that these special transactions require. A blockchain like Bitcoin is getting bigger every day, and since the scaling method of choice involves small blocks, having these large-sized transactions would become costly and detrimental for the entire network. Thanks to its quicker block time and adoption of SegWit, Litecoin can take this data burden with more ease.
The second concern has to do with bugs that lead to secret inflation that gets detected when it’s too late. The main value proposition of Bitcoin is that there will never be more than 21 million coins, and therefore the price is expected to increase thanks to a gradual growth of demand and the scarcity factor. If more coins were issued through a more or less malevolent bug, then the incident could spell the end of Bitcoin.
In the situation of Litecoin, the situation is slightly different. Though the supply of 84 million coins is fixed, its “digital silver” philosophy and its implied Keynesian purpose wouldn’t be affected as much by a hidden inflation bug. If more coins were discovered to have been mined, then the price would suddenly decrease. But the slightly more centralized nature of Litecoin would allow for quicker adjustments to please both miners and holders.
Yes absolutely, and that precise risk would be why I would argue against CT ever being added to Bitcoin.
— Riccardo Spagni (@fluffypony) June 9, 2018
Ultimately, Charlie Lee is making a very bold decision with an equally ambitious goal. In his quest for privacy and fungibility on a cryptocurrency that is specifically designed for commerce, he is also testing a technology that Bitcoin developers were reluctant to experiment with on the main chain. If the attempts prove to be successful, then we might just see a similar implementation being deployed on BTC. Otherwise, we are witnessing a slight departure from the perfect testnet approach of Litecoin, as the digital silver walks a solitary path towards mainstream adoption. The seven-year-old might finally mature and leave the nest. As for bitcoiners, they will likely be stuck waiting for Atomic Swaps with Monero or a Mimble Wimble sidechain.