Understanding the differences between NFT and Semi-Fungible Token: a complete guide to ERC standards

The crypto ecosystem is evolving at an unstoppable pace. After the boom period around blockchain and cryptocurrencies, the era of non-fungible tokens has begun, and now semi-fungible assets are entering the scene. If you’ve recently encountered the abbreviation SFT or think that NFTs are yesterday’s news, we will help you understand the essence of these phenomena.

Fundamentals: Fungibility as a Key Property of Digital Assets

To understand the differences between NFT and semi-fungible tokens, start with basic definitions.

Fungibility is the ability of assets to be exchanged in a 1:1 ratio without loss of value. Imagine two dollars: one crumpled, the other perfectly smooth. Both have the same monetary value and are fully interchangeable. Cryptocurrencies, fiat money, standard ERC-20 tokens — all are fungible assets.

Non-fungibility is the opposite principle. Assets cannot be equated to each other because each has unique characteristics, rarity, and value. Two digital artworks, even if created by the same artist, are always different assets. Non-fungible tokens operate precisely on this principle of uniqueness.

NFT: Digital Proof of Originality

Non-fungible tokens are cryptographic objects on the blockchain, each with a unique identifier confirming authenticity and ownership rights to the corresponding digital asset.

NFTs can represent various forms of content: digital art, music tracks, videos, virtual real estate, game items, and much more. Their main distinction is that these assets cannot be exchanged on a 1:1 basis, as each token has individual properties and rarity.

Historically, NFTs emerged as a response to digital creators’ need to protect their works and receive fair compensation without the risk of piracy. In 2020-2021, the sector experienced explosive growth, attracting billions of dollars in trading volume.

From Idea to Implementation: The Evolution of NFT

Although widespread recognition came in 2021, the roots of the concept go much deeper. In 2012, Meni Rosenfeld first described “colored coins” — a protocol for representing real-world objects on the Bitcoin blockchain. The idea was never fully realized due to Bitcoin’s limitations but laid the theoretical groundwork.

Key milestones in development:

• 2014: creation of the first NFT — a pixelated octagon “Quantum” on the Namecoin blockchain. Author — Kevin McCoy.
• 2016: beginning of issuing memes as NFTs.
• 2017-2020: the ERC-721 standard on Ethereum gains popularity. Cryptopunks and Rare Pepes are created, initiating the culture of collecting.
• 2018-2019: Cryptokitties cause the first serious surge of interest in NFTs.
• 2021: professional auction houses start selling NFT art; a record price is set for Beeple’s work.
• 2022-2023: other blockchains — Solana, Cardano, Tezos, Flow — begin actively supporting NFT standards. Metaverses (Decentraland and similar projects) become major drivers of demand for virtual real estate.

Today, NFTs are widely used in gaming, art, music, sports, and even in some sectors of the real economy.

Semi-Fungible Token: A Hybrid Asset Class

If NFTs are fully unique assets, and ERC-20 tokens are fully interchangeable, then semi-fungible tokens occupy an intermediate position.

A semi-fungible token is a digital asset that can switch between states of interchangeability and non-interchangeability depending on the context of use. A simple example: a concert ticket.

Before the concert begins, tickets are interchangeable — you can exchange your ticket for any other in the same row without losing value. However, immediately after the concert ends, the ticket loses its exchange function and becomes a collectible souvenir — a unique asset whose value is determined by the rarity and popularity of the event.

Technical Standard: ERC-1155

Semi-fungible tokens are created on the ERC-1155 standard on the Ethereum blockchain. This revolutionary standard, unlike ERC-721 (only for NFTs) and ERC-20 (only for interchangeable tokens), allows a single smart contract to support multiple types of tokens simultaneously.

The development of ERC-1155 was initiated by Enjin, Horizon Games, and The Sandbox, which needed a tool to manage gaming assets capable of being both interchangeable (in-game currency) and non-interchangeable (unique equipment).

Advantages of SFT over Classic Standards

For interchangeable assets (ERC-20) the main limitation is irreversibility of transactions. If you send tokens to the wrong address, they cannot be recovered. Semi-fungible tokens solve this problem by allowing transaction revocation in case of human error.

