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- A Beginner-Friendly Guide to Fungible vs. Non-Fungible Tokens
A Beginner-Friendly Guide to Fungible vs. Non-Fungible Tokens
For centuries, few people outside of finance were interested in “fungibility,” which means trading an item for another identical piece. However, since the 2021 non-fungible token (NFT) boom, everyone’s been interested in what fungibility is and how it relates to digital assets. Even non-crypto investors want to know what separates fungible vs. non-fungible tokens.
Although “fungible” and “non-fungible” can apply to all asset classes, they’re especially significant in the cryptocurrency market. A token’s fungibility will impact its market liquidity and potential utility.
What is fungibility?
Fungibility is a financial term that describes the ease of exchanging two items at an agreed-upon price. To be considered a “fungible asset,” an item must be readily interchangeable with an identical item at a transparent rate. Fiat currency is a fantastic example of a fungible asset. No matter where people earn their dollar bills, $1 will always equal $1. Fungible assets are also easily divided into smaller units (like dollars into quarters, for example) and lack unique traits. These features make it convenient for people to trade and calculate the value of fungible assets.
In contrast, non-fungible assets are always unique items that can’t be traded for each other 1 to 1. Also, it’s impossible to divide non-fungible assets into smaller units. These features make it difficult for people to figure out a “fair” value for a non-fungible product. Since non-fungible items are “one-of-a-kind,” owners may have to call appraisers to determine what people might be willing to pay.
Other examples of fungible items include:
- Equities
- Options
- Bonds
- Precious metals
- Oil
When people think of valuable non-fungible assets, they often envision items like Civil War rifles, Van Gogh paintings, and Gutenberg Bibles. Retail investors also are likely to run across other non-fungible assets like real estate, land deeds, and cars.
Generally, the less liquid an asset is, the more likely it’s non-fungible. Since there’s no widely accepted value for a non-fungible asset, it typically takes longer for an owner to liquidate it.
What is a fungible token?
Fungible tokens are cryptocurrencies that exhibit all the standard traits of fungible assets. In other words, these crypto tokens should be non-unique, divisible, and have a clear market value. It shouldn’t be difficult for traders to determine the value of their fungible tokens or trade with them on crypto exchanges.
All cryptocurrencies with transparent prices on exchanges and coin price aggregator sites are fungible. These include large-cap cryptos like Bitcoin, Ethereum, and Dogecoin. If it’s easy to determine a cryptocurrency’s market value, it’s a fungible asset.
Explaining NFTs (non-fungible tokens)
While NFTs (non-fungible tokens) are on the same blockchains as many fungible cryptos, they’re wholly unique digital assets. The data stored in an NFT is irreplicable and indivisible. For this reason, many people view NFTs as similar to intellectual property (IP) rights.
Unlike fungible assets, NFTs are always built on a smart contract blockchain like Ethereum. While fungible crypto can also be on top of a pre-existing blockchain, there are many blockchain-native fungible tokens and coins. For example, Litecoin is a fungible cryptocurrency on its own blockchain.
NFTs are often associated with animated profile pictures and digital art, but they can represent innumerable assets. From legal documents and in-game avatars to metaverse land and audio files, NFTs can grant users ownership over a diverse array of digital items. NFTs also give people access to special events, perks, or real-world objects.
All these distinctive traits make it tricky to determine how much an NFT is worth. Unlike fungible tokens, people usually bid on NFTs as they would on collectible cards or luxury vehicles.
Are NFTs equal to money?
NFTs can be traded for cash or fungible cryptocurrencies, but there’s no pre-established price for these tokens. An NFT’s value is subjective.
NFT traders can research the average floor prices and transaction history for various NFT collections, but there’ll never be a transparent exchange rate for these tokens. An NFT holder needs to hope that a buyer will pay the price the owner wants to sell their NFT for.
Applications of NFTs and fungible tokens
Now that we know what both the tokens signify and how they differ from each other, let’s go through the use cases of each.
NFTs
The use cases for NFTs are endless, but that doesn’t mean all these tokens have utility. Indeed, many prominent NFT collections like the CryptoPunks have zero utility. The primary reason CryptoPunks NFTs are valuable is due to their history in the cryptocurrency space. As one of the oldest 10K profile pic collections, CryptoPunks has an intangible historical and cultural value.
