The Battle for Sound Money

As developer David Burkett reaches the final phases of development of Litecoin’s Mimblewimble Extension Block (MWEB) upgrade, it’s a good time to remind ourselves of what this technology is trying to accomplish and why we need it.

To understand MWEB, we must first ask ourselves, what are the properties of sound money? Also, how does Bitcoin and Litecoin compete against other forms of money (fiat currency/gold, etc.)?

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Although Bitcoin and Litecoin excel in most aspects, they do have a significant weakness — fungibility. Fungibility means that certain items could be mutually interchangeable. For example, one dollar bill is equal to another one dollar bill. One 5kg (999.99) fine gold bar could be interchanged for another 5kg (999.99) gold bar — in practical terms, it’s trading one exact item for a different exact item. Some may argue that Bitcoin and Litecoin are fungible due to 1 LTC = 1 LTC, but unfortunately — in the real world, that’s not the case.

Due to the ease of traceability on Bitcoin and Litecoin’s blockchains, a freshly mined Litecoin is not equal to a Litecoin that has 7 years of transaction history and was used to illegally purchase firecrackers on the dark web, for example. A freshly mined Litecoin could be said to be untarnished due to its absence of history, but on the other hand, a Litecoin that was mined in 2012 and has a history of being involved in a nefarious transaction in 2014 carries that weight with it for its entire existence.

Why does this matter? In reality, it shouldn’t —after all, it’s estimated that about 90% of all U.S. dollar bills in circulation contain traces of cocaine and are used for criminal activity on a daily basis. With that being said, regulated cryptocurrency institutions have decided to take an opposing stance against these “tainted” cryptocurrencies. Due to an identifiable history being linked to each Bitcoin and Litecoin and an ability for one to analyze previous transactions on their respective blockchains, unfortunately, one Litecoin does not equal one Litecoin.

For example, law enforcement agencies in China heavily investigated OTC traders for possessing “tainted” cryptocurrencies, causing these OTC traders (many of whom did not commit any nefarious acts), to prove they legally obtained their cryptocurrencies. Simply having those “tainted” coins in their possession triggered an investigation.

With a Google search, one can also find several reports of users buying cryptocurrencies on decentralized exchanges such as Bisq, only later to have their accounts on different exchanges locked for having sent tainted cryptocurrencies to their addresses unknowingly.

Because of this lack of fungibility and the lack of 1 Bitcoin really being equal to another 1 Bitcoin (due to its linked history), the quest for sounder money began.

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Mimblewimble Extension Blocks (MWEB)

After a period of research into the subject, a Litecoin Improvement Proposal (LIP) was established in 2019. Through this LIP, it was decided that the best way to move towards increasing fungibility would be via a technological advancement known as MWEB. The Litecoin Foundation established a donation-based fund to help contribute to Grin ++ developer David Burkett, a Mimblewimble expert, to complete the task.

Mimblewimble (MW) is a protocol created by the anonymous figure “Tom Elvis Judesor”. Interestingly enough, MW was given its name due to it being the “tongue-tying” curse in Harry Potter and “Tom Elvis Judesor” being the French name of the character Tom Riddle. MW is a combination of different technologies including, but not limited to, “Confidential Transactions” (hides transaction amounts) and “CoinJoin” (a “coin mixer”). Some of these concepts were developed and conceptualized by Bitcoin contributors such as Gregory Maxwell, Adam Back, and Andrew Poelstra.

On the other hand, the “EB” in “MWEB” stands for Extension Blocks, which was a proposal set forth by Bitcoin developer Johnson Lau in 2013. Extension blocks can be seen as an interconnected “adjacent chain” (or, imagine a parallel highway) running next to Litecoin’s main chain. Traffic on both highways flows at exactly the same pace and if one wishes, they can continue to transact on the Litecoin main chain without ever having to jump over to the MWEB side. Vice versa, if one wanted to, they could stay on the MWEB side. MWEB is opt-in and therefore, using it is completely optional.

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Due to its built-in features, by using the MW chain, you receive the benefits of improved fungibility and privacy.

To utilize MWEB, a crypto wallet or exchange would be required to integrate it and help serve as the gateway from which you could move your coins in/out from the main chain over to the MWEB side. Exchanges that support Litecoin can decide whether or not to support Litecoin’s MWEB feature and are not forced to embrace it.

Prior to making the decision of integrating MWEB, Charlie Lee and the Litecoin Foundation contacted several exchanges to discuss this opt-in feature and gain feedback on the idea. After reaching out, the conclusion was that the risk was low. If for some reason, government’s one day decided to suppress privacy-enhancing cryptocurrencies (which would consist of applying pressure on regulated crypto exchanges), exchanges would only have to stop supporting the extension block and not Litecoin’s main chain. This is one of the main reasons why this feature was chosen to be opt-in and not obligatory.

