Fungibility has nothing to do with the ability to exchange one commodity for another. It has everything to do with exchanging one unit of a commodity with another unit of the same commodity.
Fungibility is different from liquidity. A good is liquid and tradable 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.
As an example, one US$10 bank note is interchangeable with another. Cash is fungible. A barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same crude oil. Oil (of the same type) is fungible.
Fungibility does not imply liquidity, and liquidity does not imply fungibility. Jewels 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 interchangeable in London (they are fungible there), but they are not easily traded there (they are not liquid in London).
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 as a remedy for breach of contract, instead of the more favored remedy of monetary damages.
Johanna Drucker discusses the idea that fungibility may also exist in respect of typography and the recording of information. In her article "The Future of Writing in Terms of its Past: The New Fungibility Factor" she argues that in our new age of technology, the form that written language takes is no longer an important part of the message it conveys. This is because the appearance of a message can be changed at the click of a mouse button.
The term "fungibility" is used by Intel Corporation to express the idea that a process tool is compatible across multiple production lines or products. For instance a 'tool' may be used to etch the silicon core prior to the lithography phase of manufacturing. The same tool is also capable of being used in the Assembly process to etch the package substrate prior to die placement. This tool is 'fungibile' and capable of crossing over multiple products or manufacturing processes.