Fungibility in cryptocurrency refers to the state of an asset (coin or token) which can be replaced by any other identical coin or token.
The Long Explanation
‘Fungible’ is defined in the English language as “mutually interchangeable” or “replaceable by another identical item”. In particular, an asset is fungible when each unit of the asset has the same value and validity as the others.
For an asset to be fungible, it must maintain a standard value and boast of uniform acceptance. No other factors – such as a specific unit’s history or prior owner – should be able to influence its value.
This is true of assets like gold where a pound of pure gold is of equal value to any other pound of pure gold. It is also seen in fiat currencies such as the dollar, where a 20-dollar note is equal in value to any other 20-dollar note, or even four 5-dollar notes, twenty 1-dollar notes, etc.
And, this is the same characteristic that is carried over into the world of cryptocurrency. In the world of cryptocurrencies, all of the tokens or coins minted under a digital currency class are essentially the same in value. This means one can be swapped for another with no drop or increase in value.
Turning over to Bitcoin, for example, each unit of BTC may be considered equal in value and functionality. Despite being mined from different blocks and at different times, they’re all part of the blockchain and all enjoy the same value.
The direct opposite of a fungible token or asset is a non-fungible token (NFT). This term has gained popularity in recent times as a new class of crypto tokens have shot to the limelight.
Non-fungible tokens cannot be interchanged for each other, even when they originate from the same source or share very similar features in appearance, as every token in the source is completely unique and different from the others.