There's a Fungus Among Us: Fungibility in the Digital Age



What a weird word. 

From the Latin fungibilis which means "to perform". A fungible good is something that can be replaced by an equal amount of something else without any loss of value or performance. Basically, an ounce of gold is an ounce of gold is an ounce of gold. It generally doesn't matter where the gold came from or what it used to be before it was melted down because all gold is fungible with all other gold. Most commodities (Oil, Gold, and my personal favorite lumber. Lumber deserves its own blog post at some point. Fascinating material from an investment perspective. The only major commodity that is self-replenishing, but I digress) are fungible goods as well as many consumer (Tommy Bahama Shirts) and digital goods (iTunes songs). Stocks are also a great example of a fungible good. 

Fungibility is not a hard and fast rule though. Take my Tommy Bahama shirt example. Fungibility depends on how specific you get with the product. Shirts are non-fungible. Shirts come in different styles and cuts. They are made from different materials and some will keep you warm while others will show off the tattoo you regret from spring break in Cancun. Once you drill down a little bit deeper shirts become fungible. Every ridiculously overpriced Baja Batik Camp Shirt, in theory, is equivalent to every other ridiculously overpriced Baja Batik Camp Shirt. 

Make sense? 

What isn't a fungible good you ask? 

Non-fungible goods are goods that can not be substituted while maintaining their value or production. Artwork is the classic example of non-fungible goods (despite what uncultured dolts like me may sometimes believe). Other common examples include people, land, and events. Nonfungible goods can often be expensive because they are in some way unique. 

Easy right? 

Not so fast. 

The relatively straightforward paradigms of fungibility that we have become accustomed to are quickly being turned on their head by the advent of blockchains and other distributed ledgers.  

Most crypto assets are fungible. They were designed this way so that they could be used as a means of value exchange. Bitcoin, Ether, Litecoin, and other major cryptocurrencies are all fungible goods. However, there are some crypto assets that have been specifically designed to be non-fungible. These appropriately named Non-Fungible Tokens (NFT) are unique from every other NFT. They signify ownership of a discrete and unique asset. The first widespread use of NFTs was in the popular CryptoKitty game (which I wrote more about here). CryptoKitties were unique digital pets with verifiable ownership. This was made possible through the use of NFTs on the Ethereum blockchain. 

Non-Fungible Tokens have some very interesting potential use cases. They can be used to signify ownership of digital goods in a way that was never possible before. When you used to purchase music off of iTunes (so quaint I know), there wasn't any real way to show ownership over the songs you purchased. You'd purchase Sk8r Boi (really?) for $0.99 and you would get access to listen to the song to your heart's content. Your copy of the song was the same as everyone else's copy of the song. There was nothing traceable about it and no way to say who it really belonged to. This is what has made piracy of digital assets so notoriously difficult to combat against. It is very very difficult to definitively says who owns what and where a copy of a digital good came from. 

Non-Fungible Tokens could change all of this. 

Built on the blockchain, NFTs could signify definitive ownership of digital goods. We will know who purchased the good, who has owned it since, and who is the current holder of it. This ability to create digital scarcity is game-changing for digital assets like music, collectibles, and artwork. 

On Valentine's day of this year, a piece of digital artwork, the Forever Rose, sold for $1 million to a group of 10 collectors. The Forever Rose exists on the Ethereum blockchain in the form of ROSE tokens that the owners hold. These tokens are technically not NFTs since they can be exchanged for each other and they each represent a portion of ownership in the digital piece of artwork (pictured at the top of this post). They are a representative of fungible artwork. The Forever Rose is a provocative example of the power of blockchain and token technologies and a glimpse into the future of what digital asset ownership could look like.