What Are Fungible and Non-Fungible Tokens? How Do They Affect the Future of Blockchain Respectively?

In the world of cryptocurrencies, the number of tokens is gradually increasing almost every day. According to Statista, there are over 4,000 cryptocurrencies as of early 2021.

A cryptocurrency is a conventional currency that we use to make or receive payments on the blockchain. Crypto tokens portray a distinct fungible and tradable asset or a utility created by an initial coin offering.

There are two fundamental types of cryptographic tokens – fungible and non-fungible.

What are fungible and non-fungible tokens？

Fungible cryptocurrencies constitute the majority of tokens in the market today. Fungible tokens are digital assets configured in such a way that each token (or fragment of the token) is equivalent to the next.

Fungibility is a characteristic seen in fiat money. For instance, a $20 bill can be exchanged for any other $20 bill or even fractions of it. Even where it cannot be an absolute $20 bill, it can be in multiples of $5 bills or even less with the total equaling $20.

On the same hand, one Bitcoin is equal to one Bitcoin, and its value is not different from any other Bitcoin. This is why fungibility is vital to the concept of currency, notwithstanding whether its a crypto or a fiat currency.

Just like a fiat currency can come in bits, half of a Bitcoin can also be swapped for another half without losing its essence, despite being halves of different coins.

In the case of non-fungible tokens (NFTs), they are designed to be special. These tokens usually represent unique, collectible items. Precious gems such as diamonds come in different sizes, shapes, grades and cuts.

For this reason, it becomes difficult to assign the same value to any two diamonds. A particular diamond can be a unique gem that cannot be equated with any other diamond anywhere in the world.

CryptoKitties are very good examples of non-fungible tokens. They are most likely the best-known examples of collectibles – non-fungible tokens.

Just as we know in the case of diamonds, each CryptoKitty is a unique token, and depending on its style and pedigree, it is usually worth a lot of money. The fact that no two CryptoKitties are the same makes their value vary substantially.

It is highly impossible to divide a CryptoKitty or any other non-fungible token into simpler parts or trade them for others. In the same way, they cannot be reassembled in any form to create a new, equally valuable CryptoKitty, unlike fungible assets like Bitcoin or gold.

Importance of fungible and non-fungible tokens

Tokens and currencies for exchange purposes tend to gain more value by their fungibility. If a currency is widely regarded and accepted, more people will be willing to use it as a means of exchange. This also increases its value and worth. In order to make payments a feature of any token, it must be fungible.

Non-fungible tokens have found wide usage in decentralized applications like crypto-collectibles or crypto-games. They can represent certificates of any kind such as drivers license, academic degrees and other educational certificates.

They can be used as keys, passes, identities, wills, voting rights, tickets and any type of access right, loyalty programs, copyright, supply chain tracking, medical data, software licenses and warranties, among others.

Non-fungible tokens enhance the tokenization of all types of assets, whether digital or real. This act of tokenization confers more liquidity on assets for investors. They find good usage in unique investments that can be tied to physical objects, such as unique artwork, real estate or any other real-world assets and securities.

You can also use non-fungible tokens to fractionally own goods that could not be easily divisible such as real estate, artwork or other memorabilia. In the case of buildings, tokenization can confer simple ownership titles of a part of the real estate.

Again, other tokens can allow special advantages like access rights. Non-fungible tokens have also become of potential interest in digital art since they can be useful in proving provenance, authenticity and ownership.

How they positively affect the future of blockchain respectively

As fungible tokens, Bitcoin and other cryptocurrencies have undoubtedly found prominent uses for blockchain technology. But it becomes more interesting when you realize that you can use blockchains to store non-fungible tokens.

Blockchain allows non-fungible tokens to store or point to information that is indivisible, has unique properties and isnt interchangeable. CryptoKitties are demonstrating the feasibility of perfectly consistent trading and exchanging of digital assets on a blockchain.

The CryptoKitties craze was a budding standard for non-fungible tokens on the Ethereum platform – Ethereum Implementation Proposal 721, in early 2018. It eventually gained confirmation and full support as an official Ethereum Standard ERC-721.

The standard has now matured to the extent of driving further innovation to create a framework of rules, libraries and conventions for digital certificates on the blockchain. Businesses will now harness these tamper-proof and transparent qualities to create a variety of novel decentralized applications (DApps).

Since the standard is on the Ethereum public blockchain, it becomes relatively easy for businesses to create their experimental DApps. This can enhance experimentation with DApps, as well as facilitate the cheap exchange of information on the Ethereum blockchain.

The future is bright with non-fungible tokens as we can build with these new tools and standards. Since non-fungible tokens have this uniqueness to store information instead of value, there is an opportunity to build proofs of identity or unique digital certificates on the blockchain, and this comes with the option to store sensitive data on- or off-chain.

There are high prospects of storing secure and tamperproof records of births, property deeds, academic qualifications and more, where no central authority or prying eyes can have access. There is also the opportunity of deploying the characteristics of non-fungibility to revolutionize and disrupt blockchain applications, such as in voting and elections to eliminate fraud and transform democracy.

Customer experience is another area in which non-fungible tokens can be of real value. Customers can use them to directly manage the exchange of their data for products and services.

The overriding thing is that businesses can hone in on blockchains ability to produce non-fungible tokens, rather than cryptocurrencies, for innovation.