NFT and SFT: An In-Depth Analysis of the Fundamental Differences Between the Two Token Models

The revolution in digital assets is unfolding at an incredible speed. Following blockchain and cryptocurrencies, non-fungible tokens(NFT) have become the market focus, and now, semi-fungible tokens(SFT) are quietly emerging, challenging our understanding of digital ownership. Many people have heard of NFTs, but the concept of SFT remains relatively unfamiliar. Regardless of your current level of understanding, let’s explore these two fundamentally different token paradigms and their profound significance together.

Understanding Fungibility: The Core Concept of Asset Interchangeability

To truly grasp the principles of non-fungible tokens and semi-fungible tokens, we first need to understand what fungibility and non-fungibility mean.

Fungible assets refer to asset classes that can be exchanged on a 1:1 basis. Imagine: if you have a 100 yuan banknote and your friend also has a 100 yuan banknote, you can exchange these two notes without changing each other’s monetary value. Whether the banknotes are brand new or slightly worn, their value remains consistent. This is why fiat currencies and cryptocurrencies are classified as fungible assets—they are interchangeable and equal in value.

Non-fungible assets, on the other hand, are entirely different; each digital asset has unique characteristics. This is the core of non-fungible tokens(NFT)—each NFT is a unique digital certificate representing proof of ownership of a specific asset. You cannot exchange one NFT for another expecting the same value because they each have different rarity, attributes, market valuation, and popularity.

In short: fungible assets are interchangeable, while non-fungible assets are absolutely non-interchangeable.

The Essence of NFTs: Digital Witness of Uniqueness and Ownership

Non-fungible tokens are digital assets built on blockchain technology, each with a unique digital identifier and identity information to prove the authenticity and ownership of the digital asset. These digital assets can take various forms, such as artworks, music files, images, videos, virtual land, or in-game items.

“Non-fungible” means these tokens cannot be substituted for each other, even if they share similar features or originate from the same creator. Each NFT is one-of-a-kind; even if their prices are labeled the same on open markets, their intrinsic value and rarity cannot be simply measured by price.

NFTs were originally created to protect digital creators’ works from piracy and ensure they can earn fair economic returns for their labor. Around 2020, news about NFTs began to attract widespread attention. By the end of 2020 and into 2021, the NFT market’s trading volume surged to billions of dollars.

The Development History of NFTs: From Marginal Idea to Mainstream Phenomenon

Few people realize that the concept of non-fungible tokens existed before 2021, when it became a media focus.

Tracing back, in 2012, researcher Meni Rosenfeld first proposed the concept of “colored coins” in an academic paper. This was an innovative application designed for the Bitcoin blockchain, aimed at managing and representing real-world objects on the blockchain, tracking their provenance, and regulating their usage rights through tokens, making them unique assets. However, due to technical limitations of the Bitcoin blockchain itself and its initial design goals, this idea was not realized. Nonetheless, it laid the theoretical groundwork for later NFT development.

Subsequent key milestones include:

• 2014: The first NFT artwork “Quantum” was created—a pixelated octagon that changes color and rhythmically contracts, created by developer Kevin McCoy on the Namecoin blockchain.
• 2016: Internet memes began to be issued as NFTs.
• 2017-2020: Ethereum smart contract standards gained widespread recognition, and NFT projects migrated en masse to the Ethereum blockchain.
• Era of Ethereum Prosperity: Creators developed iconic projects like CryptoPunks, built on ERC standards, followed by the emergence of CryptoKitties, which further ignited the NFT market.
• Integration with Metaverse: NFT games and virtual worlds flourished.
• 2021 Art Auction Revolution: Famous artworks started being sold as NFTs at high-end auction houses, with some breaking historical price records.
• Multi-Chain Ecosystem Expansion: Several blockchain platforms beyond Bitcoin (such as Cardano, Solana, Tezos, Flow, etc.) launched their own NFT ecosystems.
• Virtual Asset Valuation: NFTs in the metaverse became extremely scarce and valuable as virtual real estate.
• Tech Giants Enter: Major technology companies adjusted strategies, focusing on virtual worlds.

