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Comment by dacox | Hacker News Reader

I agree the imagery is not helpful. However, these privacy preserving tools are very important for digital currency.

Currently, if you receive money it is possible to trace it back to some event, be it a theft, or funds used in some legal or moral grey area.

While these tools will make it easier to launder money, they will remove this "taint".

It is possible and likely that governments will attempt to censor transactions using these "tainted" funds, seriously damaging fungibility.

Many believe that for digital currency to succeed, it must be fungible - the title of the Bitcoin whitepaper is "Bitcoin: A Peer-to-Peer Electronic Cash System".

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The difficulty in tracing Bitcoin is probably holding the technology back as a routine payment system. Every few months, there's another big ripoff, and the money is rarely recovered. These are usually blamed on outside "hackers", but most of the time it's an inside job.

Untraceable remote money transfers to anonymous parties are the scammer's dream. This makes Bitcoin a scam magnet.

I would argue that this comes from attempts to centralize a fundamentally decentralized currency.

With a centralized currency, the central repositories of currency have ultimate control over the currency: if a mistake or fraudulent transfer occurs, they revert it.

With a decentralized currency, the central repositories of currency have no real control over the currency if they lose control of the keys.

The solution, of course, is don't centralize. At a low level of course, theft can still occur, but notably, if a bank decides to steal from you by i.e. introducing fees or whatever, you they can do that and you can't really do anything about it.

What would a decentralized way to buy BTC for USD/whatever look like? That sounds like a nightmare to design without a trusted 3rd party because you're mixing reversible and irreversible transactions.

LocalBitcoins is one way.

Another would be to only store the centralized currency, and only facilitate transactions. So the person with USD deposits USD into the facilitator's account and provides a Bitcoin address to the facilitator. When the person with Bitcoin decides to make the trade, they make a Bitcoin deposit to the facilitator's account. The Bitcoin deposit automatically gets forwarded to the person who deposited the USD, and the USD gets forwarded to the person who had Bitcoin.

At no point in this transaction does the facilitator store Bitcoin.

Wouldn't that require the escrow agent (your facilitator) to either only make deals between active users (so that they can sign the transfer transaction from Alice [selling] to Betty [buying]) or for the escrow to have some multipart key with Alice that has a blank recipient address? I'm not sure we've gotten away from the escrow/exchange storing BTC there and it sounds like a very unliquid marketplace.

Yes, it would require deals to happen between active users. This does to some extent reduce liquidity, but I am skeptical that such liquidity is more valuable than security from having all your money stolen.

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