What is a token?
A token is basically a tangible, measurable representation of anything that has the potential to hold value, be it a thought, a tweet, a piece of art, or anything else. In the world of crypto, tokens are created by the means of Initial Coin Offerings (ICO), which translates to Initial Public offerings (IPO) in the non-crypto zone. Tokens often serve numerous purposes in their native environments and can also give its holders rights and benefits including voting rights as seen in the case of EOS Blockchain tokens which provide the holders with the right to vote for block creators, exclusive access as seen in Bored Apes Yacht Club- the owners of the Ape NFT get exclusive access to the club itself, providing a better user experience for token holders by issuing user experience tokens, etc. In the blockchain system, a token is something that can be digitally traded, exchanged online. Tokens symbolize ownership of a certain entity. They could serve as a pathway for people to use DApps- decentralized apps. Decentralized apps are nothing but apps that run on a network of multiple computers instead of running on only 1. This makes it free from the control of a single organization/owner.
Tokens are primarily divided into 2 types- fungible and non-fungible.
Fungible tokens- tokens that are identical, interchangeable, and divisible are fungible tokens. The best example is any form of currency. Fiat currency can be divided into any number of parts and when recombined would carry exactly the same value that it did before. The fact that such tokens can be divided into smaller units is a distinguishing factor. A 100-dollar bill is a great example of a fungible token. It is a tangible representation of wealth, every 100-dollar bill is identical, can be interchanged with another bill with no loss in its value, and finally, it can be divided into two 50-dollar bills and still hold its entire value. Cryptocurrencies are also considered to be fungible tokens. 1 ETH holds the same value as another 1 ETH, and the other factors align with the definition of fungible tokens perfectly.
Non-fungible tokens- represent uniqueness. They have only 1 of each token in the world and every token is different from the others. Trading of these tokens is possible, but the likelihood of 2 tokens having identical prices is a rarity. This type of token cannot be divided into smaller counterparts as well. Artwork is a great example to take in this case. Every painting in the world is unique, and the painting loses its value if it’s broken down (torn) into smaller parts. Non-fungible tokens can be anything unique and valuable. Nowadays we see NTFs of not only artwork but also of various other commodities including fancy collectibles like sports NFTs, pixelated art pieces, virtual cats, and whatnot. Some of the popular NFTs now are CryptoKitties, CryptoPunks, and Bored Apes Yacht club.
Summing the differences up:
1. Interchangeability- Fungible tokens are an interchangeable commodity as opposed to NFTs which are unique and cannot be interchanged as every one of them carries a separate price tag.
2. Divisibility- Fungible tokens allow for them to be divided into smaller units without losing their value. On the contrary, NFTs cannot be divided into smaller units as it would lead to a loss of value.
3. Uniqueness- Every fungible token that belongs to a category is the same, carries the same value universally. On the flip side, every NFT is different and worth more or less when compared to the other available NFTs.
4. Rules that govern them-
There are certain rules that have been listed by Ethereum for anyone who wishes to create tokens on ETH. These rules play an integral role in making people understand the basic monetary requirements.
Fungible tokens in the blockchain world are governed by the guidelines laid under ERC-20. ERC stands for” Ethereum Request for Comment”. This standard’s foundations are based on the factors including
i. Token Name
i. Total supply
Non- Fungible tokens are governed by ERC 721. This allows developers to tokenize ownership of any arbitrary data. This standard defines the following:
i. Functions name
Now that the differences between fungible and non-fungible tokens are out of the way, let us dive into how NFTs actually need fungible tokens in order to survive in the future.
Fungibility brings reliability and trust to the financial system. Hence it is really important when it comes to making exchanges in our daily lives. As of now the purchase of NFTs are dependent entirely on currencies like bitcoin and ETH, which are both fungible tokens. This is a clear example of how fungibility is a necessity.