Demystifying the Fungibile in Non-Fungible Tokens
All the conversations surrounding web3 and non-fungible tokens (NFTs) bring about a fundamental question — What does it mean to say something is fungible as opposed to non-fungible?
To gain a better understanding of what this means, let’s examine the literal definition of the word. Webster’s dictionary defines fungible as “something (such as money or commodity) of such a nature that one part or quantity may be replaced by another equal part or quantity in paying a debt or settling an account.”
This definition implies that for an item to be considered fungible, it should be easily exchangeable for an equal amount of that same item. To put it another way, a fungible item should be substitutable — i.e. a dollar bill circulating in Detroit, Texas is the same as a dollar bill circulating in the Detroit, Michigan. It makes sense that this would be a desirable trait in the context of money. If someone purchases a product they need with a set amount of dollars, the seller of that product would like to be able to use those same dollars to purchase a product they need that is of equal value to the product they just sold. One could say this is the basic principle for a modern economy to work effectively.
In years past, the value of the dollar was tied to precious metals such as gold and silver, which are also fungible. One ounce of gold is always equal to another ounce of gold; the same is true for silver. This is notwithstanding someone taking a ten-ounce brick of gold or silver and molding it into a set of unique coins that are rare in their design, which might very well turn those coins into collectibles that are no longer fully fungible. That said, if someone were to melt the same coins back down to the original ten-ounce brick of gold or silver, the precious metals would retain their value as measured by their original weight (before being turned into coins). Sugar is another example of something that is fungible. A pound of pure sugar from China is interchangeable with a pound of pure sugar from England. Gold, silver, and sugar are uniform goods that are considered commodities, and they all have fungibility as a common trait.
When looking for examples of non-fungible items, what immediately comes to mind are great works of art and rare sports memorabilia. Van Gogh’s original 1888 painting, “The Starry Night Over The Rhone,” is worth exponentially more than its many replicas. Though some would say the original painting is priceless, it appears as though its starting price is somewhere around a cool $111 million. The fact that there is only one original of this famous painting is what makes it so lucrative and sought after. In this same way, a rare sports card can also be very valuable. Though you won’t find any sports cards that can compete with Van Gogh’s one hundred million dollar price tags for his paintings, there are examples of extremely lucrative sports card sales — Mickey Mantle’s Topps baseball rookie card sold for $5.2 million and Gretzky’s 1979 O-Pee-Chee rookie card sold for $3.75 million at auction. These are of course extreme examples of very expensive collectors’ pieces, but the main takeaway is that non-fungible goods are not easily interchangeable because they are so unique, and in some cases very rare. This is what makes them non-fungible.
In many ways, the age-old concepts of fungibility make up the underlying fundamentals for the emerging and decentralized, peer-to-peer, blockchain-based version of the internet, also known as web3. Cryptocurrencies like Bitcoin and Ethereum are the fungible tokens, or digital currency, that can be used to easily exchange value between users in this space. It does not matter which Bitcoin or Ethereum someone receives, as they are interchangeable with an equal amount of the same token from anywhere or anyone. One Bitcoin is equal to another Bitcoin, and the same is true for Ethereum. It is true that these concepts can get rather deep when it comes to matters of censorship resistance and privacy as it pertains to fungibility, but that is beyond the technical scope of this discussion. The main takeaway here is that cryptocurrencies like Bitcoin and Ethereum are the fungible digital currencies that are used to buy and sell physical and virtual goods within a web3 experience.
NFTs on the other hand are the digital receipts or digital signatures that prove ownership for some kind of unique digital media within the web3 space — this digital media could be a video moment and/or a piece of digital artwork. The NFTs are “minted” on one of the aforementioned cryptocurrency’s public blockchains as being unique, individually numbered, and trackable with records of authenticity. Each NFT has its own “immutable data,” such as total inventory, artwork, audio files, and other unique information. Once created, an NFT cannot be edited or changed by any party, and ownership history is tracked on a cryptocurrency’s public blockchain. In some cases, when a piece of digital media tied to an NFT has very unique qualities, it can be extremely rare and sought after in the same way as rare paintings or sports cards. This is made possible because NFTs unquestionably prove someone’s ownership for that digital media. It is therefore unsurprising that NFTs are the non-fungible digital goods that exist in the web3 world. It’s literally in their name!
From a philosophical perspective, one can say that someone’s experiences and memories are also non-fungible. That is, a person cannot replace their own meaningful moments in life with another person’s meaningful moments. Their life experiences are unique unto themselves and even shared moments are experienced from an individual perspective. This is perhaps where NFTs have the most room for providing incredible value. Due to their immutable nature for proving digital ownership, NFTs can be tied to amazing in-real-life (IRL) and virtual experiences as a reward to their holders. Brands and sports leagues alike can provide their fans with some truly remarkable experiences by making these accessible through the NFTs they offer. In fact, the entire NFT space is built around creating fun, unforgettable moments to build lasting memories.