What Is Fungibility?

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Fungibility is a characteristic that describes an asset’s ability to be exchanged for another asset so long as both have the same uniformity, qualities and value, and are otherwise indistinguishable.

Why Is Fungibility Important?

Let’s take a very watered down history lesson. At some point in history, bartering 3 chickens for 20 stalks of wheat didn’t make much sense anymore, so a new system was needed. In order to trade more efficiently, early civilizations created stores of values by which people could trade for goods and services. Rudimentary currencies were created in the form of sea shells, stone coins, and eventually societies created metal coinage.

The point of creating coins was to allow people to trade their coins (which they got from spending time and energy) for tangible goods or services. However, problems with this system arose no matter the medium of coinage. Shells, stones, and metal coinage could all be manipulated or faked, or other similar objects could be claimed to be more valuable.

  • Just imagine, “This hermit crab shell is more valuable than any other conch shell because it has an extra swirl at the top!”

Thus, the need for fungibility became obvious. Setting a standard for a trading currency meant that if someone should try to cheat the system, it should be obvious since all pieces of currency should be the same.

Modern Fungibility

For that reason, most financial tools are fungible including fiat currencies (USD, EUR, GBP), gold, cryptocurrencies, stocks, bonds and so on. Precious metals can also be fungible, however they must be the exact same weight and purity. Gold is an exception as pure gold maintains its atomic properties no matter the physical trauma it is put through. One ounce of gold will always be equal to another ounce of gold, making it a highly fungible asset.

Fungibility in terms of fiat money exists because of the base unit of account in a currency. Take the US dollar for example. A $20 bill is worth the same as two $10 bills, or four $5 bills because they are all representative of the same quantity of US dollars. Since every dollar is equal to any other dollar, the base unit of account makes the fiat fungible.

Cryptocurrencies like Bitcoin are fungible too. Bitcoin may in fact be the most fungible asset ever created since every coin ever mined has the exact same properties, qualities, and value (1BTC always equals 1BTC). Furthermore, each coin is verified upon exchange by decentralized computers (nodes) to prevent double spending, and each transaction is marked permanently into the publicly distributed blockchain to notify the network where Bitcoins have moved. Thus, every Bitcoin is accounted for, ensuring the uniform quality of the cryptocurrency at all times.

What Exactly Is “Non-Fungible?”

Assets that are non-fungible include anything that can be created to have varying qualities. Such assets include things like cars, homes, trading cards, cookies, etc… But just because they aren’t explicitly interchangeable does not mean they can’t be traded for one another. For example, two car owners can trade their vehicles to one another, but even if they are the same make and model the cars will never be one for one replicas.

In fact, let’s revisit our chicken/wheat example from earlier. Perhaps our chicken farmer can’t trade his chickens for any other good besides wheat. If he only has chickens, he’d need to rely on others to trade for other goods for him, like clothing, wood, etc… His chickens are non-fungible assets as they don’t fetch the same value everywhere. Furthermore, each chicken will always vary from the next in size, health, feathering, and so on.

But if there were an agreed upon form of currency that was valuable because of verifiable characteristics (weight, form, hardness), and everyone including the wheat farmer also accepted this coin, you would now be able to trade efficiently. Thus, the coins are fungible since they fetch the same value everywhere.

NFTs are currently the hottest non-fungible item, as it’s in the name, “Non-Fungible Token”. There are no two NFTs that are exact equals of another. Even if 100% of one NFTs’ contents are copied into another it will never be original.

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