Replaceable Token vs. Sellable Token: Understanding the Difference

The digital finance platform is developing at a staggering pace. After blockchain and cryptocurrencies, the world is witnessing the explosion of entirely new types of tokenized assets. In addition to the well-known non-fungible tokens (NFT), developers are now exploring the possibilities of semi-fungible tokens (SFT) — a hybrid technology offering unprecedented flexibility. This article will analyze these two types of tokens in depth so you can understand their practical applications.

Basic Concepts: Fungible Assets vs. Non-Fungible Assets

First, we need to clearly understand these two fundamental asset properties.

Fungibility applies to assets that can be exchanged 1-1 while maintaining the same value. Imagine two one-dollar bills — despite their different appearances, they represent the same value and are fully interchangeable. Fiat currency, cryptocurrencies like Bitcoin and Ethereum fall into this category.

Non-fungibility reflects the uniqueness of each asset. When two items have different characteristics, rarity, or significance, they cannot be exchanged on a 1-1 basis. A Picasso painting can never be exchanged for another, even if by the same artist.

In summary: fungible = interchangeable; non-fungible = unique.

(Token Không Thể Thay Thế): Definition and Applications

A non-fungible token is a digital asset with a unique identity recorded on the blockchain, proving ownership and authenticity.

NFTs come in many forms: digital artworks (artwork), music (MP3), images (JPEG), videos (MP4), virtual real estate, and in-game items on blockchain games. Each NFT bears an independent digital signature, making them non-interchangeable despite similar valuations on exchanges.

NFTs primarily emerged to protect the copyright of digital creators, ensuring they are fairly compensated for their work without concerns over copyright infringement or unauthorized copying.

NFT boom: In 2020, NFTs began attracting significant attention, with trading volumes reaching billions of dollars by the end of the year, and this trend continued into 2021.

The Development Journey of NFTs: From Theoretical Foundations to Practical Reality

The origins of NFTs go further back than many imagine. In 2012, researcher Meni Rosenfield introduced the concept of “colored coins” on the Bitcoin blockchain — an initial idea to represent real-world assets with tokens governed by specific rules. However, Bitcoin’s limited capacity and design constraints prevented this idea from being practically implemented.

Key developmental milestones:

• 2014: “Quantum” — the first NFT was minted, a pixelated octagon with color-changing ability, created by artist Kevin McCoy on the Namecoin blockchain.

• 2016: Memes began to be minted as NFTs.

• 2017-2020: The Ethereum ERC-721 standard became popular, shifting NFTs to the Ethereum blockchain.

• Subsequent years: Cryptopunks created by John Watkinson and Matt Hall marked a breakthrough after the success of Rare Pepes. CryptoKitties appeared at a major Ethereum hackathon and caused a frenzy, sharply increasing interest in NFTs.

• 2021: First NFT auction sales at prestigious auction houses. Beeple’s artwork set a record for the highest sale price for an NFT. Other blockchains like Cardano, Solana, Tezos, and Flow started participating in the NFT space.

• From 2021 onward: NFTs became popular assets in the metaverse as virtual real estate. Facebook rebranded as Meta, exploring the metaverse as a strategic development direction.

Industries Currently Applying NFTs

NFTs are most commonly used in three sectors: blockchain gaming, digital art, and music.

However, the potential applications of NFTs are not limited to these. Any real-world asset or data can be encoded into a rare collectible, opening endless use cases.

(Token Bán Có Thể Thay Thế): New Hybrid Concept

Semi-fungible tokens are digital assets capable of flexibly switching between fungibility and non-fungibility. They are a perfect combination of the two token types, offering greater flexibility and functionality than either alone.

How SFTs work:

An SFT initially exists as a fungible token — exchangeable with similar tokens within the same class. But under specific conditions, it transforms into a non-fungible token.

Practical example: Suppose you buy a concert ticket. Your ticket is a fungible token — you can exchange it for any other ticket in the same seating area. But once the concert ends, the ticket becomes a memento, a unique item with personal sentimental value. At this point, it can no longer be exchanged — it becomes an NFT.

Technical basis: SFTs are built on the ERC-1155 standard on the Ethereum blockchain. This standard allows a single smart contract to manage multiple types of semi-fungible tokens, unlike ERC-20 (for fungible tokens) and ERC-721 (for NFTs).

The History of SFTs

Enjin and Horizon Games developed the ERC-1155 standard, with The Sandbox as a notable application. This infrastructure enables blockchain game developers to manage and adjust semi-fungible tokens via a unified smart contract, increasing efficiency.

