Cryptographically secured assets, just like physical ones, feature many proprieties, one of which is fungibility or non-fungibility. In Economics, fungibility is a term which represents an asset’s ability to be equated or interchanged with other units of the same asset.
In the crypto world, there are many categories of tokens, but based on their fungibility, they can be separated into two classes: fungible and non-fungible.
About Fungible Tokens
Fungible tokens are designed to have currency-like properties and be used similarly to fiats, rather than being something unique and having inherent value.
Fungibility is the necessary feature of any currency, as it makes it exchangeable, divisible into units, and capable of storing value. Fungibility is a trait found in Bitcoin, ZCash, Ether and any ERC20- based tokens. If you send someone 1 Bitcoin, Ether or Zcash, and get one back, you wouldn’t notice any difference. The value is the same, indifferent of its provenance.
But in certain cases, Bitcoin and derived coins which are based on the same cryptographic protocols as Bitcoin, are not fungible. If the owner of a Bitcoin address becomes a person of interest, and the coin’s transaction history becomes compromised, there may be issues when trading your tokens.
Fungibility may be debatable if coin history can be tracked and the coins are associated with an illicit activity that brands them as unusable and therefore can determine their value to increase or decrease.
About Non-Fungible Tokens (NFT)
Non-fungible tokens are unique in nature and present distinctive features from each other. The characteristics of a non-fungible item are what makes it desirable and differentiated, which in turn gives it its value, rather than it being a representing a certain value. These can be compared to collectible items, as each has unique features and different levels of rarity.
Most of the NFT found on the market today are based on the Ethereum protocol called ERC-721. ERC-721 gives a token a standard set of attributes and functions through the use of a smart contract, which must be met to be managed, owned, and traded.
Their uniqueness makes them digitally scarce. There were other instances which issued and managed digital scarce assets, such as avatars in video games, prior to the blockchain era, but this type of scarcity was costly to manage and was based on the validation and security of the game developers. This is how distributed ledgers are significant because allow the decentralized management of distinct, digitally scarce items.
NFTs on the blockchain enables the verification of digital scarcity without requiring a centralizing entity to confirm authenticity.
NFTs can be used to power applications which require unique digital items such as crypto-collectibles and crypto-gaming. Non-fungible tokens can also represent pieces of artwork or propriety. NFTs also let you insert IDs, certificates, real estate data and other relevant information of the real world assets on the blockchain.
Non-fungible tokens can be implemented in “Know Your Customer” (KYC) procedures, as well as academic degrees and other educational certificates, voting, elections, loyalty programs, copyright, supply chain management, software licenses, warranties, and much more.
One of the first non-fungible tokens to attract mass attention was CryptoKitties, a blockchain-based platform where players were able to collect and breed digital cats. Each cat was different and had various level of rarity, which increased their value.
A fungible token can be exchanged for any other token that has the same value, similar to how fiat currencies are exchanged. If you have a dollar bill and swap it with another dollar bill, it would make no difference for the user.
Non- fungible tokens cannot be replaced with another non-fungible token even if they are of the same type. When lending an item to a person, you expect to have the exact same item returned to you and not something else. For example, you cannot exchange your driver’s license with another driver’s license.
Fungible tokens of the same type share identical features and traits, meaning that all tokens of a certain type are exactly the same and can be used in the same way.
Non-fungible tokens, on the other hand, are unique and different from all other tokens from their class, meaning they cannot be replaced or swapped.
Fungible tokens can be divided into smaller units. As long the value remains the same it really makes no difference which units you have. This is similar to how you change bills into coins. By being divisible, this means that you can send a fraction of the token to someone else.
NFT are not divisible, with only the token itself representing the elementary unit.
Most fungible tokens use Ethereum’s ERC-20 protocol standard, on which many popular cryptos were issued: BNB, OMG, 0x, etc. ERC-20 only lets you attach a few asset attributes: its name, symbol, total supply, and balance.
NFT are based on a new Ethereum standard, ERC-721, which enables the issuance of unique, non-divisible tokens. Compared to ERC-20, ERC-721 allows to input more detailed attributes which give an NFT its uniqueness. The ERC-721 can incorporate in a token its ownership, approval, transfer, and its metadata.
For now, most of the NFT issued are based on ERC-721, and because the protocol is so new it hasn’t gained as much adoption as their ERC-20 counterparts. But as space develops, more decentralized applications which will cater to NFTs will appear.