Since then, the NFT ecosystem has continued evolving, with ongoing exploration of innovative applications.

Practical Applications of NFTs

Currently, NFTs are widely adopted in gaming, art, and music industries. Although these three fields still dominate, the scope of NFT applications can almost cover any industry—any physical asset can be tokenized into a rare collectible.

Semi-Fungible Tokens(SFT): A New Interpretation of Flexibility

Semi-fungible tokens represent an innovative breakthrough in asset design—they are tokens capable of flexibly transitioning between fungible and non-fungible states. This hybrid characteristic offers unprecedented flexibility and functionality in the expression of digital assets.

From a technical perspective, semi-fungible tokens initially exist as fungible tokens and can be exchanged with other similar tokens within their category. However, when actually used, they transform into non-fungible tokens with unique value.

Let’s understand this with an intuitive example: Suppose you purchase a concert ticket. Before the event, this ticket is a fungible asset because it can be exchanged with any other ticket in the same row. But once the concert ends, the ticket’s fungibility disappears. You can no longer exchange it as a valid ticket because it has lost its original function. At this point, the ticket becomes a souvenir—a collectible with personal value and emotional significance—an entirely non-fungible asset whose value is determined by its rarity and the popularity of the event.

Semi-fungible tokens are built on the Ethereum blockchain’s ERC-1155 standard. This is a unique standard that allows a single smart contract to support multiple semi-fungible tokens, differing from the ERC-20 standard for fungible tokens and the ERC-721 standard for non-fungible tokens.

Creation Mechanism of SFT

Semi-fungible tokens are specifically created on the Ethereum blockchain using the ERC-1155 standard, which combines the best features of ERC-20 (for fungible assets) and ERC-721 (for non-fungible assets).

Origin and Evolution of SFT

The ERC-1155 standard was developed by a well-known blockchain project team to manage and regulate semi-fungible tokens within a single smart contract framework, primarily aimed at the development of blockchain gaming ecosystems.

Application Fields of SFT

Currently, semi-fungible tokens are mainly limited to the blockchain gaming industry. Each in-game asset can exhibit both fungible and non-fungible characteristics simultaneously. As understanding of SFT deepens, the industry is also exploring other sectors that could benefit from SFT’s flexibility.

The New Standard: The Emergence of ERC-404

ERC-404 token standard represents a groundbreaking innovation on the Ethereum blockchain, aiming to integrate the features of fungible tokens (like ERC-20) and non-fungible tokens (like ERC-721) to create truly semi-fungible tokens.

Designed by anonymous developers “ctrl” and “Acme,” this standard endows tokens with dual nature: depending on the usage scenario, tokens can operate as fungible units or as unique assets. This hybrid mechanism introduces more flexible market dynamics—improved liquidity and fractionalized NFT trading capabilities. It directly addresses the liquidity challenges faced by NFTs under traditional auction models.

However, the ERC-404 standard has not gone through the formal process of Ethereum Improvement Proposal(EIP). It lacks the official standard’s usual formal analysis and security audits. This informal market release has raised concerns about the security and potential misuse risks of the standard, including rug pulls or unintended consequences of smart contract token signature mechanisms.

Nevertheless, multiple blockchain projects have begun exploring the possibilities of ERC-404, indicating increasing industry interest in hybrid token models capable of delivering innovative solutions.

Comparing the Three Main Standards: ERC-404 vs ERC-721 vs ERC-1155

ERC-721 Standard

ERC-721 is the most widely adopted token standard on Ethereum, covering the majority of existing NFTs. This standard defines the functions and capabilities of tokens, enabling developers to create and trade NFTs. When creating non-fungible tokens on Ethereum, all rules specified by ERC-721 must be strictly followed.

The main advantage of ERC-721 is that developers can add extra features to tokens, such as proof of authenticity and provenance, which highlight the uniqueness of non-fungible assets compared to fungible ones.

However, this standard has notable drawbacks: transaction efficiency issues. The underlying smart contract can only send one NFT per transaction. Sending 50 NFTs requires 50 separate transactions, which is time-consuming, congests the Ethereum network, and increases transaction fees and gas costs.

