The cryptocurrency industry is unpredictable––what traders might perceive as a loss-making project today could generate profits worth millions in five years. For instance, Kevin McCoy and Anil Dash minted the first-ever non-fungible token (NFT) in 2014. But this new asset class didn’t grab the public’s attention until 2017.
As NFTs became popular, they increased the curiosity quotient among traders. And by 2021, NFTs burst onto the global cryptocurrency scene with trading spiking by 21,000%, recording annual sales of $17 billion. More people began asking what non-fungible meant and whether it had anything to do with their massive success.
Although non-fungible and fungible assets exist outside crypto, these terms have special significance in the digital world. Crypto traders should know how to define non-fungible and fungible to ensure they buy the desired asset.
So What is Fungibility?
Fungibility describes how easy it is to exchange an item 1-for-1 at a transparent price. In other words, fungibility is synonymous with an asset's interchangeability. For instance, if an asset is fungible, trading it on an exchange or in daily life is relatively easy. That’s because the prices of both the fungible and tradable assets are the same. In contrast, non-fungible assets don't have a clear or widely accepted market price because every non-fungible asset is wholly unique, making determining a fair exchange rate relatively challenging.
Fungible asset examples include fiat currencies like the U.S. dollar, yen, or euro. Unlike NFTs, each USD has the same value as and can be exchanged for any other dollar, meaning it's simple to swap USD without any complexity. Not only are fiat currencies identical, but they’re also easy to divide into smaller units, making them even more convenient for trading.
Conversely, a Rembrandt painting is a non-fungible asset. Although rare Rembrandt paintings typically sell for a lot of money, the market value for a particular work of art isn't transparent. Expert art appraisers give collectors an estimate, but the final price the painting's owner receives depends on how much buyers are willing to spend. Also, physical paintings aren't divisible, meaning a seller can’t split their masterpiece into tinier pieces for fractions of its total worth. With a non-fungible asset, holders must sell the entire work or nothing at all. Other non-fungible assets include cars, rare books, and real estate.
What is a Fungible Cryptocurrency?
A cryptocurrency must be exchangeable on a 1:1 basis and be easily divisible to be considered fungible. Traders have no difficulties swapping fungible cryptocurrencies for other digital assets or fiat currencies on exchanges.Fungible assets are identical and duplicable, so every fungible cryptocurrency has the same market value as any other equal unit of the same cryptocurrency.
Fungible cryptocurrencies are classified as either coins or tokens. For context, coins are cryptocurrencies on a proprietary decentralized network of computers called a blockchain. Tokens, on the other hand, are built on top of preexisting blockchains using self-executing programs called smart contracts.
Examples of fungible cryptocurrencies include Bitcoin (BTC), Ethereum (ETH), USD Coin (USDC), and Dogecoin (DOGE).
What is a Non-Fungible Token?
Non-fungible tokens (NFTs) possess traits associated with physical collectibles, such as trading cards or artworks. Most significantly, each NFT has one verifiable address on a public blockchain, and is typically linked to an underlying digital image or other media. Whenever a creator mints an NFT on a blockchain like Solana, they create a virtual ID tag to track the cryptocurrency’s owner. This specific blockchain address sets an NFT apart from all other digital currencies so owners can't break it down into smaller pieces.
People who hold NFTs can't sell them on a centralized or decentralized crypto exchange for a fixed price. Instead, sellers must use special websites called NFT marketplaces to exchange digital collectibles. These markets, such as OpenSea, allow users to put their NFTs up for auction or at a fixed price, similar to sites like eBay. Prospective buyers may make lower offers for an NFT to see if the seller is willing to part with it. Since an NFT's value is in the "eye of the beholder," there's more guesswork involved in determining the right and fair price of an NFT. Typically, a buyer of an NFT does not receive intellectual property rights associated with the digital image or other media underlying the NFT.
NFTs can be linked to all forms of digital media, and there are countless examples in today's NFT marketplaces. However, the most well-known NFT collections are linked to animated profile pic (PFP) avatars, such as the Bored Ape Yacht Club, CryptoPunks, and dYdX's Hedgies. Other popular NFTs are linked to virtual land in video games, such as The Sandbox, mp3 files with exclusive music, and video clips with pro sports highlights on markets like NBA Top Shot.
Major Differences Between Fungible and Non-Fungible Assets
Traders look for four major categories when establishing whether an asset is fungible or non-fungible. Keeping these criteria in mind helps crypto traders quickly determine which token type they're looking at.
- Uniqueness: Non-fungible assets possess unduplicable traits, whereas fungible assets are always identical. NFTs have only one identifying blockchain address signifying their scarcity and ownership rights. There are no such ID tags with fungible cryptocurrencies, and every fungible token has the same value on the open market.
- Use cases: Typically, fungible assets are only used as a convenient medium of exchange, while non-fungible assets have countless non-monetary use cases, including aesthetic appreciation, VIP access, transportation, and shelter.
- Divisibility: It's easy to divide fungible assets into tiny units for convenient transactions, such as pennies for the USD or "satoshis" (i.e., 0.00000001 BTC) for Bitcoin. Non-fungible assets, however, aren't divisible.
- Value: It's more challenging to determine a fair price for a non-fungible asset versus a fungible one. Instead of selling for transparent prices on a public exchange, non-fungible assets often go up for auction or a private sale.
Are There Semi-Fungible Assets?
Yes. Semi-fungible assets possess both fungible and non-fungible traits. Mostly, a time factor such as an expiration date causes a fungible object to become non-fungible, making it semi-fungible. For instance, a ticket to a live music festival is semi-fungible, as it only has a 1:1 exchange rate before the concert. Once the music event ends, the ticket becomes non-fungible memorabilia without a 1:1 valuation.
Although semi-fungible crypto tokens aren't as widely used as fungible and non-fungible tokens, some developers experiment with this technology. Like the concert ticket example, most semi-fungible cryptocurrencies start as fungible tokens and transition to an NFT. For instance, a restaurant could issue fungible tokens representing discounts on pizza to customers on a loyalty program. After a customer uses these fungible tokens to order their pizza, the token could become an NFT, thus preventing people from using the discount twice.
Are ‘Colored Coins’ the Same as NFTs?
Colored coin, introduced in 2012 by the Israeli Bitcoin Foundation's Meni Rosenfeld, is a fungible cryptocurrency with a unique marker in its code that makes it easy to distinguish from other cryptocurrencies. Some crypto wallets automatically determine colored versus non-colored coins. For example, a developer could add distinct code on a tiny amount of Bitcoin, signifying VIP access to a club. In this case, the club's owner may grant access to patrons who deposit these colored BTC into the club’s crypto wallet.
Although the specific metadata and non-monetary use cases for colored coins make them similar to NFTs, they remain fungible cryptocurrencies. If a trader unwittingly held a colored Bitcoin, they wouldn't have any issues trading with it on a crypto exchange at a 1:1 value.
Discover More Crypto Education on dYdX
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