From NFT to SFT: The Digital Token Revolution and Ethereum Standards

The digital asset space is witnessing a fundamental transformation. What began with Bitcoin and blockchain has rapidly expanded into more complex concepts. From non-fungible tokens (NFTs) to semi-fungible tokens (SFTs), each step brings new possibilities and challenges. This article will delve into the differences, practical applications, and future of these types of tokens.

Practical Applications: Where NFTs and SFTs Are Changing the Market

Before diving into theory, let’s look at what’s happening in reality. Non-fungible tokens currently dominate three main areas: blockchain gaming, digital art, and virtual real estate. Content creators, artists, and gamers are finding real value in owning unique assets on the blockchain.

The gaming industry is particularly interesting due to the emergence of semi-fungible tokens. These tokens operate differently—they are not just static items but can switch between two states. This creates a more complex economic incentive, where an asset can be tradable currency at one moment and a rare, unique item at another.

Basic Understanding: Fungibility and Non-fungibility

To grasp these complex concepts, we need to start with the basic definitions of two key terms: fungible (interchangeable) and non-fungible (non-interchangeable).

Imagine you have a 1 USD coin. You can exchange it for any other 1 USD coin from your friend, and the value remains unchanged. That’s fungibility. Fiat money, cryptocurrencies like Bitcoin or Ethereum—all follow this principle.

Conversely, think of a Picasso painting. You cannot exchange it for any other painting, even if they are of equal value. Each piece has its own uniqueness. That’s the concept of non-fungible—the inability to replace.

In the world of digital assets, this means:

• Fungible assets: Can be exchanged at a 1-1 ratio, with equivalent value
• Non-fungible assets: Unique characteristics, rarity, independent value

Non-fungible Token (NFT): Definition and Nature

A non-fungible token is a digital data unit on the blockchain with a unique identifier. It proves ownership and authenticity of an asset—be it artwork, music, video, in-game items, or even virtual real estate.

What makes NFTs important is their verifiable protection. In the digital world before, a photo or song could be copied endlessly without loss of quality. But with non-fungible tokens, each copy is uniquely authenticated on the blockchain. This safeguards creators’ rights and provides a way to monetize their work.

NFTs began attracting significant attention from 2020, with transaction volumes reaching billions of USD. 2021 was a boom year, with digital artworks sold at famous auction houses and record prices continually set.

Development Journey: From Colored Coins to Modern NFTs

To understand NFT’s current position, we need to go back to 2012—much earlier than the 2021 surge.

Early Stage (2012-2014): Meni Rosenfield introduced the concept of “colored coins” on the Bitcoin blockchain. The idea was to represent real-world assets on the network. Although Bitcoin was not suitable for this purpose, it laid the conceptual groundwork for what was to come.

In 2014, “Quantum”—the first minted NFT—was created. It was a pixelated hexagon image on the Namecoin blockchain by Kevin McCoy. The image changed colors and resized rhythmically, symbolizing the start of a completely new technology.

Development (2016-2017): Memes began to be minted as NFTs. Then came Ethereum’s ERC-721 standard—a protocol defining how non-fungible tokens operate. This was a major milestone, providing a standard for the entire ecosystem.

Explosion (2017-2021): Cryptopunks emerged from the success of Rare Pepes. Then CryptoKitties, a game allowing players to breed digital cats, caused a viral effect on Ethereum. The metaverse began to take shape. Other blockchains like Cardano, Solana, Tezos, and Flow also entered the scene.

Recent Progress (2021 onwards): Major auction houses started selling NFTs. New projects launched continuously. Facebook rebranded as Meta, prioritizing metaverse development.

Semi-Fungible Token (SFT): A Bridge Between Two Worlds

If NFTs are entirely unique assets, semi-fungible tokens are a hybrid designed to handle more complex cases.

Imagine buying a ticket to a live concert. Before the event, your ticket is identical to anyone else’s in the same row. You can exchange it. But immediately after the concert, the ticket becomes a unique memento—proof that you experienced a special moment. It can no longer be exchanged.

That’s exactly how semi-fungible tokens work. Initially, they are interchangeable, freely tradable tokens. Later, they convert into non-fungible tokens with unique value based on certain conditions.

SFTs are built on Ethereum’s ERC-1155 standard—a protocol allowing a single smart contract to support multiple token types. This differs from ERC-721 (for NFTs) or ERC-20 (for standard fungible tokens).

