Fungible vs. non-fungible tokens (NFTs): What’s the difference?
“Web3 is the internet owned by the builders and users, orchestrated with tokens.” — Chris Dixon
In Web3, tokens power everything around you. Within this world, a token is defined as a representation of value or utility within a given ecosystem.
This concept isn’t new to Web3, it has been around for thousands of years. From the earliest forms of currencies to casino chips, the idea of value representation and exchange allowed communities to flourish and marketplaces to develop. What is new is that Web3 enables tokens to no longer be static objects, but rather empowered by formulas and logic through smart contracts that run on blockchains.
Tokens can be broken down into two unique categories: fungible and non-fungible (NFTs). Fungible tokens came first and challenged the need for financial intermediaries (👋 DeFi). Then came NFTs which brought culture and strong communities to crypto. As the Web3 landscape continues to evolve and expand, we are seeing more examples of these two token types being brought together to support the growth and utility of individual NFT communities.
But what does fungible mean?
In the simplest terms, fungible means interchangeable. Classic examples of fungible assets are currencies and stocks.
Take the US Dollar. Regardless of whether your $10 bill was printed in Washington D.C. or Fort Worth, Texas, it is still worth $10 wherever you go. You can trade your $10 bill for my $10 bill and we would be left with the same value. You can even divide that $10 bill into ten $1 bills or two $5 bills without changing the value that you own. This same concept applies to fungible tokens as well: 1 $APE = 1 $APE, 1 $MANA = 1 $MANA, etc.
NFTs are the total opposite. No one would argue that Bored Ape #2087 is interchangeable with Bored Ape #544, they possess entirely different traits and attributes:
While a group of individuals can come together to buy an NFT, the NFT itself isn’t divisible and any utility given to that specific NFT isn’t multiplied by the number of owners. If you wanted to pay someone with an NFT, that individual would need to do a lot of research to understand what it’s worth (determining rarity, searching for floor price, etc.). If you tried to buy things with a bundle of NFTs, the problem of accurate value determination becomes even harder to solve. This is why, in classic economic terms, fungible tokens are better at being “units of account” or enabling common measurement, and “mediums of exchange” or supporting active markets and trades.
To use fungible tokens or to use non-fungible tokens?
Neither token type is better or worse, they just have different superpowers. NFTs deliver value through their uniqueness, whereas fungible tokens deliver value through their sameness.
Since Beeple sold his Everydays: The First 5000 Days artwork for almost $70 million at Christie’s auction house in March 2021, the world has been set ablaze by conversations questioning the purpose of NFTs. As the NFT market continues to mature, the value propositions that NFTs offer have been made more clear. Nonetheless, it can still be confusing to decide which type of token to employ for different use cases. Let’s dig into where each of these tokens shines:
As you can see, each token type serves different purposes. Just like it is inefficient to use NFTs for payments, it is equally inefficient to use fungible tokens as memberships. Yet, the two can work together synergistically to supercharge community ecosystems (e.g. NFTs as memberships and fungible tokens as currency within that ecosystem).
In our next post, we will break down further how fungible tokens have been used to grow, reward, and engage NFT communities.
