Fungible vs. Non-Fungible Tokens: Learn the Difference

If you’re learning about or investing in NFTs, you will come across concepts of fungible tokens vs. non-fungible tokens. The transformative power of blockchain technology is revolutionizing our world. This disruptive technology is reshaping all processes and functions, from banking to the supply chain. The newest blockchain-based asset that is creating a buzz in the market is non-fungible tokens, or NFTs.

NFTs differentiate themselves from cryptocurrencies like Bitcoin and Ether in that these assets are non-exchangeable. The fundamentals of cryptocurrencies and NFTs are based on the economic concept of “fungibility,” which dates back to Roman times. The term fungible represents assets that are equal in monetary value and can be traded or exchanged for the same asset type.

In terms of crypto, replaceable crypto assets are known as fungible tokens, whereas irreplaceable tokens are called non-fungible tokens. They share some characteristics while also differing in other aspects. Both fungible (ETH, SOL, DOT, ERG, etc.) and non-fungible tokens share smart contract functionality. In contrast, they differ in terms of their token standards.

Cryptocurrencies and NFTs are next-generation blockchain-based elements that are becoming desirable investment opportunities among businesses and individuals. These assets have real-world worth and validity, making them a legitimate business. With NFTs being heralded as the next big thing, we need to understand the primary differences between non-fungible and fungible tokens. This article will break down the fundamental distinctions between them.

The notion of fungibility

The term fungibility refers to an asset’s potential to be swapped with similar kinds of particular assets. Since they indicate equal worth among the holdings, fungible assets facilitate trade and exchange operations. Fiat money is an excellent example of a fungible product because a $1 bill can be readily transformed into ten dimes or four quarters without affecting the currency’s overall value.

The ability to trade or swap one commodity for another is frequently confused with fungibility. It is rather the swap of exactly equivalent entities of items. Even so, some factors must be considered when determining if a fungible product is appropriate for replacement.

Fungibility can be traced back to a time when folks used the barter system. A person would trade their yield for other goods in a barter system. Farm owner A, for instance, would exchange one unit of grains for one unit of oil from Farm owner B. So, this instance is barter, but if a unit of wheat can be exchanged for the exact amount of the exact product of the exact quality, it is fungible.

Since the currency or money valuation is constant everywhere, the exchange of fiat money is an excellent commodity to illustrate fungibility. Furthermore, it makes no difference what unit of measure it is, its series, or where it is from, as long as the overall valuation remains constant. It signifies that irrespective of the series, a $5 bill would have the exact value in every financial institution or transaction.

What is a fungible token?

In blockchain technology, fungible tokens are cryptographic tokens that tangibly represent divisible digital assets such as cryptocurrencies. The fungibility of these tokens is expressed through a code script.

Fungible tokens can be exchanged for other assets of the same value because each fraction of the token is equivalent to its keen. On the Ethereum blockchain, the first fungible tokens, known as ERC20, were created. These tokens established the standards that enable developers to create various types of applications.

To understand the economics of fungibility, let’s take the example of a $1 bill. The intrinsic value of a $1 bill remains the same regardless of who the owner is or where they are from. A $1 bill in New York has an identical worth as a $1 bill in California. Moreover, two 50-cent coins are equal to the value of a $1 bill; therefore, they are interchangeable with one another.

Similarly, take the example of Bitcoin, Litecoin, and Ether. These tokens are fungible and are used as digital currencies. The inherent value of these currencies is standardized. Furthermore, the individual units of these fungible tokens are uniform and interchangeable. In other words, the value of 1 BTC is equivalent to 1 BTC no matter where it originates from.

What is a non-fungible token?

Non-fungible tokens are contrary to fungible tokens. They represent crypto commodities stored on a blockchain that is entirely one-of-its-kind, rare, and irreplaceable. Real-world items such as artwork, music, land, trading cards, etc., can be tokenized through a process called minting that essentially eliminates the probability of fraud. NFTs also act as a certificate of intellectual property for tokenized digital assets.

Although NFTs can be traded like cryptocurrencies, the tokens themselves cannot be replaced with another. Each NFT contains metadata that the owner can add for identification and distinction. Some popular NFT collections that have been sold include Crypto Kitties, Bored Ape Yacht Club, CryptoPunks, and more.

Non-fungible tokens have morphed from the ERC-721 standard. The most notable token standards for non-fungibles today are ERC-721 and ERC-1155. ERC-1155 token is usually used for NFT collections, while ERC-721 represents single NFTs. ERC-721 defines the bare minimum for exchanging and distributing tokens, including ownership information, security, and metadata.

