What is the difference between a fungible and a non-fungible token?

Understanding Fungibility in Digital Assets

The concept of fungibility is foundational to understanding both fungible and non-fungible tokens (NFTs) in the cryptocurrency space. An asset is considered fungible when each unit is interchangeable with another of the same kind and value. For example, one Bitcoin (BTC) is identical in value and function to any other Bitcoin. This interchangeability allows cryptocurrencies like Ethereum (ETH) or USDT to operate as reliable mediums of exchange, similar to traditional fiat currencies such as the US dollar. Each unit holds the same value and can be freely exchanged without loss of utility. This characteristic is essential for financial systems where consistency and predictability are required.

In contrast, a non-fungible token (NFT) is unique and cannot be directly replaced by another token. Each NFT contains distinct information or attributes that differentiate it from others, even if they exist on the same blockchain. This uniqueness is encoded into the token’s metadata and is secured through smart contract standards such as ERC-721 or ERC-1155 on the Ethereum blockchain. Because of this, NFTs are not interchangeable on a one-to-one basis. For instance, an NFT representing a digital artwork cannot be swapped for another NFT of a virtual real estate plot without considering their individual value and characteristics.

Technical Standards Behind Token Types

The technical implementation of tokens on blockchains relies on specific smart contract standards. For fungible tokens, the most widely adopted standard is ERC-20 on Ethereum. This standard defines a set of rules that ensure tokens behave uniformly across wallets, exchanges, and decentralized applications (dApps). Key functions include transfer, balanceOf, and totalSupply, which allow seamless movement and tracking of identical tokens. When you send 100 DAI to someone, the recipient receives 100 units of the same value and type, with no distinction between individual tokens.

For non-fungible tokens, the ERC-721 standard is the most common. Unlike ERC-20, ERC-721 assigns a unique identifier (tokenID) to each token, ensuring no two tokens are the same. Each NFT also includes metadata that may reference external files such as images, videos, or text. This metadata is often stored off-chain using services like IPFS (InterPlanetary File System), with the NFT containing only a link to the content. The ERC-1155 standard introduces semi-fungibility, allowing a single contract to manage both fungible and non-fungible tokens, improving efficiency for applications like gaming where multiple item types exist.

Use Cases and Practical Applications

Fungible tokens are primarily used as digital currencies, utility tokens, or governance tokens within decentralized ecosystems. For example, Chainlink (LINK) is a fungible token used to pay for oracle services on its network. Similarly, Uniswap (UNI) allows holders to vote on protocol upgrades. These tokens rely on uniformity to maintain trust and functionality across transactions. Their interchangeability ensures that users can trade, stake, or spend them without concern for individual token history or attributes.

Non-fungible tokens, on the other hand, enable ownership of unique digital or physical assets. A prominent use case is digital art, where artists mint NFTs to prove authenticity and ownership. Platforms like OpenSea and Rarible allow creators to upload artwork, attach metadata, and mint NFTs using connected wallets like MetaMask. Other applications include virtual real estate in metaverses like Decentraland, in-game items in blockchain games such as Axie Infinity, and proof of attendance for events. Each NFT serves as a verifiable certificate of ownership that cannot be duplicated.

How to Mint and Transfer NFTs

Minting an NFT involves creating a unique token on a blockchain. To do this:

• Connect a cryptocurrency wallet such as MetaMask to an NFT marketplace like OpenSea.
• Click on the 'Create' button and upload the digital file (image, video, audio).
• Enter metadata such as name, description, and properties.
• Choose the blockchain (e.g., Ethereum, Polygon) and select the royalty percentage.
• Confirm the transaction through the wallet, which may require paying a gas fee.

Once minted, the NFT appears in your wallet and marketplace profile. Transferring an NFT requires:

• Navigating to the NFT’s page on the marketplace.
• Selecting the 'Transfer' option.
• Entering the recipient’s wallet address.
• Confirming the transaction in your wallet.

Unlike fungible tokens, each transfer involves a unique token ID, and the transaction is recorded on the blockchain as a distinct event.

Security and Ownership Verification

Ownership of fungible tokens is verified by checking the balance associated with a wallet address. Since all units are identical, the system only needs to track quantity. For NFTs, ownership is tied to the tokenID and recorded on the blockchain. Anyone can verify ownership by inspecting the blockchain ledger using tools like Etherscan. The smart contract address and tokenID together form a unique identifier that proves legitimacy.

It is important to note that owning an NFT does not necessarily grant copyright or reproduction rights to the underlying content. The digital file linked to an NFT can often be copied, but the ownership record remains on the blockchain. This distinction ensures scarcity and provenance, even if the file itself is publicly accessible.

Common Misconceptions and Clarifications

A frequent misunderstanding is that all tokens on a blockchain are interchangeable. This is not true—blockchains support multiple token standards with different properties. Another misconception is that NFTs are inherently valuable. Value is determined by market demand, not the technology itself. Additionally, some believe that minting an NFT automatically protects copyright, but legal rights must be established separately.

Frequently Asked Questions

Can a fungible token be converted into a non-fungible token?No, a fungible token cannot be directly converted into an NFT because they operate under different smart contract standards. Converting would require burning the fungible tokens and minting new NFTs through a separate contract, which is a manual process and not an automatic conversion.

Do NFTs always represent digital art?No, while digital art is a popular use case, NFTs can represent a wide range of assets including virtual land, domain names, music, collectibles, and even real-world assets like property deeds or luxury goods.

Are gas fees higher for NFT transactions compared to fungible tokens?Gas fees depend on network congestion and transaction complexity. NFT transactions may cost more due to the larger data footprint of unique token IDs and metadata, but fees are not inherently higher solely because of the token type.

Can one NFT represent multiple items?Yes, under the ERC-1155 standard, a single NFT contract can manage multiple token types, including both fungible and non-fungible items. This is useful in gaming, where one contract can handle currencies, weapons, and unique characters.