Fungible Token

A fungible token is a digital token recorded on a blockchain in which each unit is the same as every other unit of that token. One unit can be swapped for another without any difference in value or rights, and units can usually be divided into smaller fractions. Most cryptocurrencies, stablecoins, governance tokens and many tokenised assets are fungible tokens. The idea mirrors fungibility in traditional finance, where one banknote or share of the same class is equivalent to another.

Fungible tokens contrast with non-fungible tokens (NFTs), where each token is unique and represents a distinct item, such as a piece of digital art or a specific property right. Some token standards support both types, and some assets, such as tokenised gold linked to specific bars, sit between the two.

Fungible tokens come in two broad forms. Native coins, such as bitcoin on the Bitcoin network and ether on Ethereum, are built into the protocol and are used to pay transaction fees and secure the network. Smart contract tokens are created by programs running on a blockchain. On Ethereum and compatible networks, most fungible tokens follow the ERC-20 standard, which defines common functions such as checking balances, transferring tokens and allowing another address to spend tokens on the holder's behalf. Other blockchains have their own standards, such as SPL tokens on Solana. A token contract records balances for each address and enforces the rules for creating and destroying units.

A token contract maintains a ledger of how many units each address holds. When a holder sends tokens, the contract reduces their balance and increases the recipient's, and the change is recorded in a block. The total supply may be fixed at creation or changed through minting and burning functions controlled by the issuer, a governance process or an algorithm. Stablecoin issuers, for example, mint new tokens when customers deposit funds and burn tokens when customers redeem them, as described under stablecoin minting. Because all units are identical, tokens can be pooled in exchanges and lending protocols, priced continuously and moved in any amount.

• Means of payment. Cryptocurrencies and stablecoins are used for transfers, trading and settlement, including stablecoin transfers between businesses.
• Governance. Governance tokens give holders voting rights over protocol decisions.
• Utility. A utility token grants access to a service, such as computing or storage on a network.
• Tokenised assets. Tokens represent shares in funds, bonds, deposits or commodities, allowing ownership to be recorded and transferred on a blockchain.
• Rewards and loyalty. Platforms issue tokens as incentives for users and liquidity providers.

Although fungible tokens are interchangeable by design, they may not be fully fungible in practice. Because public blockchains record the full history of every token, units that passed through addresses linked to hacks, sanctions or illicit activity can be identified with blockchain analytics. Exchanges and other service providers may refuse or freeze such tokens, and stablecoin issuers can blacklist addresses, which means some units are treated differently from others. This has led to debate about privacy and fungibility, and privacy-focused cryptocurrencies aim to make transaction histories harder to trace.

Regulators classify fungible tokens based on their characteristics and use rather than their technical form. A token may be treated as a payment instrument or e-money, a security, a commodity or an unregulated asset, depending on the jurisdiction and its features. In the European Union, the Markets in Crypto-Assets Regulation (MiCA) creates categories for e-money tokens, asset-referenced tokens and other crypto-assets, while tokens that qualify as financial instruments fall under securities law. In the United States, the treatment of tokens under securities and commodities law has been the subject of enforcement, litigation and legislative proposals. Service providers that handle fungible tokens are generally subject to anti-money laundering rules, including the travel rule for transfers.

Risks include price volatility, smart contract bugs that allow unauthorised minting or transfers, loss of private keys, scams in which tokens are created to deceive buyers, and failure of the issuer or reserves behind asset-backed tokens. Tokens bridged between blockchains may depend on the security of the bridge. Holders should understand who controls a token's contract, how supply can change and what rights, if any, the token gives.