to me, Bitcoin is fungible when you think in terms of UTXO's.
which half of 1BTC is tainted from joining 0.5BTC taint with 0.5BTC pure from 2 UTXO's? when you then split that 1BTC into two 0.5BTC payments, are they both uniformly tainted or is there a discrete 0.5BTC that is tainted? how do you distinguish?
yes, an address can be tainted if identified with a drug dealer. but that's not the same as UTXO's, which is where the real action is.
I think the mixing of UTXOs that occur during each transaction makes white- or black-listing unworkable in practice. Each transaction, the taint from the input coins mixes and spreads evenly across the outputs. Taint slowly diffuses across the UTXO set such that nearly every coin--even a freshly minted coin--becomes a certain shade of gray.
That depends on the rules. It may be that the taint is contagious. Coins mixed with black coins become black, or white coins mixed with non-white coins become non-white.
My second paragraph spoke to this point. If coins mixed with black coins become black, then every coin is at risk of turning black after it's already been accepted for payment. So I don't think the currency system works
at all at that point.
There is no "natural mixing" that occurs, really. Inputs to a transaction are all controlled by the same party, unless you are using a mixing protocol like coinjoin.
Let's imagine a bitcoin thief sends three "black" outputs to three recipients whom were not involved with the original crime. The first recipient then uses this black output along with two other white outputs to purchase something from Overstock. The output that Overstock receives can now be thought of as gray and is an example of "natural mixing."
BTW, it doesn't really make sense for a freshly minted coin to have a shade of gray. Not sure what you are talking about there. Coins are either born clearly white/legal (mined via a legal, possibly-regulated process) or born black (mined otherwise).
It depends how you define taint. Imagine that a miner mines a block that awarded him 1 BTC in transaction fees. Later it's learned that those transaction fees were from coins involved in a crime (and retroactively blacklisted). Is the 26 BTC coinbase reward now "white," "black," or "gray?
If the answer is "white," then this is a great loophole for whitening coins. If the answer is "black" then this currency system is probably useless.