Creators of SFTs: Enjin and The Sandbox

Companies that created the ERC-1155 standard include Enjin and The Sandbox—two major names in blockchain gaming. They recognized the need for a more flexible standard to manage in-game assets, where an item might need to change its properties.

Currently, SFTs are mainly used in blockchain gaming. However, their potential extends beyond. Developers are exploring new applications across various fields.

ERC-404: New Standard and Controversies

Recently, a new standard called ERC-404 has appeared on the market. Developed by anonymous figures “ctrl” and “Acme,” ERC-404 is an innovative approach to combine the functions of both ERC-20 (token can be replaced) and ERC-721 (non-fungible token).

Main differences:

• ERC-20: Fully interchangeable tokens, like currency
• ERC-721: Fully non-fungible tokens, each unique
• ERC-404: Tokens that can change states, functioning as fungible under some conditions and non-fungible under others

This standard promises to address some liquidity issues faced by NFTs. It allows trading of fractional parts of NFTs, increasing flexibility and accessibility.

However, ERC-404 has not yet undergone the official Ethereum Improvement Proposal (EIP) review process. It lacks thorough auditing, raising security concerns. Risks include rug pulls and unintended consequences from smart contract mechanisms.

Nevertheless, projects like Pandora, DeFrogs, and Rug have begun experimenting with ERC-404, indicating growing interest in this hybrid model.

Comparing the Three Standards: ERC-721, ERC-1155, and ERC-404

ERC-721: The Standard for NFTs

ERC-721 defines the functions of non-fungible tokens. Its advantage is that developers can add new features, such as provenance verification, enhancing uniqueness.

But there is a major issue: each transaction can only send one NFT. To transfer 50 NFTs, you need 50 separate transactions. This causes network congestion on Ethereum, increasing transaction fees and gas costs.

ERC-1155: Multi-Token Standard

ERC-1155, also called the “multi-token standard,” combines ERC-721 and ERC-20. It allows a single smart contract to support multiple token types.

Semi-fungible tokens use ERC-1155 to overcome limitations of previous asset types:

• For fungible tokens, the problem is irreversible transactions
• For non-fungible tokens, transaction efficiency is poor

ERC-1155 enables reversible transactions in case of human error and allows a single contract to perform multiple transactions, reducing fees and congestion.

ERC-404: The Complete Hybrid

ERC-404 is a significant step forward. It allows creating tokens that can operate as fungible under some conditions and as non-fungible under others. This dual functionality opens new possibilities for liquidity and use cases.

Tokenization of Real Assets (RWA) and the Role of SFTs

A new emerging field is tokenization of real-world assets (RWA). This involves converting physical assets into digital tokens.

Semi-fungible tokens play a key role here. They offer flexibility in ownership by allowing initial parts of an asset—like real estate shares—to become non-fungible once certain conditions are met.

For example:

• An initial real estate share can be traded as fungible (currency-like)
• When sold, it becomes non-fungible, representing specific ownership rights

SFTs help:

• Lower barriers for investors
• Increase liquidity for traditionally illiquid assets
• Encode rights, rewards, or obligations
• Comply with regulations

NFTs vs. SFTs: A Comprehensive Comparison Table

Practical Operation: From Theory to Application

Consider a specific example from blockchain gaming:

With NFT: You own a unique sword. It cannot be exchanged for another sword due to its uniqueness. Its value depends on rarity, appearance, or in-game utility.

With SFT: You receive a game reward code. Initially, it’s identical to others’ codes—exchangeable. But once you reach a high level, the reward code becomes a unique item, no longer exchangeable.

Smart contract integration of SFT, programmed by developers, automates these changes. This gives game developers better control over the game economy, preventing uncontrolled inflation common in older MMOs.

Depending on the mechanism, the same token can have different values—it can be currency or a weapon, depending on its state.

Conclusion: An Unfolding Journey

The world of non-fungible tokens and semi-fungible tokens continues to evolve. From basic concepts of interchangeability to complex Ethereum standards, we are witnessing a fundamental shift in how assets are owned and traded digitally.

NFTs have proven that digital ownership models are feasible and valuable. SFTs add a layer of complexity, enabling more flexible assets. ERC-404 promises new possibilities.

Practical applications extend beyond gaming and art. RWA tokenization is opening avenues for real-world assets to be represented and traded on the blockchain. Creators, developers, entrepreneurs, and investors all stand to benefit.

While SFTs may initially emerge in gaming, they will soon find applications across many fields. The journey has just begun.