ERC-1155 Standard

In contrast, ERC-1155 (also known as the multi-token standard) combines features of ERC-721 and ERC-20, providing excellent flexibility and functionality for token creation.

Semi-fungible tokens occupy a position between fungible and non-fungible tokens, partially addressing the limitations of both asset classes and further strengthening their respective advantages. For example, the main limitation of fungible tokens is the irreversibility of transactions—if mistakenly sent to an incorrect wallet, the transaction cannot be undone. Semi-fungible tokens allow transaction reversals in case of human error.

For non-fungible tokens, transaction quantity limits are a key issue. ERC-1155 solves this by allowing a single smart contract to execute multiple transactions, reducing transaction fees, gas costs, and network load.

Unique Aspects of ERC-404

ERC-404 tokens adopt an innovative approach, unifying the functions of ERC-20 (fungible tokens) and ERC-721 (non-fungible tokens). Unlike standards dedicated solely to non-fungible tokens (ERC-721) or the improved ERC-1155 (which supports multiple token types within a single contract), ERC-404 introduces a new concept.

It allows creating tokens that can operate as fungible tokens under certain conditions and as non-fungible tokens under others, truly integrating the best features of both worlds. This dual functionality opens up new possibilities for digital assets, combining the versatility of fungible tokens with the uniqueness of NFTs, providing users with broader use cases and improved liquidity options.

Core Differences and Application Comparison of NFTs and SFTs

Practical Operation Mechanisms of NFTs and SFTs

So far, you have a basic understanding of how these two tokens operate. Let’s review the key points.

NFTs operate on the blockchain, primarily on Ethereum. They are unique digital representations of real assets, serving as identity mechanisms to verify ownership. They can take various forms, such as art, music, images, videos, virtual land, or in-game items.

Importantly, NFTs cannot be duplicated after creation. This means artists, content creators, musicians, and business owners can obtain genuine economic returns for their creative labor.

For SFTs, you might encounter scenarios like: an in-game token initially exists as an NFT, which can be collected to exchange for ten units of in-game currency (a fungible asset). These game coins can then be traded with other players, used to purchase weapons, and transformed back into NFT form. As players level up, the value of these weapons increases.

The conversion of SFTs is managed by built-in “smart contracts,” programmed by game developers, not controlled by external protocols. This easy conversion capability allows developers to “reshape” the gaming experience in multiplayer online environments. Game creators can track assets and financial status, gaining greater control over the game economy, and avoiding uncontrolled inflation seen in early large-scale multiplayer games.

According to game mechanics, the same token may have different values for different users—whether traded in the NFT marketplace as game currency or existing as weapon equipment.

Semi-Fungible Tokens and Tokenization of Real Assets(RWA)

Semi-fungible tokens provide a unique solution for tokenizing real assets(RWA), addressing issues faced by fully fungible or non-fungible tokens.

SFTs offer flexibility in ownership and trading, initially representing assets as tradable fractional shares (e.g., ownership stakes), which can under certain conditions transform into non-fungible forms, enhancing liquidity and accessibility. They can also dynamically reflect changes in asset value, status, or conditions.

SFTs facilitate effective fractional ownership of indivisible assets, lowering barriers to investor entry. They improve liquidity of traditionally low-liquidity assets, enabling trading on digital platforms. SFTs can encode specific rights, rewards, or obligations related to RWAs, with their conversion from fungible to non-fungible designed to meet regulatory requirements and asset tracking needs.

Finally, SFTs foster innovative financing and investment structures, combining fungible liquidity with non-fungible uniqueness, opening doors to new investment products and opportunities.

Summary

Tokenization of assets is rapidly becoming an unstoppable trend, opening new possibilities across multiple industries. The NFT ecosystem is quickly transforming various industry landscapes and gaining broader market recognition. Blockchain technology enables us to implement and present ownership and data protection in unprecedented ways.

NFTs and SFTs represent a wave of transformation, redefining how digital content creators, artists, enterprises, blockchain game developers, and players profit, while also providing consumers and fans with greater accessibility. Although SFTs are currently mainly limited to gaming assets, they are expected to soon find applications beyond gaming, spanning multiple fields.