That word, 'fungibility' (as overpopularised by NFTs) has been in the spotlight for long enough now that the word has become sort of irritating. It is a dumb word, you can't change my mind. It doesn't sound like it should mean what it describes. A lot of people out there will, by now, understand what 'Non-Fungible' means, in that it describes something that is 'one-of-a-kind'. I'm sure that many of those people, like me, wouldn't have known what it meant if we'd been asked a few years ago.
But that doesn't mean that the opposite of Non-Fungible is "many of a kind". There is a lot more to what fungibility really means, and it takes you right to the heart of what money is and what money is for.
I can't get straight into it though until I've first covered the reasons why the 'big 3' (Bitcoin, Litecoin and Ethereum) are NOT (quite) fungible, and explain that Bitcoin and Litecoin at least are likely to become much more fungible at some point before adoption can continue at-pace.
You can skip from this heading in bold 👇 to the next one, if you already understand why fungibility is currently a bit of an issue for public ledger cryptocurrencies.
Why aren't Bitcoin and Litecoin currently behaving like fungible assets?
The big 3 cryptocurrencies all lack fungibility to an extent. That's because they operate on public ledgers. Any BTC/LTC in any wallet can be traced back to the moment they were mined, creating an uneven playing field for each coin - in the eyes of some people, these coins are not all created equal. The moniker "Bloodcoin" has even started popping up to describe BTC mined in China and other areas with poor human rights records. Pro-fiat entities and those institutions that rely upon fiat to survive, are exploiting this issue to push exchanges and onramps into blacklisting certain wallets and even freezing some people's assets - all without proof that these blacklisted wallets have anything to do with the current owners of the frozen coins.
There are even people paying a premium for "fresh" Bitcoin with no price history, bought straight from the miners.
This is all an absurdity, but it's a predictable one. Currencies that suffer from low-fungibility often fail, meaning fungibility is one of the last hurdles that pro-fiat interests are definitely hoping BTC will fail to clear.
Bitcoin and Litecoin, though, are both antifragile. If pressure on their fungibility really starts to mount, they can (and will) evolve in response to this pressure to develop greater fungibility, primarily through privacy features. In fact, it has been suggested that the reason why centralised interests are not pressing this issue much harder, is out of fear that they might accelerate Bitcoin's evolution in this direction.
Enter: MWEB (Mimblewimble Extension Blocks)
Mimblewimble has an interesting origin story, a little bit like Bitcoin. Nobody knows who made it, as it was invented and published anonymously. Litecoin developers have modified this anonymously posted invention to create an optional, private sidechain that Litecoin holders will soon be able to use on command to obtain functional privacy.
No one will be able to see your balance on the block explorer. e.g., if you send a payment to someone, on MWEB this won't reveal your holdings and transaction history to that person
Transactions will be automatically mixed on chain using CoinJoin methodology, meaning the blockchain will not keep a record of how much LTC was sent, or where.
The addition of the Extension Blocks has the secondary effect of doubling the block size, meaning that Litecoin's maximum throughput will almost double. This is highly significant as it helps LTC play a greater supporting role whenever BTC is at maximum capacity, which has been known to happen, and helps it to scale.
The removal of a way of tracing coins back to their origins, also removes the ability of centralised exchanges to censor or blacklist those addresses. This directly improves fungibility and increases trust in the currency.
What is fungibility, then, and why is it underappreciated?
Fungibility is, really, all about interchangeability, but it's not about interchangeability of appearance. In other words, it's not about how much each unit of money looks the same or has the same size and shape. A counterfeit gold ingot can be made to the exact same size, shape, and density as a real gold ingot - but they are of course not the same value and therefore not fungible with one another.
No, it's not about appearance; fungibility is about the uniformity of the perceived value of that money. If you're deciding whether to hand over your crumpled and torn $1 bill or your crisp new one, you aren't thinking about how those dollar bills measure up against each other aesthetically. It's about whether they're 'worth' as much, with things like damage or markings detracting from their value just as they would if you were valuing an ornament or a piece of clothing. You also have to factor in the other person's opinion: if your dollar is too damaged, they likely wouldn't accept it. Fungibility is about consensus between the parties making the exchange.
All this still doesn't sound like a very big deal, but when you consider just how subjective the notion of value is, the idea of something having "uniformity of value" no matter who is perceiving it, is actually an incredible feat, and uniformity of value is exactly what the word 'fungibility' describes.
Think of all the factors that feed into how value is perceived between two negotiating parties. How valuable each person thinks the means of payment will be affected by judgement such as:
How likely is this money to be counterfeited?
Can I split this money up into a number of smaller transactions, or do I have to spend it all at once?
How long will this money last once I accept it?
How easily will I be able to store this money, and how safely?
How easy is it for others to acquire or create more of this money and devalue what I own?
How easy will it be for me to later transport and spend this money?
What markets will I have access to that accept this money?