Yuga Labs is one of the most prominent studios to highlight the utility of NFTs with its Bored Ape Yacht Club (BAYC) collection. Launched in 2021, this collection of 10K animated NFTs gave holders VIP privileges such as tickets to “Ape Fest” and access to members-only merchandise. Yuga Labs has also rewarded long-term BAYC holders with crypto airdrops, including APE tokens, metaverse land NFTs, and Mutant Serum NFTs.
Following Yuga Labs’ example, many Web3 developers now offer NFT holders dozens of perks for holding their tokens. For instance, metaverse platforms like The Sandbox and Decentraland sell LAND NFTs that represent ownership over virtual parcels of land. When people buy these NFTs, they have the right to develop or rent their virtual space.
Many play-to-earn crypto games also use NFTs to represent valuable in-game items. For example, people who play "Axie Infinity'' use playable NFT monsters called Axies to battle other gamers and earn token rewards. Other games like Sorare and "Gods Unchained'' use NFT playing cards.
Fungible tokens
Fungible tokens, on the other hand, tend to have a narrower range of functions. Some cryptocurrencies like Bitcoin are used as long-term investments or mediums of exchange. Others like Ethereum and Solana pay transaction fees on their respective smart contract blockchains.
Fungible tokens built on top of a blockchain have a wider array of use cases than NFTs. Indeed, utility tokens can be used for functions such as tipping, in-game purchases, or voting within dApps (decentralized applications). There are also security tokens that represent partial ownership of a third-party asset, such as a synthetic stock.
However, remember that the use cases of fungible tokens can’t include unique features. Utility tokens and security tokens must be interchangeable on the crypto spot market. This non-uniqueness makes it more challenging for developers to use utility tokens for as many features as NFTs.
Where can I buy fungible cryptocurrencies?
Most people purchase fungible cryptocurrencies on centralized crypto exchanges (CEXs). Traders don’t need to rely on CEXs to buy crypto, but these platforms tend to have the best liquidity. CEXs with high standards for KYC and regulatory compliance also make it easy for customers to transfer cash into cryptocurrencies.
However, it’s also possible for people to use decentralized exchanges (DEXs) to purchase crypto. DEXs like Uniswap use smart contract-based liquidity pools to provide traders with peer-to-peer token swaps using their crypto wallets.
Besides exchanges, people may find physical Bitcoin ATMs in local gas stations or convenience stores. These devices often accept cash and automatically transfer crypto to a buyer’s private wallet.
Where can people buy NFTs?
Since NFTs don’t have a spot value, they aren’t listed on CEXs or DEXs. Instead, people interested in buying NFTs have to visit dedicated NFT marketplaces.
NFT markets are often divided into two categories: curated and non-curated. Curated NFT sites like Nifty Gateway require digital artists to pass screening tests before they’re allowed to sell their NFTs on the site. Non-curated NFT sites like OpenSea allow anyone with a crypto wallet to mint NFTs and put them up for auction.
Every NFT site has distinctive features that appeal to different NFT buyers and creators. For example, SuperRare focuses on high-end one-of-one art NFTs. In contrast, NBA Top Shot sells pro basketball NFTs.
While countless NFT markets exist, most require users to link a compatible crypto wallet to buy or sell tokens. NFT sites often accept the underlying blockchain’s native cryptocurrency for payment, but some markets now accept fiat payments with credit or debit cards.
Currently, most prominent NFT markets like OpenSea and Rarible are on the Ethereum blockchain. However, you can find NFT dApps on almost any smart contract blockchain. For instance, chains like Solana, Flow, and Polygon are all well known for their NFT offerings.
Wrapping up
While NFTs have many unique applications in Web3, buyers should remember that these tokens won’t have the same liquidity as fungible tokens. Even if people buy “blue-chip NFTs,” there’s no spot market for NFTs. Investors should feel comfortable with an NFT’s relative illiquidity before making a purchase.
No matter what’s in your wallet, be it fungible or non-fungible, at Worldcoin, we want to ensure everyone has a safe experience with Web3. We aim to put our share of crypto in the hands of every individual for free while maintaining their privacy. We’re also airdropping free DAI to anyone who downloads our app. Subscribe to our blog to know more about the cryptocurrency market.