Where Are SFTs Used?

Currently, SFTs are mainly deployed in the blockchain gaming industry. All in-game assets — from weapons, equipment, to items — can function both as fungible tokens (for trading) and as non-fungible tokens (with unique features).

However, communities are actively exploring new applications of SFTs beyond gaming.

ERC-404: The Next-Generation Token Standard

ERC-404 represents a breakthrough standard in the Ethereum ecosystem. Developed by anonymous creators “ctrl” and “Acme,” this standard aims to combine features of ERC-20 (fungible tokens) with ERC-721 (NFTs) — creating semi-fungible tokens with unprecedented flexibility.

Main advantages: ERC-404 allows tokens to act as interchangeable units in some cases and as unique assets in others. This facilitates better liquidity, enables fractional trading of NFTs, and addresses liquidity issues faced by traditional NFTs.

Concerns: ERC-404 has not yet undergone the official Ethereum Improvement Proposal (EIP) process, raising security concerns. Its unofficial market introduction carries risks such as rug pulls or unforeseen smart contract issues. Nonetheless, projects like Pandora, DeFrogs, and Rug are beginning to explore ERC-404’s potential, indicating growing interest.

Comparative Analysis: ERC-404 vs. ERC-721 vs. ERC-1155

Standard ERC-721 - NFT Standard

ERC-721 dominates the existing NFT landscape. It defines the functions and capabilities of tokens, enabling creation and trading of NFTs.

Advantages: Developers can add advanced features such as provenance verification, increasing uniqueness.

Significant limitations: Poor batch transaction support. A single smart contract can only transfer one NFT per transaction. To transfer 50 NFTs, you must perform 50 separate transactions, causing network congestion, high gas fees, and slow processes.

Standard ERC-1155 - Multi-Token Standard

ERC-1155 combines features of ERC-721 and ERC-20, offering greater flexibility. Semi-fungible tokens sit in the middle, partially overcoming the limitations of both types.

Advantages: Supports multiple transactions in one go, reducing gas costs and network congestion.

Difference from fungible tokens: While fungible tokens cannot be reversed or canceled, SFTs can be reversed if user errors occur (such as sending to the wrong address).

Standard ERC-404 - Fully Hybrid

Unlike ERC-721 (which only supports NFTs) and ERC-1155 (which manages multiple types), ERC-404 introduces a new concept: allowing the same token to function as a fungible token or an NFT depending on conditions. This dual functionality creates entirely new forms of digital assets, combining the flexibility of fungible tokens with the uniqueness of NFTs.

NFT vs. SFT: Comprehensive Comparison Table

Practical Operation of NFTs and SFTs

NFTs operate primarily on the Ethereum blockchain, serving as digital representations of real-world assets. When minted, they are immutable, enabling artists, musicians, and content creators to receive fair monetary value for their work.

SFTs offer higher flexibility. In a blockchain game, you might start with a token as an NFT, but as you collect, it transforms into in-game currency (used for shopping or trading). You can then use that currency to buy weapons from other players, which then become NFTs with their own uniqueness. Pre-programmed smart contracts automatically handle these changes without external protocols.

This transformation helps game developers track assets and cash flow, providing better control over the game economy and avoiding uncontrolled inflation common in traditional MMO games.

SFT and Tokenization of Real-World Assets (RWA)

SFT offers a unique approach to tokenizing real-world assets (RWA), addressing challenges of full replacement or non-fungibility.

Advantages of SFT in RWA:

• Enables fractional ownership of assets that cannot be divided, such as real estate (like property), lowering participation barriers for investors.

• Enhances liquidity of traditional assets that are hard to trade by enabling digital transactions.

• Can encode rights, rewards, or specific obligations related to RWA.

• Facilitates innovative financial structures, opening new investment products and opportunities by combining semi-fungibility with non-fungibility.

Conclusion

Asset tokenization is becoming a major trend, offering new possibilities that attract widespread interest. The NFT ecosystem is rapidly evolving, expanding into many industries. Blockchain technology makes the realization and representation of ownership rights feasible in unprecedented ways.

NFTs and SFTs bring a wave of innovation, redefining profit models for content creators, artists, game developers, and gamers, while broadening access for fan communities.

Although SFTs are currently mainly focused on gaming, they are expected to soon find widespread applications across various industries, especially in the tokenization of real-world assets.