From Swapability Perspective: The Deep Difference Between NFTs and SFTs

The evolution of crypto assets is astonishing. After the initial exploration of blockchain and digital currencies, the market witnessed explosive growth in non-fungible tokens (NFTs). Now, a new class of assets—semi-fungible tokens (SFTs)—is quietly transforming the entire ecosystem. For investors and developers, understanding the subtle differences between these asset classes is becoming increasingly important.

Asset Fungibility: Starting from Basic Concepts

To truly grasp the operational logic of non-fungible and semi-fungible assets, it is first necessary to clarify the meaning of fungibility.

Fungibility refers to an asset’s ability to be exchanged on a 1:1 basis. For example, US dollars: whether a banknote is flat or wrinkled, its face value and exchangeability remain the same. Fiat currencies and most cryptocurrencies fall into this category.

In contrast, non-fungibility emphasizes uniqueness. Each non-fungible asset has different rarity, characteristics, market value, and recognition, making it impossible to exchange them on an equal basis. Even two seemingly identical non-fungible tokens are, in fact, completely different assets. This concept changes the definition of digital ownership.

In short: fungible assets are interchangeable without issue; non-fungible assets are unique.

Definition and Evolution of Non-Fungible Tokens (NFTs)

NFTs are assets on the blockchain with a unique digital marker or identifier used to prove the authenticity and ownership of digital assets. These assets can take various forms, including digital art, music files, images, videos, virtual real estate, or in-game items.

The core feature of non-fungibility is that they cannot be substituted for each other, even if they come from the same creator or have similar features. Each asset is one-of-a-kind, even if their prices are the same on the open market.

NFTs are innovative in protecting digital creators’ intellectual property rights, ensuring they receive fair economic returns, and avoiding piracy. Starting in 2020, NFT-related news began to spread rapidly, and by 2021, they had accumulated transaction volumes worth billions of dollars.

Historical Development of NFTs

Many people believe NFTs are a recent concept, but their theoretical foundation dates back to earlier innovative ideas.

2012: Cryptography researcher Meni Rosenfeld first proposed the concept of “colored coins” in academic papers, envisioning marking and managing real assets on the Bitcoin blockchain. Although this idea was not adopted due to Bitcoin’s technical limitations, it laid the groundwork for later NFTs.

2014: The first official NFT artwork, “Quantum,” was created—a pixelated octagon that changes color and contracts like an octopus. Creator Kevin McCoy minted this piece on the Namecoin blockchain.

2016: Meme culture on the internet began issuing NFTs.

2017-2020: Ethereum’s smart contract standards rapidly gained popularity, driving a large-scale migration of NFTs to the platform. Projects like Cryptopunks and CryptoKitties attracted market attention; the latter even experienced explosive growth at a major Ethereum developer conference, causing network congestion.

Starting in 2021: NFT art pieces appeared in top international auction houses; Beeple’s work set records for single NFT sale prices; multiple blockchains like Cardano, Solana, Tezos, and Flow launched NFT ecosystems; virtual real estate became a hot topic in the metaverse; Meta (formerly Facebook) announced a strategic shift toward the metaverse, significantly increasing attention to NFTs and virtual assets.

Current Application Fields of NFTs

Gaming, art, and music are the three main application scenarios for NFTs. However, since any real asset can be tokenized into a rare collectible, the potential uses of NFTs almost cover all industries.

Semi-Fungible Tokens (SFTs): A New Choice for Flexibility

Semi-fungible tokens represent a class of assets that can switch between being interchangeable and non-interchangeable. They combine the advantages of both asset types, offering greater flexibility and functionality.

Initially, SFTs are interchangeable and can be exchanged with similar tokens. But once used or under certain conditions, they transform into unique, non-interchangeable assets with intrinsic value.

For example, concert tickets: in unused state, your ticket can be exchanged with any other ticket in the same row (fungible). After the event, the ticket loses its exchangeability and becomes a commemorative collectible (non-fungible), with its value determined by the rarity and popularity of the event.

SFTs are built based on Ethereum’s ERC-1155 standard. This standard’s uniqueness lies in that a single smart contract can support multiple SFTs simultaneously, unlike ERC-20 (fungible tokens) and ERC-721 (non-fungible tokens), which require separate deployments.

Creation and Origins of SFTs

SFTs are created using the ERC-1155 standard on Ethereum, which combines the functionalities of ERC-20 and ERC-721. Projects like Enjin, Horizon Games, and The Sandbox developed the ERC-1155 standard to manage and control semi-fungible tokens within gaming environments through a single smart contract.

Current and Future Applications of SFTs

Currently, SFTs are mainly used in the blockchain gaming industry. Assets within games can serve both as interchangeable and non-interchangeable tokens. As awareness grows, the industry is exploring potential applications of SFTs in other sectors.

