From NFT to SFT: The New Era of Digital Assets on Distributed Ledger

The pace of evolution in blockchain technology is remarkable. Building on Bitcoin and Ethereum, non-fungible tokens (NFTs) emerged, and now a more flexible new concept—semi-fungible tokens (SFT)—is gradually gaining attention. If you’re still confused about the differences between these two concepts, this article will provide a detailed analysis of their essence, application scenarios, and future development directions.

Understanding Asset Fungibility: Basic Concepts

Before delving into NFTs and SFTs, we need to understand what fungibility and non-fungibility mean.

Fungible assets refer to assets that can be exchanged on a 1:1 basis. For example: having a 100 yuan banknote—whether it is brand new or wrinkled—its value remains the same and can be exchanged interchangeably with other 100 yuan banknotes. Fiat currencies and cryptocurrencies both belong to this category.

Non-fungible assets are different. Two seemingly similar assets may not be exchangeable at equal value due to differences in rarity, attributes, value, or popularity. For example, a Picasso painting and a student’s artwork are both art pieces, but obviously cannot be exchanged at equal value.

In the blockchain world, this distinction is even more critical—it determines how tokens can be divided, traded, and transferred.

The Essence and Evolution of NFTs

Non-fungible tokens (NFTs) are essentially digital certificates that use unique cryptographic identifiers and metadata to ensure ownership authenticity and asset uniqueness. These tokens can represent various forms of assets such as digital art, music, videos, virtual real estate, and in-game items.

One important motivation for creating NFTs is to protect the rights of digital creators. In an era of rampant internet piracy, NFTs provide a clear, verifiable proof of ownership, allowing artists, musicians, and content creators to profit directly without worrying about illegal copying and dissemination.

Starting in 2020, the NFT market rapidly heated up, reaching transaction volumes of billions of dollars by 2021, sparking a market frenzy.

NFT Development Timeline

Although NFTs only truly entered the public eye in 2021, the concept was proposed much earlier.

2012: Cryptography expert Meni Rosenfeld first proposed the concept of “colored coins” in a paper, envisioning representing real assets on the Bitcoin blockchain. This idea paved the way for later NFTs, although it was not realized at the time due to Bitcoin’s design limitations.

2014: The first official NFT—“Quantum” (a color-changing octagonal pixel graphic)—was created on the Namecoin blockchain by Kevin McCoy.

2016: Internet memes began to be issued as NFTs.

2017-2020: Ethereum’s smart contract standards (ERC-721) gradually became the mainstream infrastructure for NFTs. Projects like Cryptopunks and CryptoKitties demonstrated market demand, with the latter even causing congestion on the Ethereum network due to its popularity.

2021: NFT artworks appeared at international auction houses, with works by Beeple and others setting record prices. As the market expanded, blockchains like Cardano, Solana, Tezos, and Flow also began supporting NFTs.

2021 and beyond: NFTs gained prominence in virtual real estate and metaverse applications. Facebook rebranded as Meta, explicitly focusing on the metaverse, further accelerating the maturity of this ecosystem.

Understanding ERC Standards: The Technical Framework of NFTs

ERC-721 Standard

ERC-721 is currently the most widely used NFT standard. It defines the functional attributes of non-fungible tokens, allowing developers to create and trade NFTs. Developers can add additional features within the ERC-721 framework, such as authenticity verification and provenance information, highlighting the uniqueness of non-fungible assets.

However, ERC-721 has obvious efficiency bottlenecks: each transaction can only send one NFT. To transfer 50 NFTs, 50 separate transactions are required. This is time-consuming, burdens the blockchain network, and significantly increases transaction fees and Gas costs.

The Rise of Semi-Fungible Tokens (SFT)

What are SFTs?

Semi-fungible tokens (SFTs) are a class of digital assets that can flexibly switch between fungible and non-fungible states. They combine the advantages of both asset types, providing new possibilities for complex application scenarios.

