Fungible Token (FT)

The core property of a fungible token is that every unit is identical and mutually interchangeable. One token of a specific standard (e.g., one USDC) is always equal in value and function to any other token of the same type, enabling seamless exchange and liquidity.

• Example: Swapping 1 ETH for another 1 ETH results in no change in value or utility.
• Contrast: This differs fundamentally from non-fungible tokens (NFTs), where each token is unique.

Most fungible tokens are highly divisible into smaller units, allowing for micro-transactions and precise value transfer. The degree of divisibility is defined by the token's decimals property.

• ERC-20 Standard: Typically uses 18 decimals, meaning 1 token can be divided into 1,000,000,000,000,000,000 (10^18) smallest units called wei in the case of Ether.
• Use Case: This enables pricing goods at fractions of a cent or allocating tiny shares of a tokenized asset.

Fungible tokens operate via smart contract standards that define a common set of rules and functions, ensuring compatibility across wallets, exchanges, and decentralized applications (dApps).

• Ethereum (ERC-20): The dominant standard, specifying functions like transfer(), balanceOf(), and approve().
• Other Chains: SPL on Solana, BEP-20 on BNB Chain, and ARC-1 on Algorand provide equivalent functionality on their respective networks.

A key distinction exists between a blockchain's native token (e.g., ETH, SOL) and fungible tokens created atop it.

• Native Token: The base currency of a blockchain, used to pay for transaction fees (gas) and staking. It is inherently part of the protocol's consensus mechanism.
• Wrapped Token: A pegged representation of an asset on a non-native chain (e.g., WETH is ETH wrapped to comply with the ERC-20 standard, enabling its use in DeFi protocols).

Fungible tokens are the fundamental building blocks for digital economies, serving several critical functions:

• Medium of Exchange: Used for payments and trading (e.g., stablecoins like USDT, DAI).
• Governance: Grant voting rights in Decentralized Autonomous Organizations (DAOs).
• Utility: Provide access to services, pay fees, or serve as in-app currency.
• Staking & Yield: Locked in protocols to secure networks or generate rewards.

The creation (minting) and total availability of a fungible token are governed by its smart contract logic, which defines its tokenomics.

• Fixed Supply: Capped maximum supply, like Bitcoin's 21 million (deflationary model).
• Inflationary Supply: New tokens can be minted over time, often to reward validators or liquidity providers.
• Mint/Burn Mechanisms: Tokens can be programmatically created or destroyed (burned) to manage supply, as seen with algorithmic stablecoins or fee tokens.

Interoperability is governed by technical standards. ERC-20 is the dominant standard on Ethereum and EVM-compatible chains, defining a common interface for functions like transfer() and balanceOf(). On Solana, the SPL Token program serves an analogous role. These standards ensure tokens can be seamlessly traded, held in wallets, and integrated by decentralized applications (dApps) without custom code for each asset.

The fundamental utility of FTs is as a digital currency. Stablecoins like USDC (ERC-20) and USDT (SPL) are prime examples, pegged to fiat currencies to facilitate trading, lending, and payments with reduced volatility. Native blockchain tokens (e.g., ETH, SOL) are also fungible and used to pay for gas fees and staking, acting as the base economic layer of their respective networks.

Fungible Tokens are the essential assets within Decentralized Finance. They are:

• Deposited as liquidity in Automated Market Makers (AMMs) like Uniswap.
• Used as collateral for borrowing and lending on platforms like Aave and Compound.
• Staked in governance protocols to earn rewards or voting power. This composability allows FTs to generate yield and underwrite complex financial products on-chain.

Many projects issue FTs to decentralize protocol management and access. Governance tokens (e.g., UNI, MKR) grant holders voting rights on proposals. Utility tokens provide access to a specific service, such as paying for storage (FIL) or network bandwidth. These tokens often follow the same ERC-20 or SPL standards, ensuring they remain tradable and wallet-compatible.

Wrapped tokens are FTs that represent an asset from another blockchain, enabling cross-chain liquidity. Wrapped Bitcoin (WBTC) is an ERC-20 token backed 1:1 by Bitcoin held in custody. Similarly, Wrapped SOL (wSOL) exists on Ethereum. These are created through bridge protocols, which lock the native asset and mint a corresponding fungible token on the destination chain.

Unlike Non-Fungible Tokens (NFTs), which are unique and indivisible, FTs are defined by:

• Fungibility: Each unit is identical and interchangeable.
• Divisibility: Can be subdivided into smaller units (e.g., 0.001 ETH).
• Uniform Value: All units of the same token have equal market value. This makes FTs suitable for currency and accounting, while NFTs represent ownership of distinct items.

The security of a fungible token is entirely dependent on the integrity of its underlying smart contract. Common vulnerabilities include:

• Reentrancy attacks, where a malicious contract can repeatedly call a token transfer function before the initial call completes.
• Integer overflows/underflows in balance calculations.
• Access control flaws that allow unauthorized minting or burning.
• Logic errors in upgradeable proxy contracts. A single bug can lead to the total loss or theft of all tokens in the contract.

