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Why NFTs could be fungible after all

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Among the many offshoots produced as a bi-product of the ongoing cryptocurrency experiment, nonfungible tokens have turned out to be one of the most explosive. In a few short months, over half a billion dollars worth of NFTs changed hands, as celebrities (from lists A to Z) clamored to profit from crypto’s latest 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 to ponder semantics when there are millions of dollars to be made at the click of a button?

But in lieu of said millions, we decided to ask the question: Are nonfungible tokens actually a little bit fungible after all?

Fungibility

An asset or good is considered to be fungible if it can be interchanged with another of the same type of equal value. Hence the United State dollar is fungible because any one dollar can be exchanged for any other. The same applies to Bitcoin (BTC).

Fungibility makes up one of the four pillars of Aristotle’s concept of “good money” and is possibly the most important in creating a working currency. All cryptocurrencies are fungible by nature.

Nonfungible assets are those that can’t be trusted to have equal value due to unique variations in their make-up. For example, while diamonds could be useful in a bartering situation, their minute differences in cut, shape and quality exclude them from meeting Aristotle’s evaluation of good money.

NFTs

But when it comes to NFTs, currency characteristics are irrelevant. The whole 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 the NFT comes from — its nonfungibility.

On the Ethereum blockchain, NFTs are mostly built upon a token standard known as ERC-1155. Tokens built using ERC-1155 ensure nonfungibility and, as such, would be useless in forming the backbone of a regular currency.

Regular Ethereum tokens are built on the ERC-20 standard, which enables the issuance of identical, fungible tokens for use as actual currency. For this very reason, an ERC-20 token’s utility in registering anything unique or rare is null and void.

But what if…?

But hypothetically, if one were to create 21 million ERC-1155 NFTs — all programmed to be identical to each other — and then distribute them in a free airdrop, would an actual currency not naturally begin to form?

What would stop the tokens from being traded on the open market, each holding the same identical value as the other? This concept is not an invention of Cointelegraph’s; “fractionalized NFTs” are a phenomenon that has already emerged and quickly drawn the ire of United States Securities and Exchange Commissioner Hester Peirce.

Peirce, also referred to as “Crypto Mom” for her lenient stance on cryptocurrency regulation, warned that the use of fractionalized NFTs skirts dangerously close to breaking SEC securities laws. The very reason NFTs don’t constitute securities is because they are unique and nonfungible, noted Peirce, who said people were “getting very creative in the types of NFTs they’re putting out there.”

A numbers game

Conversely, the ERC-20 standard Ethereum token that many people will have held in their wallets at some point is designed to be fungible — but is that always the case?

An Ethereum developer who helped create the ERC-1155 token standard, Philippe Castonguay, recently posed a question to his Twitter followers that probed this very issue. We’ve established that ERC-20 tokens are fungible, but could they be nonfungible?

Castonguay polled his followers, asking: “Is an ERC-20 token with a forever total supply of 1 an NFT?”

Some 46.8% of respondents answered yes, 36.4% answered no, and 16.7% declined to speculate.

Fine-tuning the definition further, Castonguay then asked if a non-divisible ERC-20 token with a capped supply of one was an NFT. After all, an ERC-20 token is divisible down to many (possibly infinite) decimal points, meaning its utility as an NFT would be gone.

“Is an ERC-20 token that is not divisible (0 decimals) with a forever maximum supply of 1 an NFT?” Castonguay asked. This time 72.1% said yes, 15.4% said no, and 12.5% declined to answer.

Cointelegraph asked Castonguay about the usage of the terms fungibility and nonfungibility as applied to cryptocurrency tokens. Is there really that much difference between the two? Are we just talking about two different ways of skinning a cat? He answered:

“Indeed, fungibility is a spectrum and the term NFT offers a quite binary view of the situation!”

One social media philosopher summed up the situation by referencing the age-old question that has plagued the world’s deepest thinkers for millennia. User Safex Vigilante proffered the analogy:





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Ethereum

ETH bonanza as three North American Ethereum ETFs approved in one day

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While gaining exposure might still be difficult south of the US-Canada border, Canadian investors will shortly have a host of options to choose from to gain exposure to Ethereum (ETH) via an ETF as regulators have approved three different Ethereum ETFs in a single day. 

Purpose Investments, Evolve ETFs, and CI Global Asset Management were all approved by Canadian regulators to launch Ethereum-backed ETFs today. The ETFs will be the first ETH ETFs in North America, and among the first in the world. 

Some observers noted that all three being approved at once may have been part an effort not to give Purpose an “unfair advantage”. Purpose appeared to gain an edge after the launch of the wildly popular Purpose Investments ETF, the first North American Bitcoin ETF which quickly swelled to $1.3 billion in AUM while competitors waited for approval. Rival Evolve Fund Group’s Bitcoin ETF only managed to attract $100 million in AUM, despite launching only two days later than Purpose and offering 25% less management fees.

In a Tweet, a reporter for Bloomberg said that the CL Galaxy and the Purpose ETF funds will begin trading on 4/20 — a date he thought would please Elon Musk, given it’s marajuana culture connection. Likewise, Evolve’s ETH ETF — which they first filed for in March — will begin trading on the same day.

The Canadian stock market has already demonstrated a significant appetite for exposure to crypto assets. Previous exchange-traded Ethereum products led to market halts on the first day of listing, and Purpose’s Bitcoin ETF cracked $100 million in its first day of trading.