For non-interchangeable assets (ERC-721) the main drawback is scalability. One smart contract can send only one NFT per transaction. Sending 50 tokens requires 50 separate transactions, overloading the Ethereum network, increasing fees, and slowing down the process. Semi-fungible tokens enable a single contract to perform batch operations, significantly reducing gas costs and processing time.

ERC-404: A New Frontier in Standardization

In 2024, the ERC-404 standard appeared, developed by anonymous cryptographers under the pseudonyms “ctrl” and “Acme.” This standard is an ambitious attempt to combine the best properties of ERC-20 and ERC-721 into a single framework.

ERC-404 allows creating tokens that function as interchangeable in some conditions and as non-interchangeable in others. The main advantage is improved NFT liquidity. Instead of trading entire items, you can trade fractions of them, as if they were regular tokens.

Important note: ERC-404 did not go through the official Ethereum Improvement Proposal (EIP) approval process. The standard was released informally, without full auditing and analysis. This raises concerns about security and risks, including potential rug pulls and unforeseen consequences in the token signing mechanism.

Despite these concerns, projects like Pandora, DeFrogs, and others are already experimenting with ERC-404, indicating growing interest in hybrid tokenization models.

Comparison of Standards in Detail

ERC-721 — the gold standard for NFTs. Each token has a unique identifier and metadata set. Developers can add additional functions to verify authenticity and provenance. Disadvantage: high scalability costs due to the requirement to send one token per transaction.

ERC-1155 solves the scalability problem by allowing one contract to manage multiple token types. This is especially convenient for gaming, where both interchangeable resources (money, experience) and unique items are needed. SFTs based on ERC-1155 can dynamically change their properties thanks to built-in smart contracts.

ERC-404 — the most innovative of the three. It automatically converts parts of NFTs into tokens and back, providing high liquidity. However, its unofficial status makes it a risky choice for large projects.

Practical Applications: Where These Standards Are Used

NFTs in the Modern Economy

Non-fungible tokens dominate three sectors: art, music, and gaming. In each, they solve specific problems:

• Artists receive fair compensation and protection from piracy
• Musicians can release limited editions of their works
• Gamers own unique equipment that can be traded on open markets

The prospects extend far beyond these three industries: certificates of authenticity, documents, real estate — virtually any real asset can be tokenized.

Semi-Fungible Token in Blockchain Gaming

Currently, SFTs are mainly used in the gaming industry. They allow game assets to function dualistically: inside the game, an item can be a interchangeable resource, and after trading on an NFT marketplace, become a unique collectible asset.

For example, in an RPG, in-game weapons can serve as interchangeable currency (10 swords = 1 shield), as well as unique combat tools with increasing value as the character levels up.

Potential of SFT in Tokenizing Real Assets

An emerging trend in the crypto ecosystem is the tokenization of real-world assets (RWA, Real World Assets). Semi-fungible tokens have significant potential here:

• Fractional ownership: real estate can be divided into multiple fractions, initially interchangeable but becoming unique under certain conditions (for example, upon full buyout).
• Dynamic value: SFTs can reflect changes in the state or conditions of the underlying asset.
• Regulatory compliance: transitioning from interchangeable to non-interchangeable states can be configured to meet various jurisdictional requirements.

Comparison Table: NFT vs SFT vs New Standards

Conclusion: The Future of Tokenization

Blockchain technology is redefining concepts of ownership and value in the digital space. NFTs have already transformed industries like art, music, and gaming, providing creators with new monetization channels and direct audience engagement.

Semi-fungible tokens represent the next stage of evolution — combining advantages of both approaches and opening doors to more complex financial instruments. While currently SFTs are mainly used in gaming, their potential extends far into real assets, insurance, fractional investing, and complex portfolio management.

The appearance of ERC-404, despite its unofficial status, indicates a developmental direction: the crypto community actively seeks ways to increase liquidity, reduce costs, and expand the functionality of digital assets.

The main lesson: each standard addresses specific tasks. The choice between NFT, SFT, or ERC-404 depends on the particular use case, scalability requirements, and regulatory constraints. The era of tokenization has only just begun.