From interchangeable to unique assets: Interpreting the evolution of token standards

Financial innovation is advancing at an astonishing pace. Blockchain and cryptocurrencies sparked the first wave, followed by the rise of NFTs. Now, another asset class—semi-fungible tokens(SFTs)—is entering mainstream view.

You may have heard of the concept of “non-fungible tokens,” but “semi-fungible tokens” still sound unfamiliar. Regardless of which category you belong to, this article will break down the underlying logic of these concepts one by one.

The Essence of Fungibility: Exchangeable vs. Unique

To understand NFTs and SFTs, first grasp the basic concepts of “fungible” and “non-fungible.”

Fungible assets are assets that can be exchanged at 1:1 equivalence. Imagine you have a 100-dollar bill, and your friend has one too. Regardless of the bill’s condition, their value is identical and interchangeable. Cryptocurrencies and fiat currencies are fungible assets—they retain their value during exchange regardless of which specific coin or bill is involved.

Non-fungible assets are the opposite. When assets cannot be exchanged on a 1:1 basis, they fall into the non-fungible category. Each non-fungible asset carries a unique identifier—scarcity, features, and value vary. You cannot directly swap one non-fungible token for another, even if they are created by the same artist.

Non-Fungible Tokens(NFT): Digital Asset Identity Cards

NFTs are blockchain assets with a unique digital identity, providing verifiable proof of digital ownership.

In terms of application, NFTs can be artworks, music files, images, videos, virtual real estate, or in-game items. Their core characteristic is—each NFT is one-of-a-kind. Even if two NFTs look similar or are created by the same artist, they maintain separate identities on the blockchain and cannot be substituted for each other.

NFTs were initially created to protect digital creators’ rights. Artists, musicians, and content creators can record ownership of their works on the blockchain, earning rightful revenue and preventing piracy. This technology gained attention in early 2020, and by 2021, transaction volumes reached billions of dollars.

The Evolution of NFTs

The concept of NFTs predates their explosive popularity.

Back in 2012, researcher Meni Rosenfield first proposed the idea of “colored coins,” attempting to track and manage real-world asset ownership on the Bitcoin blockchain. Although limited by Bitcoin’s technical constraints, this idea laid the theoretical groundwork for later NFTs.

Key milestones:

• 2014: “Quantum” was created, becoming the first officially minted NFT—a dynamic pixel art piece by artist Kevin McCoy recorded on the Namecoin blockchain.
• 2016: Internet memes began to be minted as NFTs.
• 2017-2020: Ethereum’s ERC-721 standard gradually became the mainstream NFT standard, with creators shifting to Ethereum.
• 2017: The Cryptopunks project launched, becoming one of the earliest iconic NFT collections.
• Subsequently: Cryptokitties gained popularity due to innovative gameplay mechanics, sparking the first NFT boom.
• 2020-2021: NFTs entered mainstream auctions; works like Beeple’s sold for record prices, and more blockchains like Cardano, Solana, Tezos, and Flow joined the ecosystem.
• Post-2021: NFTs found new applications in the metaverse and virtual real estate.
• End of 2021: Social media giant rebranded as Meta, shifting focus to metaverse development.

The Triangle of Token Standards

To fully understand different token types, compare the three main standards.

( ERC-20: The Standard for Fungible Tokens ERC-20 is the earliest widely adopted Ethereum token standard, designed for fungible assets. Most cryptocurrencies follow this standard—ensuring complete interchangeability among tokens.

) ERC-721: The Standard for Non-Fungible Tokens ERC-721 underpins the largest NFT ecosystem. It defines the functionality framework for NFTs, allowing developers to create digital assets with unique attributes and add features like provenance verification.

Advantages of ERC-721: Supports rich metadata and customization, fully meeting the needs of non-fungible assets.

Limitations of ERC-721: Each transaction transfers only one NFT. To transfer 50 NFTs, 50 separate transactions are needed. This is time-consuming, causes network congestion, and significantly increases gas fees.

