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Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution, such as sweet crude oil, shares in a company, bonds, precious metals, currencies, or pistachios.
It refers only to the equivalence of each unit of a commodity with other units of the same commodity. Fungibility does not describe or relate to any exchange of one commodity for some other, different commodity.
As an example: if Alice lends Bob a $10 bill, she does not care if she is repaid with the same $10 bill, two $5 bills, a $5 bill and five $1 bills or a bunch of coins that total $10 because currency is fungible (noting that, in practice, some denominations might incur additional operational or processing costs). However, if Bob borrows Alice's car she will most likely be upset if Bob returns a different vehicle—even a vehicle that is the same make and model—as automobiles are not fungible with respect to ownership. However, gasoline is fungible and though Alice may have a preference for a particular brand and grade of gasoline, her primary concern may be that the level of fuel be the same (or more) as it was when she lent the vehicle to Bob.
The word comes from Latin fungibilis from fungi, meaning "to perform", related to "function" and "defunct".
Fungibility is different from liquidity. A good is liquid if it can be easily exchanged for money or another different good. 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.
Fungibility does not imply liquidity, and liquidity does not imply fungibility. Diamonds can be readily bought and sold (the trade is liquid) but individual diamonds, being unique, are not interchangeable (diamonds are not fungible). Indian rupee bank notes are mutually interchangeable in London (they are fungible there) but they are not easily traded there (they cannot be spent in London). In contrast to diamonds, gold coins of the same grade and weight are fungible, as well as liquid.
In legal disputes, when one party is compelled to remedy another party as the result of a ruling or adjudication, the appropriate legal remedy may depend on the fungibility of the underlying right, obligation or property interest that is intended to be restored. Depending on whether the interests of the aggrieved party are fungible (a determination made by the trier of fact) the appropriate remedy may change. For example, a court may require specific performance (an equitable remedy) as a remedy for breach of contract, instead of the more favored remedy of monetary damages.
Fungibility is also important in the context of product liability. If a plaintiff is injured by a fungible product but is unable through no fault of her own to identify the manufacturer of the product that actually injured her, jurisdictions that follow the doctrine of market share liability can shift the burden of disproving liability to all manufacturers of that product. If the defendants fail to rebut the presumption of liability, they will be liable pro rata based on their market share during the relevant period.
Oxford theoretical physicist David Deutsch has adopted the economic term fungible to describe the physical nature of quantum particles and universes within the quantum multiverse, where, by virtue of being identical in all respects, different particles chaotically divide or combine as a result of physical interactions from a common fungible fund in superposition.
In his 2005 book, The World Is Flat, Thomas Friedman discusses the fungibility of jobs that involve digitizable information that can be off-shored to another country. "You do not want a fungible job," he maintains.
In some software engineering circles fungibility is used to refer to the ability of an engineer to apply their skills to different problem sets. It is used as an antonym to specialization.
Fungibility has been used to describe certain types of tasks or jobs that can be broken into interchangeable pieces that are easily parallelized and are not interdependent on the other pieces. As an example: If a worker can hand dig 10' of ditch in a day, and a 100' ditch needs to be dug, either that worker can be given 10 days to complete the entire project, or 9 additional workers can be hired and the project can be completed in a single day. Each worker can complete his piece of the project without interfering with the other workers, and more importantly, each worker is not dependent on the results of any of the other workers to complete his piece of the total project. On the other hand, non-fungible tasks tend to be highly serial in nature and require the completion of earlier steps before later steps can even be started.