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What are Fungible and Non-Fungible Tokens?

Matthew Warner | February 2020

TL;DR: Fungible tokens are types of cryptographic tokens which are essentially identical. Non-fungible tokens are cryptographic tokens designed to be in some way unique. The former may be exchanged on a 1-to-1 basis whereas the latter are not equal.

History of Fungible and Non-Fungible Tokens
Like specific denominations of fiat currency, bitcoin and early cryptocurrencies act as fungible tokens; one pound coin or one bitcoin or one ether can be exchanged for another pound or bitcoin or ether, and their function and uses are (essentially) identical. This kind of fungible token or coin is very useful for exchanging value, as currency is designed to do. 

The first noteworthy instance of non-fungible tokens being used occurred when the CryptoKitties phenomenon broke out in November 2017. A game designed using ERC-721 token standard Ethereum tokens (with ERC-20 being the usual tokens at the time), each token represented a ‘CryptoKitty’, with a unique code that determined the attributes (‘cattributes’) of the CryptoKitty. The tokens could be bought, sold, and even ‘bred’ to create new tokens with aspects from the ‘parents’. The game quickly became popular. The growth it experienced was unprecedented, with the number of transactions reaching such a level that within the first week, the amount of pending transactions on Ethereum increased by a factor of six. This was a significant problem at the time as GAS prices increased, making transactions more expensive whilst also slowing down the rate that other Ethereum-based programmes could operate. 

Though it was seen as a huge issue at the time, it merely highlighted the scalability question that was being raised around blockchain technology. It could be argued that it actually helped in the long run, as groups immediately began on ways to scale the ecosystem in response to the traffic it was experiencing – forcing an issue that was already on most people’s minds at that time. In addition, the game brought a lot of attention to the blockchain and pointed to potential future methods of gaining mass adoption or at least increasing the usage of blockchain – gaming.

Since Cryptokitties there have been a number of non-fungible tokens and associated services which have been developed, such as other collectables, exchanges and even a virtual world. Though the initial uses focus heavily on enabling unique blockchain-based collection ownership, there are other uses for non-fungible tokens which can be linked to real-world collections, specific permissions and other areas. 

What is a Fungible Token?
A fungible token is a type of cryptographic token which is designed to be uniform. As the tokens are (to all intents and purposes) identical, they can be split or interchanged with other fungible tokens of the same type with no issue; one bitcoin may be exchanged for another with no discernible difference to the owners. This is the case the majority of cryptocurrencies and tokens find themselves in as they are being used as an exchange of value, method of remittance or mimicking traditional currency in the digital world. 

What is a Non-Fungible Token?
A non-fungible token is a type of cryptographic token which has a specific uniqueness in its code or function compared to others of its kind. This uniqueness means that it cannot be split or evenly changed for other non-fungible tokens of the same type. The primary use of this has been to recreate or enable the ownership of collectables, much like pokemon cards or pieces of art, in the digital world. 

What are the Benefits of Fungible and Non-Fungible Tokens?
Both fungible and non-fungible tokens have their uses but the main focus remains the same: representing or recreating real-world possibilities without the risk of fraud thanks to the immutability of blockchain. They both also open up trade and commerce on a global, borderless scale and enable more efficient ways of interacting with their respective uses than have traditionally been possible. There are however, key differences in their potential due to the uniformity or uniqueness of their respective designs. 

As functionally identical tokens, fungible tokens have certain benefits:

  • Fractionalisation. Fungible tokens are essentially infinitely-divisible tokens. This allows for a number of opportunities not afforded by traditional currency or non-fungible tokens. These include micro-payments and micro-investments. Rather than being limited by the denominations on offer, the fungible token may be split infinite times. This opens up pricing and payments and investment, not only to a larger pool of people than before, but also to a range of products or services that may not have been able to use it. This includes options such as micro-payment ‘tipping’ services which have already been developed to enable and increase revenue generation from online content generation.   
  • Liquidity. Fungible tokens enjoy vastly superior liquidity to non-fungible tokens and traditional currency due to their ability to be offered at potentially infinitely small denominations. Compared to traditional currency, the nature of blockchain technology also increases the liquidity through its removal of middle men, making transfers fast and efficient, and the option to trade on digital exchanges with no down-time.

With their inherent uniqueness, non-fungible tokens offer other benefits:

  • Specific Ownership. A non-fungible token can be used to represent something unique, both in the digital world and in the real world. This has been used for collectibles and gaming in the digital world – proving someone owns a specific CryptoKitty or item – but it could equally be applied to unique items in the real word – such as houses, cars, art or potentially even identities. It could also be used to grant specific access, granting access to an Airbnb at specific times or for air travel tickets. 
  • Customisation. Non-fungible tokens are able to be securely customised in a way that other tokens can’t be. Smart contracts and fungible tokens might be able to enact some of the functions of non-fungible tokens but with the non-fungible token, the token itself holds all the data. The token can also have additional data assigned to it which could include standard options such as the name and the ownership, but could be expanded to areas such as the history of the token and associated information – a picture of the house the token represents, the previous owners of a car the token represents, or the number of character skins in a game with the same model type the token represents. 
  • Secure Tradability. Traditionally, transferring ownership of a physical or digital item is at risk of fraud, and as such is either onerous in its execution or sometimes simply not allowed. With the security of blockchain and the uniqueness of non-fungible tokens, trading anything represented by the token would be a much simpler and more efficient process. As a token, it could potentially also allow the ownership of items to be transferred across platforms or even be interoperable across multiple services such as games or marketplaces. 

Links to useful articles:
https://medium.com/dapperlabs/cryptokitties-receives-12m-in-funding-38322f90ab65
https://www.cryptokitties.co/
https://decentraland.org/
https://wax.io/
https://opensea.io/
https://opensea.io/blog/guides/non-fungible-tokens/
https://nonfungible.com/