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Fungibility

Updated on :  

08 min read.

If you are a crypto enthusiast, there are various new terms from the crypto space that you will encounter. One such term is fungibility. The term fungibility is usually associated with a good or commodity.

To know more regarding this matter, read on. 

What is fungibility?

The term fungibility denotes the characteristic of an asset that makes it easily tradable with another item for the same value. However, the items exchanged must have the same functionality. 

For example:

You can easily exchange a Rs.20 currency note for two Rs.10 notes. Both assets will have the same value. 

What are fungible assets?

A fungible asset is any item with the same value after exchanging it with another item. 

Other than fiat currency, fungible assets include precious metals, commodities, bonds, and cryptocurrencies. 

One unit of cryptocurrency mined from a particular blockchain will have the same value and functionality as other units of the same network.

If you take one Ether coin and exchange it with another, they will have the same value. Regardless of which block they were mined from and at what point, as they were created in the same blockchain, they will be considered fungible assets. 

As you may know, each complete transaction on a blockchain gets a unique time stamp. This makes its history easily traceable. If a unit of cryptocurrency has been used in fraudulent activities, people may be deterred from accepting it as payment. However, given its origin is the same as others in its category, it remains a fungible asset. It will have an equal value to the other similar tokens on its blockchain.

For example:

Let’s say you intend to pay someone for an item with Bitcoins. Upon tracing the transaction history, you see that some of the Bitcoins you have were used in phishing attacks in the past. This will not affect the value of your cryptocurrency in any way. Being a fungible asset, you can easily use it for payment without any hiccup. 

However, there is a catch. If a cryptocurrency is forked, the new currency formed will not be considered fungible or equal in value to the old currency. 

For example: 

On November 15, 2018, Bitcoin Cash (BCH) forked into Bitcoin Cash and Bitcoin SV. After this event, Bitcoin Cash continued functioning on its own rules, and Bitcoin SV ran on its updated protocols. Although both the variants came from Bitcoin Cash, they will not be considered fungible. 

Non-fungible vs fungible assets

An item that cannot be exchanged for an equal value is a non-fungible asset. Each asset in this class is unique and has its value. Unlike fungible assets, you cannot exchange them with one another and expect an equal value in return. 

Thus for investors, it serves as a great opportunity to earn profit.
You must be aware of several other terms in the crypto universe to increase your knowledge of digital assets. Having a clear idea of these terminologies will help you better understand the workings of the crypto space.