Fungibility vs. Non-Fungibility Explained: A MUST KNOW in FinTech

By Alyze Sam and Tech & Authors

When dabbling in financial technology or NFT investments, it is wise to understand fungibility and non-fungibility.

Definition

The potential seen in financial technology expands far beyond digital tokens. Cryptocurrency enables individuals and companies to place IDs, certificates, real estate data, and other important information about real-world assets on the blockchain. Therefore, when discussing cryptocurrencies, one comes across the terms' fungible' and 'non-fungible’.

Important to Note in Stable Economies

The word 'fungible' is derived from the Latin verb fungi, meaning "to perform."

The dictionary describes fungible as an adjective meaning "being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind."

The study of economics suggests fungibility is the property of a good or commodity which retains individual interchangeable units where each counterpart is indistinguishable.

In standard dialect, it is crucial to consider that fungible can be defined as "interchangeable," "changeable," "fluid," or "malleable."

Generally speaking, it was a term most often heard in legal contexts, at least until digital assets became a popular topic of discussion.

In efforts to fully understand stable assets, one should gain a foundation in fungible and non-fungible assets.

Examples and Everyday Use Cases

Fungible assets are helpful in stable economies because they simplify the exchange and trade processes, as fungibility implies equal value between assets.

Fungibility refers to non-distinguished entities. Fungible items are interchangeable, substitutable, or uniform.

One kilogram of genuine gold is comparable to another kilogram of pure gold, whether in coins, ingots, jewelry, or other states. Gold is fungible, no matter what shape it takes.

Another example is that $10, represented by a single ten-dollar fiat bill, has an identical value and is seen as the same as $10 represented in two five-dollar fiat bills.

When two commodities are considered fungible, this implies they are indistinguishable in the specification, or that a specific unit can be interchanged. 📷

Consider distinct grades of commodities in fungibility. No. 2 yellow corn is fungible considering it does not matter where the corn was produced; all corn designated as No. 2 yellow corn has the same value.

Other fungible commodities can include company shares, bonds, crude oil, precious metals, and currencies.

Fungibility refers only to the equivalence and indistinguishability of each unit in a commodity. Fungibility does not apply to the exchange of one commodity for another, which is barter.

Cross-listed stocks, equal shares of stock listed on domestic and various worldwide exchanges, are further acknowledged fungible. The shares signify the corresponding ownership interest, whether acquired on the New York Stock Exchange or the Tokyo Stock Exchange.

Although digital currencies, cryptocurrencies, and stablecoins are considered fungible assets, some are unique and non-interchangeable. Non-fungible tokens (NFTs) are digital collectibles that have this quality.

As a disruptive technology transforming the financial scenery, blockchain is redefining what fungible and non-fungible assets can be. Proof-of-concept in blockchain technology was first introduced in 2009 in the Bitcoin White Paper by Satoshi Nakamoto. The first cryptocurrency appeared to fall into an asset class that shared some similar characteristics of traditional currencies.

The success of Bitcoin encouraged other developers to build new projects with blockchain, birthing a new digital economy. This brought more individuals to research the different categories of each owned digital asset for taxation purposes and otherwise.

What most understand about the blockchain economy today is built using fungible tokens. The preponderance of the excitement has come from prominent tech corporations building cryptocurrencies based on this protocol.

Fungible vs. Non-Fungible Interactions

With knowledge of fungibility, it is easier to understand non-fungibility.

Take this real-life scenario to easily compare fungible goods and non-fungible items.

Imagine this Fungible Interaction

“Individual A” lends “Individual B” a $50 fiat bill.

“Individual A” then repays with a different $50 bill, as it is mutually substitutable or fungible, despite not being the same $50 fiat bill.

Likewise, “Individual A” can be repaid with two $20 fiat bills and one $10 fiat bill. The debt is still satisfied since the total equals $50. “Individual A” repaid with fungible assets.

Similarly, non-fungible lending is also a possibility.

Imagine this Non-Fungible Interaction

“Individual A” lends “Individual B” a car.

When rendering the used article, it is not admissible for “Individual B” to repay with a different vehicle, even if it is the equivalent make and model as the initial vehicle furnished by “Individual A.”

Cars are not fungible concerning ownership, but the gasoline that powers them is fungible.

Assets like diamonds, land, art, homes, or baseball cards are not fungible because each unit has unique qualities that add or subtract value.

A typical example of non-fungible transactions in finance includes The Federal Reserve Bank of New York offering gold custody services to central banks and governments by storing gold bars in its underground vault. The protocol includes weighing each gold bar deposited into the vault. The refiner and purity markings on the individual bars are inspected to confirm they match the depositor instruction sheets. All data obtained is carefully monitored and recorded. Since the exact bars deposited to the New York Fed are the exact ones returned upon withdrawal, these types of gold deposits are not considered fungible.

In the economic world, semi-fungibility is also discussed and has been a debate in cryptocurrency since its inception.

Semi-fungible goods are equal in some ways, but not all. For instance, concert tickets to the same concert, but with different seats, can be considered semi-fungible. Both tickets have a comparable value, though they may not be entirely interchangeable, as they would be in fully fungible items.

Semi-fungibility can blur the line between fungibility and non-fungibility. Among these assets, determining the difference boils down to the consensus surrounding the asset’s perceived or agreed to value and whether or it possesses any significant distinguishing features.

Check out more on history of fiat, history of crypto, the evolution of Stablecoins and the future of digital assets in the number one new release on Amazon's financial education and science and technology, Stablecoin Evolution, found here.

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