Fungibility is a term that describes how interchangeable a certain asset is with other assets of the same kind.
If an asset is fungible, one unit of that asset is interchangeable with another unit of that asset.
Of note, fungibility differs from liquidity. A good is said to be liquid if it can be easily exchanged for money or another good.
However, a good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place.
By this analog, money is considered to be fungible. For example, one $20 banknote is interchangeable with any other authentic banknote like it.
It is also interchangeable with two $10 banknotes, or twenty $1 banknotes, or any other combination of banknotes and coins adding up to $20.
Fungible Versus Liquid
Similarly, different issues of a government bond are also fungible, which may have been issued at different times.
This is only if these issues carry precisely the same rights and any of them is equally acceptable in settlement of a trade.
Fungibility does not imply liquidity, and vice versa. Certain commodities such as diamonds for example can be readily bought and sold. However, while the trade is liquid, individual diamonds are unique and not interchangeable.
Cryptocurrencies are often considered to be fungible assets, as one coin is equivalent to another.
However, a notable exception occurred after a major breach in Japanese exchange Coincheck, during which token developers for cryptocurrency NEM added a special flag to hacked coins to indicate they are not to be traded or used.