Fungibility is the cornerstone of sound money. It means that every unit of a currency is interchangeable with any other unit of the same value. This property is what allows money to function as a frictionless medium of exchange.
Bitcoin, with its public and transparent ledger, faces unique challenges to fungibility. Every Unspent Transaction Output (UTXO) has a traceable history. Blockchain analysis can lead to the "tainting" of certain UTXOs due to their past history. If market participants begin to reject tainted UTXOs, fungibility erodes.
To combat this, techniques like CoinJoin have been developed—brilliantly implemented in protocols like WabiSabi (used by Wasabi Wallet)—to obscure the deterministic link between transaction inputs and outputs.
However, the predominant CoinJoin architecture has introduced a critical weak point: the Coordinator.
The Role (and Power) of the Coordinator
The most popular CoinJoin implementations are not fully P2P; they rely on a central server, the Coordinator, to orchestrate the mixing round.
The WabiSabi protocol uses sophisticated cryptographic techniques, such as keyed-verification anonymous credentials (KVACs) and homomorphic value commitments, to ensure the coordinator can neither steal funds nor directly link specific inputs to specific outputs during the round.
However, the coordinator maintains critical power during the Input Registration phase: it decides which UTXOs can participate.
The Attack Vector: Input Censorship
Herein lies the fundamental problem. Because the Coordinator sees all inputs before the mix, it has the technical power to refuse participation to specific UTXOs.
In recent years, under growing regulatory pressure (from FATF, OFAC), some of the largest coordinators (including Wasabi's default coordinator, zkSNACKs) have begun implementing blacklists. If a UTXO is flagged as "high-risk" by a blockchain analysis provider, the Coordinator blocks its access to the CoinJoin round.
This act, ostensibly aimed at compliance, is a direct attack on Bitcoin's fungibility.
The Devastating Impact on Fungibility and the Anonymity Set
Coordinator censorship creates a fracture in the Bitcoin economy and undermines the very effectiveness of CoinJoin for all users.
1. The Creation of a Two-Tier Bitcoin
If "tainted" UTXOs cannot access the main liquidity pools for mixing, they remain traceable and segregated. This creates a de facto two-tier economy: "clean" Bitcoin and "dirty" Bitcoin. If 1 BTC is not equal to 1 BTC because of its history, Bitcoin fails as money.
2. The Erosion of the Anonymity Set (AnonSet)
The effectiveness of a CoinJoin is measured by its Anonymity Set. The fundamental assumption is that every input is equally likely to correspond to any given output.
When a coordinator censors, this assumption collapses. If an outside observer (e.g., Chainalysis) knows that the coordinator blocks a known list of "suspicious" UTXOs, they can deduce that none of the outputs belong to those UTXOs.
Privacy is not just diminished for the censored users; it is diminished for everyone in the round. The effective AnonSet is compromised because the set of potential participants is artificially limited. As noted in several academic analyses (e.g., Stütz et al., 2022), pre-mixing traceability constrains anonymity; censorship amplifies this effect.
3. The Privacy Paradox and False Positives
Blockchain analysis is probabilistic, not deterministic. "Tainting" is transitive and often generates false positives. An innocent user might receive funds that, several "hops" prior, were near a suspicious activity. If the coordinator censors, the innocent user is punished and denied access to privacy.
Ironically, by excluding users who seek the most privacy (who may have complex UTXO histories), centralized coordinators transform CoinJoin from a robust tool into a mere "compliance veil."
Conclusion: The Need for Neutral Infrastructure
The fight for Bitcoin's fungibility cannot be won by relying on centralized entities subject to coercion.
True privacy requires neutral, censorship-resistant infrastructure. A neutral coordinator enforces only the rules of the protocol: it verifies the technical validity of a UTXO (does it exist? is it unspent?) without judging its history.
Supporting and using neutral coordinators (like SwissCoordinator.app) is not just a choice to improve one's own privacy; it is a strategic imperative to preserve the fundamental properties that make Bitcoin revolutionary. Without neutrality at the coordination layer, Bitcoin's fungibility remains at existential risk.