Fungibility: Fungible Tokens vs. Non-Fungible Tokens (NFTs)

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If you have got interested in NFTs since the popularity of cryptokitties – a virtual cat collectible game, it’s time to understand what tokens are. You possibly have a basic idea about NFTs but don’t exactly know the difference between a fungible token and a non-fungible token. So, in this post, we will find out the difference between these two types of tokens to help you better understand NFTs.

What is a Token?

For most people, blockchain technology is all about cryptocurrencies. However, the potential of blockchain technology extends beyond digital currencies. Besides cryptocurrencies, it is believed that non-fungible tokens are the future of the blockchain economy. To understand what fungible and non-fungible tokens are, it is important to first understand what a token is. Typically, a token is a visible or tangible representation of an asset or identity. For instance, a driving license or office ID card represents a token. In the crypto world, tokens refer to a crypto token or an asset of value. It represents something of value, voting right, stake, or anything. Token serve multiple purposes. It can be used as a store of value to carrying out transactions or represent ownership of something unique. This is where the concept of fungibility comes in.

Fungibility refers to the ability of a good or asset to be interchanged with other goods or assets of the same type. Tokens are divided into two types based on their fungibility.

Fungible Tokens

Fungible tokens can be exchanged for another of like kind. Money such as dollars is the most common type of fungible asset. For instance, a $1 bill can be easily exchanged or converted into four quarters or ten dimes. Likewise, Bitcoin is also a fungible token because 1 BTC is equivalent to another bitcoin. So, the tokens that are divisible and interchangeable refer to fungible tokens. Gold bars, dollars, stocks, cryptocurrencies, and other exchangeable assets that are not unique are all fungible. It means that if person A has a $5 bill and person B also has a $5 bill, both bills will hold the same value. Also, the value of two bills of $5 will be equal to the value of one $10 bill. Similar fungible goods and tokens have the same value because they don’t have any uniqueness. The shares of stock listed on different exchanges are also fungible because they represent the same ownership interest in a firm.

Non-Fungible Token

Non-fungible tokens (NFTs) are not interchangeable. Non-fungible refers to something unique and rare that cannot be exchanged for another item such as your house. Non-fungible tokens are often collectible items and cannot be split or exactly changed for other non-fungible tokens of the same type. Non-fungible tokens (NFTs) are quickly gaining popularity in the blockchain/cryptocurrency space. These are digital assets that are rare and not interchangeable. You can buy or sell NFTs online, usually with cryptocurrency. It is typically based on the Ethereum blockchain and represents a whole unit. NFTs consist of various types of digital commodities such as photos, GIFs, audio, video, and other digital files.

Likewise, your house or diamonds are non-fungible assets because of their uniqueness. Diamonds have different cuts, colors, sizes, and grades that make each piece unique and non-interchangeable. In the blockchain sphere, Crypto Kitties, a collectible token, is the most popular example of NFTs because no two CryptoKitties are the same. Unlike fungible tokens like money and Bitcoin, you cannot trade, exchange, or divide CryptoKitty. Fungible tokens are divisible into smaller units but NFTs cannot be divided. These are units of data stored on the blockchain and each NFT represents a unique asset which means that every NFT has a different value.

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