From Replaceable Tokens to NFTs: A Journey to Understanding Token Standards on Blockchain

The crypto world is witnessing a revolution in how we imagine digital asset ownership. While blockchain and cryptocurrencies have transformed finance, now non-fungible tokens (NFT) and semi-fungible tokens (SFT) are opening up entirely new possibilities. But what truly sets them apart?

Basic Concepts: Fungible or Not?

Before diving into the technology, we need to understand two fundamental concepts. Fungibility (fungibility) refers to the ability to exchange assets on an equal basis. Imagine you have a dollar bill and your friend has one too — they can be exchanged without losing value.

Conversely, non-fungibility $1 non-fungibility( indicates uniqueness. If you have a Picasso painting and I have a Van Gogh, we can’t simply swap them 1-1 because they have completely different characteristics.

Fiat currency, cryptocurrencies, Bitcoin — all are fungible. You can exchange 1 Bitcoin for another Bitcoin from someone else without any difference. The value remains the same, regardless of where the Bitcoin comes from.

NFT: Unique Digital Assets

Non-fungible tokens )NFT( represent a revolution in protecting creators’ efforts. Each NFT is a digital asset with a unique verification mark on the blockchain, proving you own it and that it is the original.

From digital art, MP3 music files, to virtual real estate in the metaverse, or one-of-a-kind items in blockchain games — NFTs can represent anything unique. It’s like owning a certificate of authenticity for a one-of-a-kind piece; no one else can recreate or copy it.

NFTs began attracting major attention in 2020, with sales reaching billions of dollars. Now, blockchains beyond Ethereum — from Solana to Cardano — also support these NFTs.

) NFT History: From “Colored Coins” to Million-Dollar Art

If you think NFTs are a recent phenomenon, think again. The idea started in 2012 when creator Meni Rosenfield introduced the concept of “colored coins” — attaching additional information to Bitcoin to track real-world items. Although Bitcoin had limitations, this idea became the precursor for what would become NFTs.

A real breakthrough came in 2014 when “Quantum” was minted — a pixelated hexagon with changing colors. Then in 2016, memes began to be minted as NFTs. But the true explosion happened when Ethereum launched the ERC-721 standard in 2017.

CryptoPunks, CryptoKitties — these projects sparked a movement. In 2021, as prestigious auction houses began selling NFT artworks and a piece by Beeple sold for a record-breaking price, NFTs officially entered the mainstream.

SFT: The Versatile Hybrid

So what is SFT? Semi-fungible tokens ###SFT( are a strange type of digital asset — they can be both fungible and non-fungible, depending on the context.

Take a concert ticket as an example. Before the concert, your ticket is fully fungible — you can exchange it for any other ticket in the same row. But after the concert ends, that ticket becomes a unique memento — proof that you attended the event. It’s no longer interchangeable because its value now depends on rarity and the concert’s popularity.

SFTs are built on Ethereum’s ERC-1155 standard, which allows a single smart contract to manage multiple types of tokens simultaneously. This is more efficient than creating separate contracts for each token type.

Ethereum Token Standards: A Detailed Comparison

) ERC-721: The Original NFT Standard

ERC-721 is the face of NFTs. It defines how non-fungible tokens operate, allowing each token to have a unique identifier and metadata. Developers favor this standard for its extensibility — you can add provenance verification and other features to make each NFT truly unique.

But it has a major drawback: technical limitations. An ERC-721 smart contract can only send one NFT per transaction. Want to send 50 NFTs? You need to perform 50 separate transactions. This congests the Ethereum network and increases gas fees.

ERC-1155: The Multi-Token Standard

To address these limitations, ERC-1155 was introduced — a standard combining the strengths of both ERC-20 ###fungible tokens( and ERC-721. With ERC-1155, a single smart contract can manage multiple tokens, allowing batch transfers. This reduces gas costs, congestion, and provides a smoother transaction experience.

This is where SFT shines. By enabling tokens to switch between fungible and non-fungible states, SFTs solve the challenges of both models.

) ERC-404: The Latecomer with Attention

The latest development is ERC-404, a new standard created by anonymous creators “ctrl” and “Acme.” ERC-404 combines features of ERC-20 and ERC-721 to allow tokens to act as interchangeable units in some cases and as unique NFTs in others.

This has enormous potential — it could increase liquidity for NFTs by enabling fractional trading. However, ERC-404 has not yet undergone the official Ethereum Improvement Proposal ###EIP( process, raising concerns about security and rug pull risks. Projects like Pandora and DeFrogs have begun experimenting with this standard, indicating growing interest in hybrid token models.

Where SFT and NFT Shine: Practical Applications

NFTs are mainly used in gaming, art, and music. Any unique asset can become an NFT — from digital paintings to rare in-game items.

In contrast, SFTs are currently dominating the blockchain gaming world. Imagine a game where you pick up a weapon. Initially, it functions as a fungible token — you can sell it, trade it, or convert it into in-game currency. But once you upgrade it enough, it becomes a non-fungible asset — a one-of-a-kind item. This gives game developers more control over in-game economies compared to traditional MMO games, where external inflation can be uncontrolled.

) RWA: The Emerging Trend for SFTs

A new area emerging is Real-World Asset Tokenization ###RWA(. SFTs offer a unique approach here. Imagine tokenizing a real estate property on the blockchain. Initially, it can be fungible — multiple investors buy shares. But under certain conditions )such as after a holding period(, it becomes non-fungible, establishing ownership or status. This opens up new financial possibilities.

Conclusion: The Future of Digital Assets

Asset tokenization is no longer just the future — it’s the present. NFTs, SFTs, and new standards like ERC-404 are reshaping how we own, trade, and value digital assets.

For artists, content creators, musicians, and blockchain game developers, these technologies offer new ways to monetize their efforts. For players and collectors, they provide genuine ownership and asset management.

SFTs may start in gaming, but their applications will extend beyond. As the blockchain ecosystem continues to evolve, we will see these hybrid tokens appearing across most industries. From real estate to insurance, supply chain management to loyalty programs — the possibilities are truly endless.