Fungibility - What is it?
What does Fungibility Mean? How does it apply to crypto?
Honestly it sounds pretty gross. Fungi is the plural form of fungus. Is it something’s ability to be like fungus? Not exactly.
Let me explain:
Merriam-Webster defines it like this:
- being something (such as money or a 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
- capable of mutual substitution
That isn’t the clearest definition – so we’ll help break it down for you.
Let’s simplify this with a quick real-world example:
Your neighbor from across the street stops by and asks to borrow some sugar. He’s baking a cake for his wife’s birthday and ran out. There is a 5-pound bag of sugar in your pantry and you happily offer him the whole thing to make sure his wife’s birthday cake is successful.
Two days later, he returns to your house – carrying with him a new 5-pound bag of sugar he purchased from the grocery. He thanks you again for your generosity and hands over the sugar.
You hardly notice that the sugar returned was a different brand – but don’t really care. Its sugar – you happily put it back in your pantry.
A few days later, a different neighbor stops by and asks if he can borrow your lawn mower. His mower is currently in the shop and doesn’t want to be in trouble with his neighbors. There is a nice, brand-new riding lawn mower stashed away in your garage and you happily offer it to him to keep the neighborhood looking nice.
Two days later, he returns to your house – carrying with him a beat-up, push lawn mower. He thanks you again for your generosity and hands over the lawn mower you’ve never seen before. You do not accept his return offer, and demand that he brings back the mower you let him borrow. He says, “I borrowed a lawn mower, and I returned a lawn mower. I don’t see the issue here?” You reply, “You don’t understand what fungibility means!”
Although this is an extreme example, it highlights the difference in fungibility between sugar and lawn mowers. You cannot just one for one swap non-fungible things.
Okay, that is common sense… but how does this apply to cryptocurrency?
A non-fungible token is on one end of the spectrum. Like the lawn mower in the example above, but on steroids.
You can own a 1 of 1 piece of content: collectible, artwork, etc.
Or a unique piece from a set like CryptoPunks, Autoglyphs, or Hashmasks where there may be others like your piece, but not exactly the same.
Or a limited supply of the exact same piece (You own #4 of 8).
This makes them extremely valuable, and the top prices and the floor prices can be drastically different.
At first you might think, “Okay so cryptoart is non-fungible and the coins themselves are fungible.” Again, not exactly.
Coins that exist on a public, transparent ledger will never achieve true fungibility (BTC, ETH, etc.) For example: 850,000 bitcoins were “stolen” back in 2014 during the Mt. Gox scandal. There are dedicated pages (https://www.cryptoground.com/mtgox-cold-wallet-monitor/) to monitor the movement of these coins. Reputable exchanges like Coinbase, Binance, Kraken, etc. have these coins “blacklisted” – and will not allow the holder to convert them to cash on their exchange.
Ask yourself, would you pay the same amount for a “Mt. Gox” bitcoin as you would a bitcoin purchased from say, Coinbase? If the answer is no, then you know that bitcoin isn’t truly fungible.
“But that is a good thing, right? They were stolen in the first place!”
To that I’d argue:
In the age of mass surveillance and censorship, this can be a very slippery slope. Chainalysis (https://www.chainalysis.com/chainalysis-kyt/) analyzes a specific bitcoin or wallet address and provides a risk assessment based on things like: coin mixing, number of users, which exchange it came from, and more.
If you sell your car on Craigslist in exchange for some bitcoin, but unknown to you, that bitcoin was acquired from a Dark Net Market – it may be “blacklisted” from all other exchanges! You have no way to exchange your bitcoin for cash or other coins and now your only options is to try and pass it off to another unsuspecting victim! If you send it to an exchange, they can lock your funds.
There is no fungibility without privacy. Enter Monero (XMR). A private ledger – by default – that opens up a new level of fungibility that I’d argue is unmatched in the crypto space. Each Monero is worth the exact same as the next Monero. What this means for the value of each coin is for you to decide.
“But the government will ban Monero!” is the same argument they made in the early days of bitcoin. Until the government realized that they see every transaction made throughout its history on the blockchain.
This is not financial advice, but personally I believe all of these assets mentioned will be profitable going forward - but this is just something to add to your understanding:
Where does your favorite coin land on the fungibility scale from NFT to XMR?