Read ahead to explore the fungibility definition in the crypto context and understand why this characteristic is important for the growth and adoption of digital assets!
What Is Fungibility?
Fungibility refers to a quality of an asset that allows its units to be interchangeable with one another, which means they are indistinguishable. Some examples of fungible asset classes include commodities, fiat currencies, bonds, precious metals, and cryptocurrencies.
What You Need To Know About Fungibility
Keep in mind that fungibility doesn’t always deal with identical units, as long as the transaction occurs between instruments of the same type and functionality. For example, exchanging a $5 bill for five $1 bills is considered an equal exchange, as the US dollar is a fungible asset and the banknotes merely represent its value.
The majority of cryptocurrencies feature fungibility as one of their attributes, with the most prominent example being Bitcoin. Each BTC unit is equivalent to another, no matter which blocks the coins were mined in, as they belong to the same blockchain and perform the same functions.
Note that some Bitcoins or similar cryptocurrencies may be less desirable due to their inherent traceability, particularly if they have been linked to dubious or illegal activities. As a result, some merchants or service providers may reject payment attempts made with BTC if they suspect the coins were obtained through criminal means.
However, while traceability may affect the perceived value of certain Bitcoin units, it doesn’t affect its fungibility. Traceability and fungibility are distinct concepts and, regardless of the transaction history, each Bitcoin unit is still the same in terms of quality, technology, and performance.
However, if someone forks Bitcoin and creates a new version of the blockchain, the resulting coins won’t be fungible with the original bitcoins as they’d be part of a different network. Speaking of assets that cannot boast fungibility, we must mention NFTs (non-fungible tokens).
In contrast to BTC and other fungible assets, no two NFTs are exactly the same and can’t be interchanged or divided into smaller units without losing their unique identity and value.
