Fungible and Non-Fungible Tokens in Blockchains

Part of this series:

• Fungible and Non-Fungible Tokens in Blockchains
• Fungible Tokens in Ethereum: ERC-20
• Non-Fungible Tokens in Ethereum: ERC-721

I love how Blockchain moves so fast. In just a few years, we have grown from nothing more than Bitcoin to a multitude of different projects exploring the limits of the technology. 2019 and 2020 have seen an explosion of experiments in Non-Fungible Tokens. But what are they? And how do they differ from Fungible Tokens? That’s what I explore in this post.

What Does Fungible Mean?

The word ‘Fungible’ was not invented by the blockchain community.  In my view, it is so specialized and rare in everyday life that it is one of those jargon words that only make the matter more obscure.

Some technical words are nice, they immediately convey a meaning you can easily explain: cloud, for example, even artificial intelligence. If a non-tech-savvy person hears these words, s/he can at least get an idea close to what they mean. But fungible? No way!

Before I got into blockchain, I only ever heard the word fungible being used in one place: financial markets. It is a property of things like money and stocks, in opposition to assets like houses, art or classic cars.

I will go over more details and examples below, but if you want a shortcut idea to take away, think like this:

If fungible tokens are like money, non-fungible tokens are like collectable coins.

Properties of Fungible Tokens

There are two basic properties of fungible assets:

1. The things you buy are completely interchangeable with others of the same type and quantity.
2. You can buy them in any quantity, even fractional.

The first property is the most important here, and the other is not usually part of the definition. But I like to have it because it is one that you typically don’t find in Non-Fungible things.

Money and company shares are the usual examples of fungible tokens. When you buy a share of a company, you buy a fraction of that company.

That means you buy a well-defined quantity of something, a certain number of parts of the company. You don’t buy each share individually, just like you don’t buy a specific banknote for everyday transactions.

What’s more, your shares are worth exactly the same as those of any other stakeholder of the same company and share type, in the same quantity.

A Small Example

If you buy 35 ordinary shares from company X at the London Stock Exchange for £100, 30 later in Amsterdam for £87, and then sell 15 in Paris for £42, you’ll come out holding 50 shares after spending £145.

Someone else who has bought 50 shares of the same company and type in the New York Stock Exchange for a total of £120 in one go will have the same type and quantity of shares as you.

Yours and hers are completely interchangeable, despite the fact they were acquired at different times, in different places and for different prices. They have the same value because they represent equal quantities of the same thing.

Just like money, where no one cares about the serial numbers of their banknotes, or whether they are newly minted or 10 years old, no one cares whether you have a share certificate.

Even though in old days you might have needed that to sell your shares, and people might have looked at them as valuable things, in today’s world of disembodied money they are mostly for decoration only.

Before I move on to the next section, note that the shares you buy are only fungible with other shares of Company X; not with shares of Company Y, even if they’re worth the same; nor with an amount of money equal to the shares’ current value. Those are different things, with different powers, that only happen to be worth the same.

Properties of Non-Fungible Tokens

So, what has all this to do with blockchains? Well, the initial use-case of blockchains, and still the most recognizable, was to emulate currencies. And currencies should be very fungible.

But of course, this term wouldn’t even be a thing if the alternative, non-fungible tokens (NFT), hadn’t become so note-worthy since Cryptokitties took Ethereum by storm in 2017.

A non-fungible token, of course, is a token that is not fungible, but defining things by what they are not is usually a bad idea as it leaves them essentially undefined. There are a few things we expect, in the blockchain world, of a non-fungible token.

Representation of Individual Things

The most distinctive characteristic of NFTs, in my view, is that they represent unique things of some type. They are the ideal way to digitally represent a real-world asset.

For example, the HM Land Registry is considering representing property-ownership in a blockchain. Each house, flat or piece of land would be represented by an individual token with a well-defined owner.

The security and ubiquity of the blockchain would then guarantee the integrity of the ownership record,  define how this could be transferred, and allow easy proof of ownership, among other things.

NFTs are not unique to houses. They can represent any real-world asset that we want to digitally represent, and because of that are often called digital assets. Be careful with this term, they are usually not assets in themselves, but rather digital representations of real-world assets.

Uniqueness

The association of Tokens to individual things confers them another fundamental property: they must be unique and distinguishable.

If you have a £5 note, that is always a £5 note. You can exchange it for any other of the same value.

But if you have a house, that is not the case. Even if your house has a twin that looks exactly the same, sits right next to yours and is worth the same in the market, would you swap with your neighbour without a thought?

You probably wouldn’t. Because even if on the surface the houses look the same, they will have different histories attached, will have been treated and kept differently by their successive owners and, in any case, you will have a different emotional attachment to them. They’re not the same thing, even if they look the same.

In the same way, NFTs have their own identity, even if their attributes (see the next section) may look exactly the same.

Attributes with Arbitrary Information

Fungible tokens are associated usually with some value represented in some unit. For example, ten units of $1.

They can be far more complex than this. For example, future contracts are highly formalized and technical financial products, that allow you to buy a certain quantity of a thing (eg shares, oil barrels, rice or any other commodity) at a fixed date in the future, with delivery at a well-defined location.

The key aspect of futures is that they are fully standardized. Your merchandise has to be of a strictly defined quality, delivery dates and quantity batches are standardized and so on. When you buy a futures contract, it is perfectly exchangeable with another contract with all the same parameters. All that matters is, again, type and quantity.

So it seems that fungible tokens can store lots of arbitrary information, but if you look closely, that is not so. All of the things I specified above are only the characteristics of the type, not of the tokens that you buy.

That is not the case with non-fungible tokens. When you hold a token representing a classic car, you can store with it its unique physical characteristics, successive owners, inspections, incidents, police reports, and so on. It is precisely this variety that gives this token a specific identity that separates it from all other tokens of the same type.

Indivisibility

Finally, non-fungible tokens are indivisible. If you have £10, you can break this into as many smaller pieces as you like, up to some minimum granularity.

But NFTs are valuable as a whole. They don’t have parts you can sell, everything is integral to their identity and what makes them valuable.

If you have a token representing a classic car and decide to break it apart and sell a token to its engine, another for the tires, and another for the seats, I’m sure you’ll agree with me that you should expect far less money out of it, besides a lot of angry messages from car lovers.

Hybrid Tokens

This is not a standard term. I’m using it here because I think there is a middle-ground of things that you may want to capture as NFT but still have properties of Fungible Tokens.

I’m talking of collectables. By this, I mean things that are produced in a limit amount or for a limited period, where each collection is possibly sold in large quantities but made up of many different types of items, with different overall counts.

Think, for example, of tradeable card games like Magic the Gathering or Pokemon. Each card face comes in different quantities, and some of these become way more valuable than others due to their artwork, powers and rarity But yet, among cards of the same face, they should all be interchangeable and worth the same.

It could be argued that some people may value a card more if it is well kept inside a sleeve or so, but in general, there is no record of how many times a card has been used in a game or other distinguishing features.

All cards of the same type are fungible among themselves, but card types of a collection are definitely non-fungible, even if you can buy each of them for the same price at the initial point of sale (when you buy a pack of cards).

This is just an example and I hope it serves to illustrate the whole class. You may be able to think of others.

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If you’ve never heard of tokens before, or have been confused by what that word means, I hope this introduction has given you some hints. Stay tuned for more information on how tokens can be used in the real world and why we like them.

Meanwhile, if you like what I write, please like it, share it, or comment below.

Have fun, and until next time.