Many fungible tokens, especially those deployed via ERC-20 or similar standards, include administrative functions controlled by a private key. This creates a single point of failure. Risks include:

• Rug pulls, where developers maliciously drain liquidity or mint unlimited tokens.
• Accidental loss of admin keys, permanently freezing upgrade capabilities.
• Regulatory seizure risk if a centralized entity controls the minting function. Decentralized governance via a DAO or immutable, non-upgradeable contracts mitigate this risk.

The economic model, or tokenomics, dictates a token's long-term viability and security. Critical considerations are:

• Inflation rate & supply schedule: Uncontrolled minting can lead to hyperinflation and devaluation.
• Vesting schedules for team and investor tokens to prevent market dumping.
• Utility & demand drivers: Tokens must have a clear use case (e.g., governance, protocol fees, collateral) beyond speculation.
• Liquidity depth: Low liquidity on decentralized exchanges (DEXs) makes the token susceptible to price manipulation and high slippage.

Fungible tokens used as collateral in DeFi protocols (like stablecoins or LP tokens) depend on price oracles for valuation. This introduces systemic risk:

• Oracle manipulation attacks (e.g., flash loan attacks) can provide false price data, allowing attackers to liquidate positions or borrow excessively.
• Oracle downtime or failure can freeze an entire protocol.
• The security of the token is therefore tied to the security and decentralization of its primary price feed, such as Chainlink or a time-weighted average price (TWAP) from a major DEX.

Fungible tokens, particularly those marketed as investment vehicles, face significant regulatory scrutiny. Key risks include:

• Securities law violations: Tokens may be classified as securities (e.g., under the Howey Test in the U.S.), requiring registration.
• Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements for issuers and exchanges.
• Tax implications for holders, including capital gains on every transaction.
• Geographic restrictions that can limit user access and liquidity based on jurisdiction.

For end-users, the primary security risk is not the token contract itself, but private key management. Since fungible tokens are held in externally owned accounts (EOAs) or smart contract wallets:

• Phishing attacks can trick users into signing malicious transactions, draining all token balances.
• Private key compromise via malware or insecure storage leads to irreversible theft.
• Social engineering attacks targeting seed phrases.
• Solutions include using hardware wallets, multi-signature wallets, and social recovery mechanisms to mitigate single-point key failure.

A Non-Fungible Token (NFT) is a unique cryptographic token that represents ownership of a distinct digital or physical asset. Unlike fungible tokens, each NFT is indivisible and non-interchangeable, with metadata that proves its scarcity and authenticity. Key characteristics include:

• Uniqueness: Each token has a distinct identifier.
• Indivisibility: Cannot be divided into smaller units like 0.5 of an NFT.
• Use Cases: Digital art, collectibles, real estate deeds, and in-game items.

ERC-20 is the dominant technical standard for creating fungible tokens on the Ethereum blockchain. It defines a common set of rules—a smart contract interface—that all ERC-20 tokens must follow, ensuring interoperability across wallets, exchanges, and dApps. Core functions include:

• transfer() to send tokens.
• balanceOf() to check a wallet's holdings.
• approve() and transferFrom() for delegated spending. Examples include USDC, DAI, and UNI. This standardization is why most Ethereum-based DeFi tokens are interchangeable.

A Stablecoin is a type of fungible token engineered to maintain a stable value, typically pegged to a fiat currency like the US Dollar. It combines the programmability of crypto with the price stability of traditional money. There are three primary collateralization models:

• Fiat-Collateralized: Backed 1:1 by bank reserves (e.g., USDC, USDT).
• Crypto-Collateralized: Over-collateralized by other cryptocurrencies (e.g., DAI).
• Algorithmic: Uses smart contract algorithms to control supply and demand. Stablecoins are essential for trading, lending, and as a medium of exchange in DeFi.

Tokenomics (token economics) refers to the economic model and incentive structures governing a fungible token's issuance, distribution, and utility. It is a critical design element that determines a token's long-term viability. Key components include:

• Supply: Total, circulating, and maximum supply mechanics.
• Distribution: How tokens are allocated (e.g., public sale, team, treasury).
• Utility: The token's purpose (e.g., governance, staking, payment for services).
• Inflation/Deflation: Mechanisms like staking rewards or token burns that affect supply. Poor tokenomics often lead to inflationary collapse or lack of adoption.

A Governance Token is a fungible token that grants holders the right to participate in the decentralized governance of a protocol or DAO (Decentralized Autonomous Organization). Ownership translates to voting power on proposals that shape the project's future. Typical governance actions include:

• Voting on protocol parameter changes (e.g., fee adjustments).
• Deciding on treasury fund allocations.
• Electing or removing key contributors. Examples include UNI (Uniswap), AAVE, and MKR (MakerDAO). These tokens align incentives between users and protocol development.

A Semi-Fungible Token (SFT) is a hybrid token type that exhibits properties of both fungible and non-fungible tokens. Initially, multiple copies of an SFT are fungible and interchangeable, but they can become unique NFTs upon redemption or a specific trigger. Key concepts:

• Defined by the ERC-1155 standard on Ethereum.
• Use Case: Event tickets or in-game items where many identical tickets exist (fungible phase), but upon entry, your specific ticket is consumed and becomes a unique souvenir (non-fungible phase).
• Enables efficient batch transfers of multiple token types in a single transaction.