A straightforward example is concert tickets. Before the event, tickets in the same row are interchangeable—your ticket is essentially the same as your friend’s. But after the event, the ticket loses its exchange value and becomes a souvenir, with its value determined by the rarity and popularity of the performance. The ticket transitions from a “fungible” to a “non-fungible” state.

SFTs’ Technical Foundation: ERC-1155

SFTs are based on Ethereum’s ERC-1155 standard. This is a unique “multi-token” standard that allows a single smart contract to manage multiple types of SFTs simultaneously. In comparison:

• ERC-20 standard is used for fungible tokens (like cryptocurrencies)
• ERC-721 standard is used for non-fungible tokens (like traditional NFTs)
• ERC-1155 provides a unified framework for both

This means one smart contract can handle multiple transactions, significantly reducing transaction fees and Gas costs, easing the load on the blockchain network.

Practical Applications of SFTs

Currently, SFTs are mainly used in blockchain gaming. Each in-game asset can exist as both a fungible asset and a non-fungible asset. For example, a weapon obtained in a game might initially be a tradable “game currency,” but after upgrading to a certain level, it becomes a unique, non-tradable piece of equipment.

The application prospects of SFTs extend far beyond gaming. They show strong adaptability in industries such as ticketing systems, loyalty reward programs, and copyright management.

ERC-404: A New Exploration of Hybrid Standards

Recently, a brand-new standard—ERC-404—has attracted discussion in the Ethereum community. Proposed by anonymous developers “ctrl” and “Acme,” this standard aims to go further by creating tokens that can seamlessly switch between fungible and non-fungible states.

The core innovation of ERC-404 lies in enhancing NFT liquidity. Traditional NFTs often require auctions or peer-to-peer transactions to sell, but ERC-404 allows fractional trading of NFTs, enabling small investors to participate in high-value asset investments.

However, ERC-404 has not yet passed the formal Ethereum Improvement Proposal (EIP) process. It lacks the rigorous auditing and formal analysis required for official standards, raising security concerns. Projects like Pandora and DeFrogs have begun testing this standard, but potential risks (such as rug pulls) should be approached with caution.

Comparison of the Three Main Standards

Core Differences Between NFTs and SFTs

Practical Operations in Real-World Applications

NFT Workflow: NFTs operate on blockchains (mainly Ethereum). Each NFT has a unique cryptographic identifier and detailed metadata record. Once created, it cannot be duplicated, ensuring fair economic returns for digital creators, artists, content producers, and businesses.

SFT Workflow: Taking gaming as an example, an in-game item might initially exist as tradable “game currency,” which can be converted into a non-tradable “legendary equipment” through accumulation or synthesis. This conversion is automatically managed by smart contracts, not relying on external protocols. This flexibility allows game developers to better control the in-game economy and avoid issues like uncontrolled inflation common in early large-scale online games (MMOs).

The Fusion of SFTs and Real Asset Tokenization (RWA)

Semi-fungible tokens provide new solutions for real asset tokenization (RWA). Compared to fully fungible or non-fungible tokens, SFTs offer more flexible ownership and trading mechanisms.

For example, a property can be divided into multiple tradable equity tokens (initially fungible), but once a buyer obtains full ownership, the property deed becomes a non-transferable non-fungible asset. This design improves liquidity while meeting regulatory requirements. SFTs can also encode specific rights, rewards, or obligations, dynamically adjusting based on asset status, opening new doors for financial innovation.

Looking Ahead: The Future of Tokenization

Asset tokenization is becoming an important trend in the blockchain ecosystem. From NFTs to SFTs and the exploration of ERC-404, we see an ongoing evolution—making token standards more flexible, efficient, and suitable for diverse scenarios.

Blockchain technology enables unprecedented recording and protection of asset ownership. Whether for digital creators, game developers, traditional enterprises, or ordinary users, everyone benefits from this tokenization revolution.

Although SFTs are currently mainly applied in gaming, as technology and legal frameworks improve, they will expand into industries such as ticketing, insurance, and supply chain management. In the future, we may see a truly interconnected ecosystem of tokenized assets, where NFTs, SFTs, ERC-404, and other innovative standards coexist and serve their respective roles.