Fungibility Meaning

Fungibility – is the ability of an asset to be exchanged for another of the same type.

What is fungibility?

Fungibility (or interchangeability) is the ability of an asset to be exchanged for another of the same type. The fungibility of money equals the fungibility of crypto assets. Thus, a fungible crypto asset consists of identical units with the same value. It means one unit can be swapped for another without losing value or functionality. They are divisible and not unique.

Fungible crypto assets can be divided into three groups:

• Assets that can be used as a general medium of exchange.
• Assets for transactions within the platform or network.
• Assets with the characteristics of debt, equity, and derivatives.

Crypto assets can be fungible and nonfungible. 

Here are the four main features typical for fungible crypto assets:

• Each unit has an identical value as any other unit of the same asset.
• Fungible crypto assets can be divided into smaller parts.
• Each unit is interchangeable on a one-to-one basis.
• The assets can be used as a means of exchange and a store of value.

Fungibility provides price stability during transactions. It’s crucial for fail-safe transactions and trading whether through an OTC platform or a centralized exchange.

What is an example of fungibility?

In cryptocurrency, fungibility is achieved through token creation in one blockchain or using the same network standard.

ERC-20 tokens are fungible. They are on the Ethereum blockchain basis and can be exchanged according to their liquidity level (possibility to be sold and bought) and market value.

However, if a fungible asset is given unique characteristics, it loses its interchangeability, which is the fundamental concept behind non-fungible tokens (NFTs). Unlike fungible assets such as cryptocurrencies, NFTs are unique digital assets, each with distinct value and identity.

What is the fungibility of Bitcoin?

Bitcoin (BTC) is a good example of strong fungibility. Each Bitcoin costs the same as any other Bitcoin. It can be divided into numerous pieces, each having the same value.

Each BTC unit equals another, regardless of when and how it was mined. It is part of the same blockchain and functions the same. However, if a new blockchain fork occurs and creates a new version of BTC, these coins are not considered to be the same as the original ones.

Since Bitcoin is fungible, many businesses including everyday brands like Subway, Burger King, and Starbucks have begun to start accepting Bitcoin as payment, recognizing its reliability as a digital currency.

Is fungibility the same as liquidity?

Not exactly. Fungibility and liquidity are related, but they’re not the same thing.

Fungibility refers to an asset’s ability to be exchanged on a one-to-one basis. For example, one Bitcoin is always equal to another Bitcoin, just like a dollar bill can be swapped for another dollar bill.

When it comes to liquidity, we deal with the assessment of how easily one can buy or sell an asset in the market without significant price fluctuations. A crypto asset is reckoned to be liquid in case it can be quickly converted into cash or another asset at its market price. Trading volume and demand are the key factors here. The more people buy and sell, the smoother the trades.

If an asset has low liquidity, it can be difficult to sell it. You might have to wait longer to find a buyer or even accept a lower price just to close the deal. It’s often the case with new or unpopular cryptocurrencies that don’t have an active market yet.

In general, high liquidity is a good thing. It helps stabilize prices, reduces the risk of market manipulation, and makes trades fast.