Differences Between Fungible and Non-Fungible Assets

While the above terminologies have been used for decades in the financial and economic ecosystem, they have been made increasingly popular through the widespread creation of blockchain-supported, non-fungible tokens (NFTs).

Despite this widespread adoption, many people still find it difficult to differentiate between one from the other, especially those who are relatively new in the industry.

To put this confusion to bed, I'm going to, through this article, clearly differentiate between these two terms and provide examples to improve your understanding of the subject matter.

Fungible Assets

Fungible assets can be easily exchanged for assets of the same value. The assets are identical, equal in specification and can be mutually substituted.

Currency is one of the most common examples of a fungible asset. For example, if someone loans you a $10 bill and it's time to return it, it doesn't matter if you return a $10 bill different from the one initially loaned to you. Also, you could even decide to give him a $5 and five $1 bills so long as they all make up the $10. This is a good example of fungibility because the item is easily substituted, interchanged and subdivided.

Cryptocurrencies like Bitcoin and Ethereum are also examples of Fungible tokens. They are easily substituted for the same value, interchanged and subdivided into smaller units.

Other examples of fungible assets are commodities, options and common shares.

Non-Fungible Assets

Non-fungible assets or tokens, on the other hand, are unique assets that do not have equivalent exchangeable value or smaller denominations. Although, like Fungible tokens, they could be physical or intangible.

Examples of non-fungible physical assets are real estate, cars, trading cards, etc. Should you decide to lease your house or loan your car to someone else and at the end of the leasing or loaning period the person hands you a different house or car, it wouldn't make sense because these two items have different factors that come into play when evaluating their value and wouldn't have exact replicas in value that can be easily exchanged. They also cannot be divisible or substituted.

Intangible non-fungible assets include digital art and NFTs that typically reference certain digital files such as videos, photos, art and audio. They are supported by their underlying blockchain used to verify ownership and certify authenticity. They are unique, one-of-a-kind, and are not divisible into smaller units.

The Bottom Line

When deciding if an asset (or token) is fungible or not, there are three (or four) things you must consider:

• Interchangeability: Are the assets able to be exchanged for another item of similar value? Fungible assets or tokens are easily interchanged while non-fungible assets are not.
• Value: Does the particular asset retain the same value across the board? Fungible tokens have the same value regardless of where you are ($1 equals $1 wherever you are). Non-fungible tokens or assets represent a unique value proposition.
• Divisibility: Can the asset be divided into smaller units that can make up the singular whole in value? Fungible assets are easily subdivided and reassembled to make up the value of the whole while non-fungible assets cannot be subdivided into smaller bits.
• Token Standards: For digital and blockchain underlying tokens, do they have the ERC-20 or ERC-721 standards? Fungible tokens are typically supported by ERC-20 standards while non-fungible tokens utilize ERC-721 standards.

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