What Is Fungibility?
In the world of finance, the term “fungible” refers to items that are interchangeable and identical to each other. Each unit is the same as every other of its kind. Let’s take Bitcoin, a prominent cryptocurrency, as an example. If Person A sends one Bitcoin to Person B, and Person B sends one Bitcoin back to Person A, no one would argue that they received a different Bitcoin. The Bitcoin is fungible because each unit is equal and interchangeable.
Fiat currencies, such as the US dollar or Euro, are also fungible. If you lend a $10 bill to a friend, you wouldn’t demand the exact same bill back when being repaid. Any $10 bill would do, because each one holds identical value.
What Is Nonfungibility
Nonfungible, on the other hand, refers to something unique and irreplaceable. It can’t be exchanged on a like-for-like basis, as each item has its own distinct value.
This is where Nonfungible Tokens (NFTs) come into play. An NFT is a type of digital asset that represents ownership or proof of authenticity of a unique item or piece of content, using blockchain technology.
The artwork “Everydays: The First 5000 Days” by Beeple, sold as an NFT for $69 million, is a prime example. This piece of art is unique, with a value determined by market interest. It’s not interchangeable with any other artwork.
Similarly, CryptoKitties, one of the earliest examples of NFTs, are unique digital cats. Each CryptoKitty has unique attributes (“cattributes”) and can’t be replaced with another.
To make a tangible comparison, let’s look at fiat currency and art.
Fiat currency, like the US dollar, is fungible. Each unit, or bill, of the same denomination holds the same value. You can exchange one $10 bill for another without losing or gaining value.
Art, however, is nonfungible. Each artwork is unique and holds its own distinct value, much like an NFT. A Van Gogh painting cannot be directly exchanged for a Picasso because their values are not identical. They’re unique in their attributes — the artist, the style, the time of creation, and so on.
The terms fungible and nonfungible aren’t about better or worse; they’re about different types of value. Fungible assets like Bitcoin or fiat currency have value in their interchangeability. Nonfungible assets, like NFTs or works of art, have value in their uniqueness.
As the digital world evolves, we’re seeing an exciting expansion of what can be considered valuable. From fungible cryptocurrencies to unique digital art, there’s a place for both in our increasingly digital economy.