( ERC-1155: The Breakthrough Multi-Token Standard ERC-1155 is known as the “multi-token standard,” combining the advantages of ERC-20 and ERC-721 into a unified contract framework.

A single ERC-1155 smart contract can manage multiple token types—both interchangeable and unique assets. This greatly improves efficiency: one transaction can transfer multiple tokens simultaneously, reducing gas costs and network congestion.

Semi-Fungible Tokens)SFT(: The Bridge Between Two Worlds

Semi-fungible tokens exemplify this “dual identity” asset.

SFTs appear as fungible tokens during creation, allowing free exchange among similar tokens. But once used or meeting certain conditions, they transform into non-fungible assets, gaining unique value and identity.

Real-world analogy: Buying concert tickets, your ticket during the sale phase is fungible—tickets for the same seat row are interchangeable. After the concert, the ticket becomes a cherished souvenir, no longer usable for entry. It has transformed into a non-fungible asset—unique to you, with value determined by the concert’s rarity and popularity.

SFTs are built on Ethereum’s ERC-1155 standard, enabling a single smart contract to manage both fungible and non-fungible assets simultaneously.

) SFT Creation and Applications

SFTs can only be minted on the Ethereum blockchain via the ERC-1155 standard. Developed jointly by Enjin and Horizon Games, this standard is designed for gaming ecosystems, allowing developers to manage all in-game assets within one smart contract.

Currently, SFTs are mainly used in blockchain gaming, where in-game items can switch between fungible and non-fungible states based on player actions. As understanding of SFTs deepens, more industries are exploring their potential.

New Innovation: ERC-404 Standard

ERC-404 is a recent experimental standard introduced by anonymous developers “ctrl” and “Acme,” aiming to further break the boundaries between fungible and non-fungible.

ERC-404 allows a single token to simultaneously behave as a interchangeable unit and a unique asset depending on the scenario. This hybrid feature introduces new liquidity to the NFT market—investors can buy partial shares of an NFT instead of purchasing full ownership.

Potential advantages: Enhances NFT liquidity and opens new markets for traditionally illiquid digital assets.

Real-world risks: Since EIP is not yet officially recognized, security audits are lacking. There are risks of smart contract vulnerabilities or misuse, and some projects have already experienced rug pulls.

Despite risks, projects like Pandora and DeFrogs are actively exploring ERC-404’s possibilities, indicating ongoing market interest in hybrid token models.

Comparing NFT and SFT Operations

Practical Insights

In blockchain gaming, SFTs offer best practices. Players can initially collect tokens as fungible currency for trading, then convert them into specific weapons or gear that appreciate as their level increases. Developers manage these state changes via programmable smart contracts, ensuring economic stability—improving upon the chaos of early MMORPG inflation.

In physical asset tokenization)RWA###, SFTs show great potential. Real estate, stocks, and other traditional assets can be tokenized into fungible shares to lower entry barriers, then converted into unique assets based on conditions, balancing liquidity and ownership certainty. SFTs can also encode rights and obligations, making asset tracking and regulatory compliance more flexible.

The Hierarchical Logic of Token Standards

From Fungible to Non-Fungible to SFT, the evolution of token standards reflects a clear hierarchical progression:

1. ERC-20: Purely interchangeable, suitable for currencies
2. ERC-721: Fully unique, suitable for collectibles and art
3. ERC-1155: Flexible hybrid, suitable for diverse ecosystems
4. ERC-404: Condition-based liquidity, exploring complex market scenarios

Each standard addresses limitations of its predecessors and opens new application possibilities.

Future Outlook

Asset tokenization is becoming one of the most promising applications of blockchain technology. The NFT ecosystem has already transformed value distribution in art, gaming, and music industries, while SFTs offer opportunities for more traditional sectors.

Blockchain enables new ownership mechanisms—digital creators, artists, game developers, and traditional enterprises can redefine interactions and revenue models with these standards.

Currently focused on gaming, SFTs are expected to rapidly expand into ticketing, financial derivatives, membership systems, and more as technology matures and awareness deepens. The era of hybrid tokens has begun, and the next wave of innovation is on the horizon.