Of the many ramifications produced as a by-product of the ongoing cryptocurrency experiment, non-fungible tokens have proven to be one of the most explosive. In a matter of months, more than half a billion dollars from NFT changed hands, as celebrities (from lists A to Z) clamored to take advantage of the latest crypto craze.
But amid the rush to jump on the bandwagon, few have stopped to consider the veracity of the terminology applied to NFTs. After all, why would you stop thinking about semantics when there are millions of dollars to be made with just one click?
But instead of those millions, we decided to ask the question: Are non-fungible tokens actually a little fungible after all?
An asset or good is considered fungible if it can be exchanged with another of the same type of equal value. Therefore, the United States dollar is fungible because any dollar can be exchanged for any other. The same goes for Bitcoin (BTC).
Fungibility is one of the four pillars of Aristotle’s concept of “good money” and is perhaps the most important in the creation of working currency. All cryptocurrencies are fungible by nature.
Non-fungible assets are those that cannot be believed to have the same value due to unique variations in their composition. For example, while diamonds might be useful in a barter situation, their tiny differences in size, shape, and quality exclude them from Aristotle’s assessment of good money.
But when it comes to NFTs, currency characteristics are irrelevant. The point is that each unit of the asset can be varied, unique, exclusive and rare. This is precisely where much of the perceived value of NFT comes from – its non-fungibility.
On the Ethereum blockchain, NFTs are mostly built on a token standard known as ERC-1155. Tokens built using the ERC-1155 ensure non-fungibility and, as such, would be unnecessary in forming the backbone of ordinary currency.
Normal Ethereum tokens are built on the ERC-20 standard, which allows the issuance of identical and fungible tokens to be used as real currency. For this very reason, the utility of an ERC-20 token to record anything unique or rare is null and void.
But hypothetically, if we created 21 million ERC-1155 NFTs – all programmed to be identical to each other – and then distributed them in free airdrops, wouldn’t real currency naturally begin to form? ?
What would prevent tokens from being traded in the open market, each having the same value as the other? This concept is not an invention of TBEN; Fractional NFTs are a phenomenon that has already appeared and quickly aroused the anger of the US Securities and Exchange Commissioner, Hester Peirce.
Peirce, also referred to as “Crypto Mom” for her lenient stance on cryptocurrency regulation, has warned that using fractional NFTs comes dangerously close to violating SEC securities laws. The very reason NFTs aren’t titles is because they’re unique and non-fungible, noted Peirce, who said people “get very creative in the types of NFTs they put out.” .
A numbers game
Conversely, the standard Ethereum ERC-20 token that many people will have kept in their wallets at some point is designed to be fungible – but is it still?
An Ethereum developer who helped create the ERC-1155 token standard, Philippe Castonguay, recently asked his Twitter followers a question who probed this issue. We have established that ERC-20 tokens are fungible, but could they be non-fungible?
Castonguay has surveyed its followers, request: “Is an ERC-20 token with a permanent total reserve of 1 an NFT?”
Is an ERC-20 token with a permanent total supply of 1 an NFT?
– Philippe Castonguay (@PhABCD) April 6, 2021
Some 46.8% of the respondents answered yes, 36.4% answered no and 16.7% refused to speculate.
Further refining the definition, Castonguay then asked if a non-divisible ERC-20 token with a reserve capped at one was an NFT. After all, an ERC-20 token is divisible into several (possibly infinite) decimal points, which means its usefulness as an NFT would be gone.
“Is an ERC-20 token that is not divisible (0 decimal places) with a permanent maximum bid of 1 an NFT?” Castonguay request. This time, 72.1% said yes, 15.4% said no and 12.5% refused to answer.
TBEN asked Castonguay about the use of the terms fungibility and non-fungibility as applied to cryptocurrency tokens. Is there really that much difference between the two? Are we just talking about two different ways to skin a cat? He has answered:
“Indeed, fungibility is a spectrum and the term NFT offers a fairly binary view of the situation!”
A social media philosopher summed it up by referring to the age-old question that has plagued the world’s deepest thinkers for millennia. Safex Vigilante user Free the analogy:
It’s like the chicken or the egg dilemma.
– Safex Vigilante (@SafexVigilante) April 6, 2021