Fungibility is unreasonably useful. Two things are fungible if they can be substituted for each other. The best example is of course money. A one dollar bill, a dollar coin, four quarters, or a credit card with a $1 balance are all essentially fungible.

Credit card payments don’t have to be made immediately so their value may not always be fungible with cash if the amount is large. The dollar bill and four quarters are more akin to each other than the credit card. If you have ever driven a car in an aging American city where parking meters only accept quarters or have slow credit card machines with dial-up modems, you understand the unique value of the quarter.

It’s obvious that fungibility always exists under specific conditions and fungible things can suddenly become diverse. Consider our fungible dollar assets. If you find yourself in a third wave coffee shop in San Francisco where they still don’t accept anything but cash, then your credit card, and dollar bill are no longer fungible.

The world runs on an interplay of dualities - mutation and selection, mass and energy, exploration and exploitation, creation and destruction, and so on. Most of these yin-yang forces have existed since the beginning. The modern world is increasingly shaped the interplay of fungibility and diversity.

Caesar’s Coin, Rubens

Founders keepers

Say you have $10 in your neighborhood bank. Your $10 only exists as a number in the bank’s ledger. If you walked into the bank and asked to withdraw all your money in cash, the bank would “randomly” pick a stack of ten $1 bills and hand it over to you. Say the bank has 100,000 $1 bills at the moment you walked in. All of those bills are exactly equal and fungible.

At the moment you walk into the bank, the bills are no longer fungible. Ten of those bills are yours, but it is not known which 10. From the moment you ask for your money until the moment the teller picks a stack of 10 bills, the bills exist in a state where they are neither all fungible nor all distinct. We have diversity in fungibility. This Schrodinger’s cat state collapses into two sets of fungible bills as soon as the teller picks your $10.

If you were to withdraw your money as a cashier’s check, there would be no intermediate diversity in fungibility since the bank would simply subtract 10 from your balance in its computer. Computation, unlike cash, works purely with fungible bits, and can manipulate abstract quantities like “totals”.

All forms of money are not perfectly fungible. Old copper pennies are definitely more valuable than newer copper-plated-zinc pennies. The diversity in money can even cause bad money to drive out good (Gresham’s Law). A crisp sweet smelling newly printed note is marginally more valuable than an old greasy half-torn note of the same value. Besides notes have ids assigned to them making each one uniquely traceable.

The limited fungibility of cash leads to a founders keepers model of ownership. If a thief steals “your” $10 after you walk out of the bank and spends it at a restaurant, you cannot claim “your” $10 from the restaurant, though you may go to the police and seek compensation through law from the thief in the form of another fungible $10. “Your” original $10 is not a good that you own, but a currency that always belongs to whoever currently possesses it.

How would you prove that your money was stolen by the thief? You could, in theory, remember the ids of the notes which are now in the possession of the restaurant which was visited by the thief and not you, thus proving the theft. Of course, all this gets more complicated if had you exchanged some of the money with the alleged thief for a service, or if you had also visited the same restaurant around the same time.

Some are more equal

Newer forms of money such as bitcoin are more fungible than cash. Bitcoins do not have unique ids like bank notes and exist only as unspent outputs of chains of transactions. Unlike a bank note, there is no such thing as a bitcoin that you can point at.

If I receive 2 bitcoins in my wallet and then spend 1 bitcoin, there is no way to tell even after the transaction is complete which of the 2 bitcoins was spent. This is not because of anonymity or security features of Bitcoin but because the entire exchange occurs only at the level of an abstract total quantity of bitcoins. More subtly and precisely, there were never 2 real bitcoins in my wallet in the first place, not even 200,000,000 satoshis or however you want to split the change. There was only the platonic idea of 2 bitcoins.

The world has some total number of bitcoins. It is only known who owns how much. It is not known - it cannot be known, and it doesn’t matter anyway - who owns which bitcoins. There is no which there.

All Bitcoins are equal, but some may be more equal. Bitcoins which are the unspent outputs of transactions which can be ultimately traced back to publicly known illegal activities such as the sale of arms of drugs, or theft, could, in theory, be denied as legal tender in a future transaction. Some bitcoins may also be valued more by collectors if they could be traced back to the original genesis block.

Cryptocurrencies like Monero have tried to solve the traceability problem with Bitcoin and offer true fungibility, but the gold standard of fungibility is, of course, the eponymous gold itself. In antiquity, gold was the only substance which was not soluble in any acid known at the time. That was until the discovery of aqua regia - a mixture of nitric acid and hydrochloric acid - in 854 AD. Thus gold can be easily assayed for purity with a simple acid test. Contrast that with the anti-counterfeiting measures required for fiat or the complex proof of work or proof of stake for crypto.

The most awesome testament to the durability of gold is the story of the Nobel prizes of German physicists Max von Laue (1914) and James Franck (1925). When Germany invaded Denmark in World War II, Hungarian chemist George de Hevesy dissolved their gold medals in aqua regia and placed the resulting solution on a shelf in his laboratory at the Niels Bohr Institute. It was ignored by the Nazis who took it for a jar of common chemicals.

After the war, de Hevesy precipitated the gold out of the acid and returned it to the Nobel Foundation which recast the medals and presented them back to the physicists. The irony in this story is that since gold is truly fungible the Nobel Foundation could have easily cast brand new medals for the physicist which would have been indistinguishable from the originals. But we care about history, and we love a good story, and we can bring diversity to even the most fungible things in nature.

Render unto Satoshi?

The fungibility of gold derives from its durability and purity. Any piece of gold can be easily melted and purified and subjected to the acid test. There is no arguing over the value of any piece of gold.

Gold also has two more advantages over both fiat and crypto. First, gold does not carry any identifiers or history with it. Even if a gold artifact is identifiable, it can be easily melted and recast without a loss of value. Thus gold offers a level of anonymity and fungibility far beyond fiat or most forms of crypto.

Second, gold is truly rare. Both fiat and crypto require extraordinary measures to artificially maintain a level of supply which prevents either rapid inflation or deflation. Fiat supply is controlled by the monetary policies of governments. They do it by manipulating interest rates and taxes - another of those great dualities of life.

The Bitcoin protocol increases the difficulty of mining new coins so that the rate at which new coins are issued is halved every four years. The maximum number of bitcoins is capped at 21 million and around 85% have already been mined. Bitcoin is a lot like gold then. Gold is created in the rare collisions of neutron stars and there is increasing difficulty in mining the remaining 20% of the gold that is still below ground on earth.

There is one more quality that makes gold the perfect fungible asset - it is pretty much useless for any purpose other than perhaps its rare applications in computer electronics and medicine. Thus gold is the perfect store of value and was used to back the US dollar under the Bretton Woods system which maintained fixed exchange rates between currencies. Nixon ended that in 1971 when there wasn’t enough gold to cover the number of dollars in circulation and fiat was born.

The thing about the fungibility of any form of money is that it is not an inherent property of the underlying asset itself but ultimately depends on protocols and laws surrounding its use. The fungibility of bitcoin is diminished when governments shut down exchanges or the CEO of your exchange embezzles all the assets by faking his own death in India. Even fiat is susceptible to hyperinflation and demonitization.

Perhaps it is the good old gold, after all, forged in the cataclysmic death of neutron stars, which is the one true store of value. Alas, gold is only a good store of value but not a good currency and must be stored in a safe for once it is taken from you it is lost since it bears neither identity nor history.

For all practical purposes then, fiat works, more or less, depending on where you live. After all, fiat is backed by your government and its big guns. As Jesus would tell you, render unto Caesar the things that are Caesar’s.