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Core Concept: Tokenization
Learn all about tokens, which are the technology powering Decentralized Finance (DeFi) and have a wide range of use cases!
Fungible vs non-fungible
The term ‘fungible’ simply means that one asset is just like another. There is no difference, and both assets are interchangeable. This is the fundamental mechanism describing money. We all recognize $20 USD is $20 USD, and can easily exchange that for other goods and services. Prior to fungible asset classes we generally needed to use some type of barter system, trying to come to agreements such as my basket of apples is worth half a bucket of your turnips, which made trade much more difficult.
When assets are non-fungible, this means that an asset, while similar to others, has a unique value and is differentiated from others. While I could easily exchange $1 for $1, we can’t easily exchange an apple with a Picasso, since each has their own unique and different value.
In cryptocurrency, a fungible coin or token is one that can be easily exchanged for another of its kind. An example would be Ethereum. Once added to your account there is no way to tell one ETH from another, and I can easily exchange them. On the other hand, a good example of non-functional token, or NFT, is a CryptoPunk or similar piece of digital art that has been ‘minted’ on the blockchain. You can’t easily exchange one CryptoPunk or Bored Ape for another, since each has its own unique value. You need to convert (or sell) those assets to some type of fungible common denominator, like Ethereum.
There are a variety of different tokens that can be created on multiple of blockchains. Each of these tokens has their own base standard. Token standards are the set of rules that smart contracts interact with. Each blockchain will have its own standard(s). Sometimes new standards are simple improvements, and in other cases some are defined for generic use cases.
Sometimes tokens are used for the purposes of adding some type of abstraction layer on top of existing coins, such as an IOU. This coin or token may be located on the same blockchain (e.g. wETH on Ethereum), but it might also represent an asset from another chain (e.g. wBTC on Ethereum).