Semi-fungible tokens vs. Non-fungible tokens: What's the difference and why does it matter

The cryptocurrency world is constantly evolving and expanding its boundaries. After the explosive growth of blockchain and digital currencies, the era of NFTs has begun. Now a new class of assets is emerging — semi-fungible tokens (SFT), which are attracting increasing attention from investors, developers, and innovators. Although the concepts of non-fungible tokens are already familiar to many, semi-fungible tokens remain less studied. Let’s explore these two important classes of digital assets and understand how they differ.

Fundamentals: Understanding Asset Interchangeability

To understand NFTs and semi-fungible tokens, it is first necessary to grasp the basic concepts of asset interchangeability and uniqueness.

Fungible assets are those that can be exchanged 1 to 1 without changing their value. Take two regular US dollars: one smooth, the other crumpled. Their monetary value is identical, and exchanging them causes no issues. Cryptocurrencies (Bitcoin, Ethereum), and fiat money work exactly the same — each unit is equal to another and can be exchanged without hindrance.

Unique assets — this is a completely different story. Two similar assets cannot be exchanged on a 1:1 basis because each has distinctive characteristics. Rarity, origin, popularity, and value vary for each asset. It is this uniqueness that forms the basis for creating non-fungible tokens.

Non-Fungible Tokens (NFT): Digital Ownership Marks

Non-fungible tokens are cryptographic records on the blockchain that verify the authenticity and ownership rights of a digital asset. Each NFT contains a unique identifier and metadata that make it one-of-a-kind.

NFTs can represent a wide variety of objects: digital art, music compositions, videos, virtual real estate, in-game items, and much more. The key difference is that they cannot be exchanged for each other, even if they belong to the same creator or have the same market price.

Historical Milestones in NFT Development

The history of NFTs predates what many think. In 2012, programmer Meni Rosenfeld proposed the concept of “colored coins” for the Bitcoin network, which envisioned managing and representing real-world objects on the blockchain. Although Bitcoin’s limitations prevented the implementation of this idea, it became a prototype for future developments.

The first practical NFT called “Quantum” was created in 2014 by Kevin McCoy on the Namecoin blockchain — it was a pixelated octagon changing colors and pulsating like an octopus.

A real breakthrough occurred with the development of smart contracts on Ethereum:

• 2016: start of issuing memes in NFT format
• 2017-2020: active expansion of Ethereum smart contract standards and migration of NFTs to this platform
• Cryptopunks and Cryptokitties laid the foundation for mass adoption
• 2021: explosive growth in NFT art trading, record sales
• Integration of alternative blockchains: Cardano, Solana, Tezos, Flow
• Metaverses became the main platform for trading virtual real estate
• Facebook rebranded as Meta, cementing industry focus on the future of metaverses

Token Families: From ERC-20 to ERC-404

Various standards have been developed for managing digital assets on Ethereum.

ERC-20 — the standard for interchangeable tokens (cryptocurrencies). Each token is identical to another, making it ideal for currencies and utility tokens.

ERC-721 — the standard for non-fungible tokens. Each token contains unique metadata and an identifier. Developers can add authentication and provenance verification functions. However, a significant drawback is that a smart contract can only send one NFT per transaction. Transferring 50 NFTs requires 50 separate operations, which overloads the network and increases gas fees.

ERC-1155 — a multi-token standard created as a hybrid of ERC-20 and ERC-721. It allows a single smart contract to manage multiple types of assets simultaneously. This significantly reduces fees, decreases network load, and opens new possibilities.

ERC-404 — a new standard currently in experimental phase. Developed by pseudonymous authors “ctrl” and “Acme”. This standard combines the functionality of ERC-20 and ERC-721, allowing tokens to switch between interchangeable and non-fungible states. However, ERC-404 has not undergone the official Ethereum Improvement Proposal (EIP) process and lacks formal audits. This introduces certain risks, including the possibility of rug pulls and unforeseen consequences in smart contract mechanisms. Despite this, projects like Pandora, DeFrogs, and Rug are actively experimenting with this standard.

Semi-Fungible Tokens (SFT): A Hybrid Approach

Semi-fungible tokens are a revolutionary class of assets that combine properties of interchangeable and unique assets. SFTs can start life as regular interchangeable tokens but then transform into unique assets depending on usage conditions.

Consider a practical example: a concert ticket. Before the concert, tickets in the same row are fully interchangeable — you can swap your ticket for any other. But after the concert, the ticket loses its functionality as a tradable item and becomes a collectible souvenir, unique to you, with value determined by the rarity and popularity of the event.

How SFTs Work in Practice

SFTs are created based on the ERC-1155 standard on Ethereum. This standard allows a single smart contract to manage multiple SFTs simultaneously, providing flexibility and efficiency.

In gaming environments, SFTs reveal particularly interesting possibilities. A game item can start as an SFT, then be combined to obtain a fungible in-game currency (interchangeable asset), which can be exchanged for other goods or weapons. This weapon then becomes a unique asset again, especially as its characteristics change with the player’s progress. All these transformations are managed by an embedded developer’s smart contract.

This grants developers unprecedented control over the game economy, eliminating the problem of uncontrolled inflation that was common in old MMO games.

SFT and Tokenization of Real Assets (RWA)

Semi-fungible tokens show enormous potential in the field of real asset tokenization. SFTs offer a solution for assets that need to be divided among multiple owners. For example, ownership shares in real estate can be represented as interchangeable tokens (shares), which under certain conditions become unique (for example, when transferring full control to one owner).

SFTs facilitate:

• Fractional ownership and lowering entry barriers
• Increasing liquidity of traditionally illiquid assets
• Encoding rights and obligations directly into the token
• Automatic compliance with regulatory requirements through programmable conditions
• Creating innovative investment structures

Where Are These Tokens Used?

NFTs have historically been used in:

• Digital art and collectibles
• The music industry
• Video games and metaverses
• Virtual real estate

However, the potential of NFTs extends far beyond these boundaries. Any real or digital asset can be tokenized if there is demand for proof of authenticity and ownership rights.

SFTs are currently concentrated in blockchain gaming, but developers are actively exploring applications in other sectors. Main areas include:

• Event ticketing systems
• Loyalty and reward programs
• Limited-duration game items
• Real asset tokenization

Comparative Analysis: NFT vs SFT

Practical Use in Real Conditions

NFTs function as digital proof of ownership on the blockchain, primarily on Ethereum. Once created, an NFT cannot be duplicated, allowing artists, content creators, and musicians to receive fair compensation for their work without the risk of piracy.

SFTs demonstrate a different mechanism. A user can own a game item that starts as an NFT, then is (converted into currency), exchanged for weapons, which then become NFTs again. Each transition is managed by a program coded by the developer. The token’s value at any moment depends on the context of its use.

Conclusion

Asset tokenization is transforming the way we represent, transfer, and manage digital and physical property. NFTs and SFTs are two key innovations in this process, each with unique advantages.

NFTs provide irrefutable proof of originality and ownership, revolutionizing creative industries. Semi-fungible tokens add flexibility and efficiency, opening new opportunities in gaming, finance, and asset management.

While SFTs are currently focused on the gaming sector, their potential extends across many industries and applications. In the coming years, we expect significant expansion in the use of these technologies, especially with the development of new standards and their adaptation to various use cases.