In contrast, the ERC-1155 standard expands on this notion by lowering the trading and storage charges associated with non-fungible tokens. They also merge numerous kinds of NFTs into a unitary contract. Thus, making it the suitable standard for more extensive digital collections which consist of numerous individual NFTs.

Over the last two years, NFTs have gained immense popularity and scrutiny, with the discovery of use cases across multiple domains. NFTs have been most popular among art enthusiasts and the gaming community. However, a growing number of other industries are also adopting NFTs.

Given the immutable nature of non-fungible tokens, they are being used for KYC procedures and identifications. Moreover, the NFT application is expected to become a crucial component in areas such as supply chain management, ticketing, academic credentials, and voting because these tokens enhance transparency and trackability.

The key differences between fungible and non-fungible tokens

Interchangeability

Fungible tokens can be exchanged for any other token of the same type. Fungible assets can be transferred from one owner to another to pay for specific products. Non-fungible tokens, on the other hand, are not interchangeable because they cannot be exchanged for another non-fungible token of the same type.

Fungible tokens are most commonly used for crypto payment and balance tracking. A real-world utility of fungible tokens is their association with an organization’s payment account. Organizations can track every transaction and ensure that all transactions are accurate and tamper-free. A greater number of companies accept cryptocurrency and fiat money for payments. The transparency of fungible tokens prevents fraud and hacking.

On the other hand, NFTs are prized for their rarity and uniqueness. Owning an NFT is similar to acquiring a piece of rare artwork. One non-fungible token cannot be traded for another non-fungible token. For example, BAYC is a set of ten thousand non-fungible tokens. Although the ‘Apes’ have similar traits, every single one of them is unique and irreplaceable. The difference in the price of these ‘Apes’ also reflects the uniqueness of the NFT. Now more about the difference between crypto and NFTs.

Value transfer

A key distinction between fungible and non-fungible tokens is that each account keeps a balance based on the tokens it owns. Direct transactions or exchange mechanisms make it simple to transfer the tokens to other Ethereum accounts.

Token transfers, like bank transfers, debit the source account with the transfer amount. The beneficiary account receives a credit in the same amount at the same time. In the case of token transfers, the transfer amount is debited from the source account and credited to the beneficiary account.

Non-fungible tokens, on the other hand, have a distinct and absolute value proposition. As a result, each token has a unique ID that distinguishes it from other tokens in the same smart contract. This allows the non-fungible token to have a unique owner at all times, and its values to change depending on how each token is treated.

Certain NFTs can symbolize one-of-a-kind tributes with easily demonstrable scarcity. Moreover, NFTs can support ownership transfer and trading. Consequently, NFTs are valuable to investors as they represent rare digital assets with exclusive proprietary rights.

Ethereum token standards

Fungible tokens adhere to the ERC20 standard, whereas non-fungible tokens adhere to ERC721 token standards. The Smart Contracts of each of these token standards differ. ERC20 is the standard protocol used in the Ethereum network that allows users to share, exchange, and transfer tokens. The fundamental content of this token includes Token Name, Symbol, Decimal, balanceOf, transferFrom, transfer, totalSupply. In contrast, ERC721 has evolved from ERC20 to accommodate NFT attributes.

Tokenization of ownership of any type of arbitrary data is made more accessible by ERC-721 token standards. The ERC-721 token standard, like the ERC-20 tokens, adheres to a set of norms. The difference is that the ERC-721 token standards concentrate on essential factors for determining ownership and methodologies for token production. The guidelines also specify how the tokens should be destroyed and transferred.

Divisibility

Another difference between fungible and non-fungible tokens is the divisibility of the tokens. In the case of fungible tokens, they may be divided into smaller units. The number of units does not affect the token’s intrinsic value as it remains the same. In the case of non-fungible tokens, their net worth is related to their entirety, so they are not divisible.

Conclusion

NFTs differ from cryptocurrencies such as Ether, Bitcoin, BUSD, Tether, etc., in that they are not exchangeable. The fundamentals of cryptocurrencies and NFTs are based on the Roman-era economic idea of “fungibility.” Fungible assets are those that have the same monetary worth and can be traded or exchanged for the same asset kind.

Despite the enthusiasm around digital currencies and NFTs, experts suggest investors take their time and carefully assess whether investing in the industry is a suitable fit for their strategy. Before investing in any asset, it is necessary to investigate the product’s rarity, know the patterns, and realize the potential risk and return.

Consumers may be skeptical about non-fungible tokens since they are new. But these tokens are gaining popularity in the blockchain ecosystem, with significant applications in gaming and art. As the debate over fungible vs. non-fungible tokens intensifies, new innovations can potentially add or alter the long-term investment value of these tokens.