An asset can be considered non-fungible when it cannot be replaced by another asset in whole or in part. In simple terms, an asset that can be considered unique due to its attributes even amongst its own kind, is non-fungible. Gold for instance can be considered fungible, as a kilogram of gold can be replaced by a kilogram of gold.
The idea of turning a fungible asset into non-fungible one isn't as original as it would seem. Extending the previous example, a gold artifact with historical significance cannot be replaced by another replica. For more clarity, consider the Nobel Prize, a gold medal symbolizing the reward. In 1943, Niel Bohr's laboratory in Copenhagen was busy dissolving Nobel Prizes of two Nobel laureats, Max von Laue and James Franck to keep them safe from the invading Nazis. The gold was dissolved in a 3:1 mixture of hydrochloric acid and nitric acid and kept on a laboratory shelf in plain sight secured from clueless Nazi soliders who scavenged the laboratory for traces of gold. The solution was retrived again after the Victory in Europe and the gold extract was sent to the Nobel Foundation. The foundation then recast the gold in its appropriate form.
Though for a brief period Von Laue and Franck's awards were reduced to what one would consider an indistinctive blob of gold, the ability to trace back its origins and recasting it into its deserved form brought back the exclusivity. The same theory of gold can be applied to (fiat) coins. The 1913 Liberty Nickels for example are rare with only 5 pieces in circulation one of which was reportedly sold for over $3.1 million. Could this idea be further extended to crypto currencies like Bitcoin?
Bitcoin inherently is fungible. While bitcoin is not designed to differentiate between one coin from another, could we trace the owners of the first bitcoin ever? A logical process to prove the origins of a coin in a wallet can in essence allow us to distinguish one coin from another.
Bitcoin transactions carry 3 primary components - a list of input transaction(s), output transaction(s)
For instance, I cannot choose to spend one bitcoin from my wallet in favor of another the way I could do with fiat currency coins in my physical wallet.