A token is fungible if one unit of it is essentially interchangeable with another unit. In simpler terms, fungible tokens are all identical in value and properties. Most currencies are fungible. For example, a one-dollar bill is fungible—it doesn’t matter which specific dollar bill you have; any dollar is worth the same as any other dollar. If I lend you a $5 bill, I don’t need the exact same serial-numbered bill back, any $5 bill will do, because they’re fungible and equal. Similarly, one Bitcoin is equal in value to any other Bitcoin, making Bitcoin a fungible token.
Fungibility is important for tokens that serve as money or a medium of exchange. It provides uniformity. On a blockchain, fungible tokens are implemented through standards like ERC-20 (on Ethereum) which ensure that each token unit is indistinguishable from another in that contract. Other examples of fungible tokens include other cryptocurrencies like Litecoin or tokens like USDC (a stablecoin where each token aims to equal 1 USD). If you hold 10 USDC in your wallet, it doesn’t matter which specific token IDs you have; it’s just 10 units of value, the same as anyone else’s 10 USDC.
🧠 DEEP DIVE: ERC-20 and the Standardization of Money
The ERC-20 standard on Ethereum is like a blueprint that all fungible tokens follow. It ensures that wallets, exchanges, and apps know how to interact with the token. This standardization is what made thousands of crypto projects interoperable.
Example: USDC, Chainlink (LINK), and Uniswap (UNI) are all ERC-20 tokens. Without a common standard, none of these would easily work across platforms.
Why do we need fungible tokens? They’re crucial for financial applications (trading, payments, etc.) because they allow easy exchange. Imagine if every dollar had unique properties and some were “more valuable” than others—that would make commerce very confusing! So, fungible tokens provide consistency. They are widely used in Decentralized Finance (DeFi) for things like lending, trading, and more (we’ll explore DeFi in Chapter 6). In fact, the vast majority of tokens you’ll see listed on exchanges are fungible tokens—they represent cryptocurrencies or digital assets meant to be traded one for one.
A helpful analogy: Fungible tokens are like coins or chips in a game—if a game gives you 100 gold coins, you don’t care which specific coin IDs you have, just the total number. Those coins can be exchanged or replaced without issue.
🎯 QUICK CHECK:
If I give you 100 tokens and later take back 100 different ones, do you care which tokens they are? If not, they’re fungible!