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What does fungible mean? 📖
Fungible refers to any kind of money or commodity that can be replaced with an equal value of money or commodity. It is originally derived from the Latin verb ‘to perform’.
Fungibility goes back as far as time can, where fungible assets were used for trading and barter. Fast forward to the modern era, casino machines and arcade games have been using tokens that can be exchanged with money.
This concept is also present in blockchain and it refers to the ability of a non-unique cryptographic digital asset to be divided or exchanged equivalently with another asset of a similar kind.
The opposite of these tokens are non-fungible tokens or NFTs, which cannot be exchanged and are unique.
Types of tokens
However, if we were to categorize tokens, we would categorize them as
- Utility tokens – holders get access to blockchain-based services
- Security tokens – basically stocks and shares in the form of digital tokens on a blockchain
Now, these are broader terms. You can just refer to them as fungible and non-fungible.
Difference between a crypto coin and a token
We talk about coins and tokens all the time but rarely do we ask about the difference between the both. In order to understand the difference between fungible and non-fungible tokens, it is important to understand the difference between a token and a coin.
|These are essentially cryptocurrencies that are native to a certain blockchain
|Tokens are more of digital assets that operate on a blockchain via smart contracts usually
|Coins are usually mined through a consensus mechanism of a blockchain
|Tokens are not mined. They are rather created on a smart contract.
|Crypto coins are usually used as a medium of exchange
|Tokens have less to do with exchange. They are uniquely suited as luxury goods.
|The total supply of a crypto coin is specified
|Tokens can have an unlimited supply meaning infinite different tokens to be created and sold
Difference between fungible and non-fungible tokens
Since we are majorly talking about fungible and non-fungible tokens, here is a table for you to understand the principle differences between the two quickly.
|Two fungible tokens always have the same value and are easily interchangeable
|Two non-fungible tokens can not have the same value and are definitely not exchangeable
|When exchanged for one another, neither their value nor their functionality is affected
|Non-fungible tokens are never identical because of the different and unique characteristics that they possess
|Divisibility is a quality that can increase or enhance the supply of a fungible token
|Non-fungible tokens are unique which is why they can not be divided hence limited supply
|Ether, Bitcoin (BTC), etc.
|The Bored App Yacht, Crypto Punk, etc.
Can coins also be non-fungible?
That is a really interesting question. You must know that a coin is native to a blockchain whereas a token is created on a blockchain.
As a result, coins are usually fungible because they serve as a medium of exchange and a proper currency (albeit virtual). As fungible assets, they are also interchangeable and exchangeable.
Thus, it makes no sense for a coin, a currency, to be non-fungible. However, there is one class of coins that resemble tokens that are non-fungible.
How, you ask? Well, they have some unique characteristics or numbers that vary from coin to coin. Think of such coins as blocks on a blockchain with each block having a different hash value that serves as its identity.
These coins also kind of work like the blocks on a blockchain which makes them non-fungible. Such coins are known as “numismatic coins”.
A good example of a fungible token
Contrary to coins, tokens can be both fungible and non-fungible. A good example of a fungible crypto token would be the ERC-20 tokens of the Ethereum blockchain. Fungible tokens serve as many purposes as a fungible coin would do.
Some stablecoins can also come under the umbrella of a fungible coin. These tokens have a fixed value, are interchangeable, and can also be divided. This makes them much easier to be traded.
Use cases of fungible and non-fungible tokens
Both fungible and non-fungible tokens have different use cases and they are as follows.
- Fungible tokens
- They can be used to purchase goods and services.
- Similar to fiat currencies, you can hodl fungible tokens to earn some amount in return.
- Having access to fungible tokens can allow you to access services and features within an ecosystem.
- Non-fungible tokens
- NFTs like RealIT and Propy can be used in real-estate tokenization for asset ownership.
- They can also be used in gaming and gaming freaks can buy the tokens and collect them.
- Finally, NFTs usually are collectibles and as mentioned, they can easily fall into the luxury items domain.
The best analogy to understand fungible tokens
Suppose if Person A borrows $50 from Person B.
It does not matter if Person A repays the loan with a different $50 bill as it interchangeable. Even if Person A returns the money with two $20 and one $10 bills, it doesn’t make a difference, because it is equal in the value.
The blockchain technology that underlies Bitcoin is a major technical breakthrough that could, in time, revolutionize both the Internet and the financial industry as we know them, and the first steps of that potential revolution are now under way.Jon Evans, a famous writer and software engineer on Bitcoin fungible tokens
In conclusion, fungible tokens like cryptocurrency are of great use in the blockchain space and have the capability to change the trading system.