No, fungibility has nothing to do with mushrooms. Fungibility is a big word with a simple meaning: the ability to trade or have an equal value. It means things can be mutually exchanged or replaced by an identical item.
If you have a quarter, and I have a quarter, these two items are interchangeable. They are fungible. They have an equal value. It doesn’t matter which we use to buy a stick of gum. The cashier is going to accept either one, as they are virtually the same.
Likewise, if you have dollar bills, one of those is fungible for four quarters. These values are the same.
While the exchange rate can fluctuate daily, those same four quarters are also equal in value to a set amount of English pounds, or Japanese yen. Even foreign exchanges are fungible. Values can be traded with other currencies.
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Fungibility and Crypto
All things are not created equally, and nowhere is that more true than in the world of cryptocurrency. While there are tokens that are universally valued at the same worth, such as Ethereum’s ERC-20 token, meaning they are fungible, other forms of digital currency may not be equal (non-fungible).
For example, a Bitcoin is not equal to an ERC-20. Unique blockchains will have unique forms of currency. Much like the world has many countries, and each country (or region) has its own currency, the online world has many blockchains, and each of those too has its own currency.
The ERC-20 Token
The ERC-20 has a unique capability of being used across platforms, meaning multiple, unique blockchains can still use the set value of an ERC-20 when discussing smart contracts.
This token was designed to give a value that was acceptable in multiple cases, for multiple uses.
Money makes for an easy example when talking about fungibility. But, when it comes to assets, it can be a bit muddier. Fungible assets technically refer to interchangeable things that are not money. They are two things that are of the same value and often are used to trade in the process of commercial purposes.
Two objects are far harder to compare at times than two equally valued pieces of money. Other times, the comparison is obvious.
For example, two stocks for the same company are traded at the same value. They are worth exactly the same. They are fungible. The entire New York Stock Exchange is created under the same model. Each of the individual units (or stocks in this case) is considered fungible.
If you have the same amount of stocks as your neighbor, they are of the same quality. They are the same product. They are easily exchanged with other units (or stocks).
Other times, there may be discrepancies. You may think your Joe Montana rookie card is valued far more than Joe Namath, but your card trader may not agree. These values are more subjective. There may be ratings and statistics you can use to value the cards, but at the end of the day, there are plenty of subjective components that pour into saying what each is worth.
Trading cards is just one example of the controversy that can arise with fungibility. Baseball cards are not football cards. And not all football cards are created equally.
Fungibility and Its Qualities
Same Value, Equal Value
The entire concept of fungible items is that they have the same value. From finances to trading cards, anything with an equally valued counterpart can be fungible.
On the flip side of fungible is, you guessed it, non-fungible. Non-fungible means, as the name would imply now that you know what fungible is, things that cannot be exchanged. There is no item of the same kind, the same type. There would be no “same value” because it is a one-of-a-kind object.
Examples of fungible items include pieces of solid gold or other precious metals, common money, oil, a common stock, or bond. One unit of gold is worth one unit of gold. Whether you have two exact bars of gold or one gold ounce, it is completely exchangeable with another set of two gold bars or one gold ounce.
Examples of a non-fungible asset include unique digital assets, collector’s items, land, or precious gems. You may have two diamonds in your hand, but the worth of each of the precious stones can be drastically different.
Whether there is a noticeable difference or not, there are things in the world that can be exchanged, and some things that cannot.
Another focus on fungibility is that of quality. You cannot exchange items when the quality of the items is greatly varied. Not only must the two items being traded be of the same value, but they must be of the same quality.
You may say that two 2019 Honda Pilot vehicles are interchangeable. They may sound like the same item. They may be made the same way. They are the same make of vehicle.
However, one of the Pilots may have front-end damage, stained interior upholstery, and a broken window, while the other has absolutely zero scratches, perfectly protected and scotch-guarded upholstery, and still be in pristine condition.
These two example vehicles do not have the same quality. They are not completely interchangeable. This is an example of non-fungibility.
You don’t have to study quantum physics to appreciate these differences. These two items are not the same. Non-fungibility is not always so clear, but one way to consider these items would be “irreplaceable.”
In another analogy, let’s assume you are housesitting for your grandmother while she is on holiday. During your stay, your best friend bumps into the wall, forcing her hanging plate collection to crash to the floor and shatter before your eyes.
These rare collector’s items cannot be easily replaced. They are not interchangeable pieces. Some may have been limited-time or limited-release products. Grandma is in for a hard lesson in non-fungibility when she returns, and as a result, so are you when it comes to your inheritance.
Another key component of fungible assets is that they can be traded back and forth, repeatedly, without changing the value. These multiple exchanges will not impact the worth of the item. For example, a single dollar bill can be used repeatedly. You may have put it in a vending machine this morning. The machine’s owner emptied it this afternoon and bought his lunch with it. The waitress counted her tips out and was given the dollar in exchange (or should we say due to the fungibility) for her four quarters. She used it to get on the bus to get home. The bus company still has the dollar, and it still has the worth. Fungibility refers to this phenomenon.
The dollar is a fungible commodity. The exchange and trade processes this dollar experienced in a single day did not devalue its worth.
Key Takeaways: Fungibility
The band The Grateful Dead once sang the lyrics, in the famed song Althea, “There are things you can replace, and others you cannot.” And, while Dead Heads know that these lyrics were not at all about fungible goods, it is a solid way to remember the lesson.
Fungible things are interchangeable. They are of a substantially equivalent value. Those that cannot be replaced, or do not have an equally valued counterpart, are considered non-fungible.