Bitcoin and Cryptocurrency Technologies

features without needing to change Bitcoin. However, such systems are still reliant on Bitcoin — for
example, they are subject to the same fee requirements as other Bitcoin transactions. This approach
can also be inefficient, since nodes on the overlay currency may need to process a lot of data, since
Bitcoin nodes don’t filter these transactions for you.
9.2 Bitcoins as “Smart Property”
Now we’ll talk about using bitcoins to represent something other than a unit of currency in the Bitcoin
system.
Recall from Chapter 6 that you can trace ownership of value in the Bitcoin system over time, simply by
following the transaction graph. Keep in mind the caveat: there's no such thing as a “bitcoin” per se —
just unspent transaction outputs, which we refer to as coins. Every bitcoin has a history that anybody
can view in the block chain. A coin’s history traces all the way back to one or more coinbase
transactions in which coins were originally minted. As we said discussed earlier, this is bad for
anonymity, since you can often track ownership of coins this way.
Fungibility​. ​This also leads to an interesting observation: bitcoins aren't ​fungible​. In economics, a
fungible good is one where all individual units are equivalent and can be substituted for one another.
For example, gold is fungible since one ounce of (pure) gold can be substituted for any other ounce of
gold. But this isn’t always true of Bitcoin because every bitcoin is unique and has a different history.
In many contexts this history may not matter, but if the history is meaningful to someone you want to
trade with, it may mean be that your 1.0 bitcoin is not the same as their 1.0 bitcoin. Maybe they
wouldn’t be willing to exchange theirs with yours because they prefer the history of their coin to that
of your coin. For example, just as coin collectors value old coins, some day bitcoin collectors might
place special value on coins originating in the genesis block or some other early block in Bitcoin’s
history.
Smart Property. ​Could this non‐fungibility property be ​useful​? We’ve already seen why it can be bad
for privacy because of the potential for deanonymizing users. In this section we’ll look at why it can
also be useful to give ​meaning ​to the history of a bitcoin.
Let's think about what it would mean to give meaning to the history of ordinary offline physical
currency. Suppose we wanted to add metadata to offline currency. In fact, some people already do
this. For example, they like to write various messages on banknotes, often as a joke or a political
protest. This generally doesn’t affect the value of the banknote, and is just a novelty.
But what if we could have ​authenticated​metadata attached to our currency — metadata that cannot
easily be duplicated? One way to achieve this is to include a cryptographic signature in the metadata
we write, and tie this metadata to the ​serial number​of the banknote.
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