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I don't disagree that this happens or will happen but IMO the issue as you present it is a construction of fiat parasites especially interested in undermining the privacy and fungibility of Bitcoin.
As we slowly move away from this paradigm I believe it will eventually become a non-issue. Moreover I understand there is significant progress being made toward implementation of privacy related features in things such as sidechains which contribute to solve the related issues.
I agree that this is exacerbated by "fiat parasites", but I disagree it comes only from this.
Even in a fully Bitcoin-based economy, I don't see why it would disappear. You could still refuse to deal with coins out of belief or social pressure. Think of the US dentist who went to kill this lion and was everywhere in the news: imagine if he had paid for the "right to kill" with bitcoins, that the entire world would know at a given instant would be on an address X. Don't you think some people out there would refuse them for a payment?
I believe it will always happen, if you can attach history to coins (in practice outputs).
You could also refuse to deal with coins out of legal fear. If you own anything (money or objets) that you know is coming from a theft, you're legally liable as well (fence in English?). If you don't know but didn't take sufficient precautions, and the circonstances should have raised suspicions from you, you're liable as well; at least where I live. Why would the legal system be any different with coins? In fact it's worse: it is much easier to do your due diligence with bitcoins than with real world items, so you can be also accused more easily.
EDIT: I forgot about sidechains. A sidechain implementing "confidential transactions" would help with privacy (despite not providing untraceability - that is not hiding the origin of the funds). But they don't solve fungibility: they could be seen like a mixer, and with limited liquidity. Coins seen entering in to be made more private, then seen going out. It is easy to be "hey why did you sent coins to this sidechain?", or "I don't want coins that visibly were mixed on the sidechain!".
The reason I believe no meaningful functionality to bring more privacy to the bitcoin protocol any time soon or ever is because
it would violate the social contract bitcoin has in place with corporations and businesses that are attempting to be compliant with regulators in their respective countries of operation.
Get outta here....
Bitcoin has no such "social contract" with fiat corporations and regulators. That is absolute nonsense.
We obviously disagree.
Go tell Coinbase that you as a user (hypothetically YOU are) are going to now operate on a side chain or with CT which may make it difficult for them to determine where you coins came from given the original definitive protocol for bitcoin is 100% transparent blockchain.
See how much they disagree that the social contract was NOT broken by developers of bitcoin and its users (i.e. Coinbase) for this example.
Fuck Coinbase. The only reason why they'd bother with these details is because they need to suck up to fiat institutions.
What the hell would I use Coinbase for anyway? Coinbase could go bankrupt for all I know Bitcoin doesn't care and it certainly has no social contract with these banking parasites.
The whole system was built on the premise of being permissionless. You think they have a right to say anything if somehow chooses to develop privacy features on top of Bitcoin?
I dont use Coinbase either but if you use my example you will see my point.
People will use centralized services for some time to come. And I think it will be that way to a certain extent for a very long time, doesnt matter the system.
Your supposed perfect world where everyone uses bitcoin to transact and says "fuck you" to any business attempting to operate as an exchange, mixer, payment processor is not going to happen any time soon (within the next 5-10 years), if ever.
Sure bitcoin will be still around but I doubt there will be that perfect scenario where the issues I've brought up do not exist.
Just because you do not choose to use 3rd party centralized services to transact does not stop others from doing it. And ignoring that fact is actually very ignorant as sometimes you have to put yourself in the shoes of others to really understand what the implications of those people choosing to operate/transact mean for the overall marketplace.
Coinbase is to be used to buy bitcoins. If you are intelligent enough you will move them out of there ASAP.
If you are one of these noobs you describe you will buy from Coinbase and use their wallet but seeing as you've bought from them you should expect to have "clean" coins, no?
What you are essentially saying is that people unable to use Bitcoin as it is intended to be might encounter problems.... well frankly that's too bad for them but it has no incidence on Bitcoin.
That's like saying Bitcoin has a security issue because of Mt. Gox. No, the problem is the user, not the technology.
