Blockchain Developer Certification Practice

Which of the following accurately describes fungible tokens?

1. They are unique and cannot be exchanged for one another.

2. They can be divided and exchanged without loss of value.

3. They must follow the ERC-721 standard.

4. They have a specific market value that is always fixed.

The correct answer is: They can be divided and exchanged without loss of value.

Fungible tokens are designed to be interchangeable and identical in value, which means that each unit of a fungible token is equivalent to another unit of that same token. This characteristic allows fungible tokens to be divided and exchanged without any loss of value. For example, cryptocurrencies like Bitcoin or Ethereum are considered fungible because each coin or token can be exchanged for another without affecting its overall value. The ability to divide these tokens into smaller units further assures their fungibility; for instance, one Bitcoin can be split into smaller amounts, like satoshis (which are 1/100,000,000 of a Bitcoin), allowing for transactions of varying values while maintaining overall value equivalence. In contrast, tokens that are unique and cannot be exchanged for one another pertain to non-fungible tokens (NFTs), which address specific ownership of individual items or artworks. The ERC-721 standard is specifically for NFTs, whereas fungible tokens commonly adhere to standards like ERC-20. Additionally, stating that tokens have a specific market value that is always fixed does not accurately reflect the volatility typically associated with cryptocurrencies and fungible assets, as their market value can fluctuate based on supply and demand dynamics.