Fungible Token
A token whose units are interchangeable, so any one unit counts exactly the same as any other unit.
Fungibility means units are defined only by quantity, the way one dollar bill substitutes for another. A fungible token contract stores balances rather than individual item identities, which is what allows pooled markets to work: an automated market maker, an order book, or a lending pool can accept deposits from thousands of holders and hand back equivalent units later. On Ethereum the ERC-20 standard is the usual implementation. In practice fungibility can be weakened by surveillance rather than by code: because most ledgers are transparent, some exchanges and compliance services screen units by their transaction history and treat otherwise identical units differently.
In practice
Depositing tokens into a lending pool and later withdrawing different units of the same token is only possible because the units are fungible.
The common misunderstanding
Fungibility is a property of how units are treated, not a guarantee: on a transparent ledger some services will freeze or reject units whose history they dislike, even though the code makes them identical.