In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable, as fungibility implies equal value between the assets. Fungibility refers only to the equivalence of each unit of a commodity with other units of the same commodity and not to the exchange of one commodity for another, which is barter.
Currency is fungible: one banknote is interchangeable with any other banknote like it. Gold of the same grade and weight is fungible. On the other hand diamonds are considered unique and are not perfectly fungible, variations make it difficult to find several diamonds expected to have the same value. Fungibility does not imply liquidity, and vice versa. Diamonds trading is liquid, yet individual diamonds are not interchangeable.
In cryptocurrencies, privacy is essentially tied to fungibility. Cryptocurrencies with a public ledger such as Bitcoin often lose fungibility, as some coins are treated as more acceptable than others. Coins involved in questionable transactions can taint entire wallets since values are merged. Tainted coins can be accepted without knowledge, or can even be sent into an unknowing account, resulting in a loss of reputation.