In every decision taken, there are trade-offs. In Litecoin’s case, the trade-off for basic/light privacy (opt-in, MW) was made with the intent of being more exchange friendly — and being exchange friendly, also remain liquidity-friendly. On the other hand, a cryptocurrency that’s completely private in every way, shape and form faces a much higher risk of an exchange delisting. This increases the difficulty for people entering the space to gain access to the cryptocurrency.

Although MWEB provides basic privacy features, MWEB should not be used for illicit activities requiring an extreme amount of privacy due to the potential for transactions being linked together via sniffer nodes. There are other methods such as using services like CoinJoin prior to broadcasting a MW transaction to achieve a higher level of anonymity if one wishes to.

MW continues to be a work in progress and the protocol continues to be improved upon — for example, non-interactive MWEB transactions were not in the original plans for Litecoin, but will now be included thanks to continued improvements in the space.

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Although this technology is still in its initial phase, at the very least, today, it will provide the benefit of hiding transaction amounts and improve scalability due to its ability to compact transactions (by erasing parts of the transaction history and only keeping track of unspent coins). MWEB has the ability to scale better than Litecoin and Bitcoin while also having the side benefit of acting as a block size increase on the main chain without there actually being one. This helps increase Litecoin’s transaction throughput.

Recently, David Burkett made a Tweet stating that he believes usability could eventually become as easy as typing in a specific MWEB address to send your coins to.

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It’s interesting to note that the addition of MWEB will mark the second time in Litecoin’s nearly 10 year existence in which Litecoin implements an upgrade prior to Bitcoin. The first time was in 2017 when Litecoin activated SegWit first. Usually, the upgrades flow from Bitcoin towards Litecoin but when it’s proven necessary, Litecoin is capable of taking the first step. With Bitcoin and Litecoin’s code being so similar, the opportunity to bounce technology back and forth between each other is substantial. There’s a possibility that Litecoin’s MWEB may serve as a blueprint for Bitcoin to one day achieve higher fungibility and privacy as well.

What’s the purpose?

This brings us to the question, why do we need MWEB? Why is Litecoin going through this hurdle and deviating from Bitcoin to accomplish the task at hand?

Put simply, would you like it if your friends and family (or complete strangers) knew how much money came into and out of your wallet on a daily basis? The purpose of MWEB is to achieve higher fungibility and improved privacy as a basic human right.

If a company wanted to pay employees in cryptocurrency, it’d be essential for those transaction amounts to be private — if not, “employee A” would be able to analyze how much “employee B” was receiving. The secretary from department 1 could very easily realize she’s getting paid less than the secretary from a department 2. One can quickly realize how scenario’s like this could become troublesome from an ethical and legal standpoint.

Today, there are also many third party organizations tracking transactions on the blockchain. For example, a popular Twitter account named “Whale_Alert” publishes how much money (in cryptocurrency) is being transferred from one wallet to another. It’s quite literally alerting us of high net-worth individuals moving their funds and how much they’re moving. The problem is, it’s likely not in a “whale’s” best interest for third parties to analyze how much money they’re moving, especially if one of those wallet’s is associated to a name or a company. “Whale_Alert” is only one of the many chain-analysis groups that currently exist. There are many spectators viewing the ongoing transactions on each network at all times and unfortunately, they all have varying motives.

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For one reason or another, increased privacy has been a topic that’s been pushed to the side in many crypto circles although in the fiat world, financial privacy has been here and continues to persist. An example of basic financial privacy is the ability for one to make cash transactions.

In 2018, The Federal Reserve conducted a study and came to the conclusion that about 26% of all transactions in the U.S. are settled in cash. That’s right, in the digital era we’re currently living, a quarter of all transactions were made with paper money. Per the study, cash was also the second most utilized payment instrument.

In our current data-driven world, cash continues to be one of the most private forms of payment and, with MWEB’s added features, Litecoin will become the most cash-like cryptocurrency in the top 10 due to its added anonymity features.

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Where are we currently at?

Currently, MWEB’s testnet has been up and running for about 3 months and according to David Burkett, “has been running smoothly”. A recent update included a visual representation of how a wallet with a peg-in/out of Litecoin’s MWEB could look like.

It’s estimated that MWEB will be completed around Q1-Q2 of 2021. In a recent progress update thread, David Burkett stated that MWEB will be “code-complete” by March 15, meaning the code will be ready for final review and formal auditing. When this process is completed, miners will then have to signal their support for the update.

As Litecoin continues to make progress in the never-ending battle for increased fungibility and privacy, it will also take a leap towards becoming one of the most all-around, soundest forms of money in existence. Thanks to MWEB and the ongoing dedication of all of the contributors involved, Litecoin is en route to fulfilling the last missing trait of good, hard money.

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