Fungible and Non Fungible Tokens

 What is fungible and non-fungible tokens?

Fungible Tokens

Let’s start with a simple example. You (my friend) show me a pack of Nu. 100 notes. I then ask you to let me borrow Nu. 100. As a kind friend of mine, will you be silly enough by asking me “which Nu. 100 notes do you want”? This is because all Nu. 100 in the pack you have, represents the same denomination and be exchanged with any other Nu. 100 i.e., the next time I pay you back Nu. 100, I can pay you either with 2*Nu. 50, or 10*Nu.10 or simply with another Nu. 100. This is because Ngultrum is fungible, meaning they can be easily exchanged/traded/replaced as they are not unique. This example also explains the meaning of fungibility.

In the world of blockchain, fungible cryptocurrencies are classified as either coins or tokens. Coins are cryptocurrencies on the decentralized network; while tokens are built on top of the preexisting blockchains using the self-executing programs called smart contracts. For example, fungible cryptocurrencies include BTC, ETH, USD Coin (USDC), and DogeCoin (DOGE).

Non-fungible Tokens (NFT)

For example, consider a flight ticket. While a ‘Ticket Counter’ can issue several tickets to the customers at once, and each of the tickets differ from the other in terms of the ‘Flight number’, ‘Destination’, ‘Time’, or the ‘gate of embarkation’. Thus, Mr. A cannot change his ticket with Mr. B, as the consequences could be disastrous, including reaching a completely different destination or not being able to board the flight at all.

NFTs possess traits associated with physical collectibles, such as artworks. NFT has one verifiable address on a public blockchain, and is typically linked to an underlying digital image or other media. In the blockchain such as Solana, whenever a creator mints an NFT, a virtual ID tag is created to track the originality/owner of the cryptocurrency. This specific blockchain address sets an NFT apart from all other digital currencies so that owners can’t break it down into smaller pieces.

However, unlike the fungible cryptocurrencies, people who hold NFTs cannot sell on a centralized or decentralized crypto exchange for a fixed price. Instead, sellers use special websites called NFT marketplaces to exchange digital collectibles. Markets such as OpenSea and Raribles allow users to put their NFTs up for auction or a fixed price, similar to the commercial sites like eBay. For examples, animate profile picture (PFP) avatars (such as Bored Ape Yacht Club, CryptoPunks, NFTs linked to virtual land in video game (such as The Sandbox) are Non-fungible Tokens.

Difference between Fungible & Non-Fungible Assets/Tokens

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.