ERC-404: A New Paradigm Beyond Binaries

ERC-404 is a groundbreaking innovation in the Ethereum ecosystem, aiming to unify the functions of interchangeable tokens (ERC-20) and non-interchangeable tokens (ERC-721). Created by anonymous developers “ctrl” and “Acme,” this standard allows tokens to switch roles flexibly depending on the application scenario—acting as interchangeable units under certain conditions and as unique assets under others.

This hybrid feature enhances market liquidity, enabling NFT fractional trading and addressing liquidity issues present in traditional auction models.

However, ERC-404 has not yet been adopted through Ethereum’s official improvement proposal process (EIP). It lacks the in-depth analysis and security audits expected of formal standards, raising concerns about token mechanism security and potential abuse risks (such as “rug pulls”).

Nevertheless, projects like Pandora and DeFrogs have begun exploring ERC-404’s potential, indicating a growing market demand for hybrid token models.

Technical Comparison of the Three Standards: ERC-721, ERC-1155, and ERC-404

ERC-721 Standard

ERC-721 covers the vast majority of current NFT projects. It is a protocol specification defining the functions and capabilities of non-fungible tokens, enabling developers to create and trade NFTs.

Advantages: Developers can add advanced features such as authentication and provenance verification, strengthening asset uniqueness.

Disadvantages: Efficiency issues exist. Each transaction can transfer only one NFT; sending 50 NFTs requires 50 separate transactions, leading to network congestion and high gas fees.

ERC-1155 Standard

ERC-1155 (multi-token standard) combines features of ERC-721 and ERC-20, providing flexibility and diverse functionalities for created tokens.

Semi-fungible tokens address pain points of both:

• For fungible tokens—once traded, the transaction is irreversible. SFTs allow transaction reversals in case of human error.
• For non-fungible tokens—low transaction efficiency. SFTs enable multiple transactions within a single smart contract, significantly reducing gas costs and network load.

ERC-404’s Innovation

ERC-404 breaks the binary structure. Unlike ERC-721 (pure non-fungible) and ERC-1155 (either/or), ERC-404 allows the same token to act as both interchangeable and non-interchangeable in different scenarios, combining the advantages of both worlds and offering broader use cases and improved liquidity.

Functionality Comparison: NFT vs. SFT

Working Principles and Practical Applications

NFTs operate on the blockchain, mainly deployed on Ethereum. As a digital mapping of real assets, NFTs serve as certification mechanisms, confirming data ownership and existing in various forms. Once created, NFTs cannot be duplicated, allowing artists, content creators, musicians, and business owners to receive fair economic returns.

SFTs enable more complex scenarios. For example, in gaming, you might collect an NFT initially, then convert it into ten game coins (interchangeable assets). Later, you can trade these coins with other players or use them to buy weapons and convert back into NFTs. As players level up, the value of these weapons increases.

The state transitions of SFTs are managed by internal smart contracts written by developers, not external protocols. This flexible feature allows SFTs to upgrade traditional games in multiplayer online environments, giving game creators greater control over assets and economies, representing a qualitative leap over early MMORPG inflation issues. The same token can present different values to different users—serving as a trading currency or as equipment.

The Future Intersection of SFTs and Real Asset Tokenization

Semi-fungible tokens provide innovative solutions for real-world asset tokenization (RWA), addressing the shortcomings of fully fungible and non-fungible tokens.

SFTs offer trading flexibility through initial fungibility (e.g., ownership shares) while allowing transformation into non-fungible states under specific conditions, enhancing liquidity and accessibility. They can dynamically reflect changes in asset value, status, or conditions.

SFTs facilitate efficient fractional ownership of indivisible assets, lowering entry barriers for investors. They turn traditionally low-liquidity assets into tools tradable on digital platforms. SFTs can encode specific rights, rewards, or obligations related to RWA, with conversion between fungible and non-fungible states designed to meet regulatory and asset-tracking requirements. Ultimately, SFTs open up possibilities for innovative financing and investment structures, combining liquidity and uniqueness to create new investment products and opportunities.

Overall Outlook

Asset tokenization is rapidly becoming mainstream, opening unprecedented opportunities. The NFT ecosystem is reshaping multiple industries at an impressive pace and gaining widespread recognition. Blockchain technology makes previously unimaginable asset ownership verification and data protection methods a reality.

NFTs and SFTs are sparking a revolution, redefining the revenue mechanisms for digital creators, artists, blockchain game developers, and players, while also increasing engagement opportunities for customers and fans. Although SFTs are currently mainly applied in gaming, their innovative features are expected to be adopted across a broader range of industries.