NFT and SFT: Understanding the Two Types of Blockchain Tokens and Their Different Roles

The digital finance world is undergoing an unprecedented transformation. After blockchain and cryptocurrencies dominated the market, NFTs quickly became a trending keyword, and now, a new asset class called semi-fungible tokens (SFTs) is gaining increasing attention. If you’ve just heard of NFTs or are still unclear about SFTs, this article will help you understand the key differences between these two types of tokens and why they matter.

Basic Concepts: Fungible and Non-Fungible Assets

To understand NFTs and SFTs, we need to start with two fundamental concepts: fungibility and non-fungibility.

Fungibility refers to assets of equal value that can be exchanged on a 1-to-1 basis without loss of value. Imagine you have a $1 bill and your friend also has another $1 bill. You can exchange them without any loss because both bills hold the same value. The same applies to cryptocurrencies and fiat money.

Non-fungibility, on the other hand, is entirely different. It refers to unique assets, each with its own distinct characteristics. You cannot exchange two non-fungible tokens (NFTs) because each one differs in rarity, attributes, value, and popularity.

In summary: fungible assets are highly interchangeable, while non-fungible assets are unique.

Non-Fungible Tokens (NFTs): Essential Points to Know

NFTs are digital assets with a unique digital signature or identity on the blockchain. This signature proves the authenticity and ownership rights of that digital asset. These assets can include digital art, music, images, videos, virtual land, or blockchain game items.

The most important distinction is: each NFT is unique. Even if two NFTs have the same market value, you cannot exchange them directly. This is precisely why NFTs were created—to protect the rights of digital creators, enabling them to monetize their work without copyright infringement.

NFTs started gaining attention in 2020, with transaction volumes reaching billions of dollars. This growth continued into 2021 and beyond as the industry matured.

History of NFT Development

The concept of NFTs actually emerged in 2012 when Meni Rosenfeld introduced the idea of “colored coins” on the Bitcoin blockchain—ways to represent real-world items on the blockchain. Although this idea was not implemented on Bitcoin itself, it laid the groundwork for future NFTs.

In 2014, the first NFT was minted—called “Quantum,” a pixelated octagon created by artist Kevin McCoy on the Namecoin blockchain. Since then, NFTs have gone through several development phases:

• 2016: Memes began to be minted as NFTs
• 2017-2020: Ethereum became the primary platform for NFTs, replacing Bitcoin due to more flexible smart contract standards
• 2017-2018: Cryptopunks and Rare Pepes appeared, followed by CryptoKitties—early and famous NFT projects
• 2021: NFT art sales started at major auction houses; Beeple achieved record prices for NFT art
• 2021+: Other blockchains like Solana, Cardano, Tezos, Flow, etc., joined the scene; NFTs became popular in the metaverse
• 2021: Facebook rebranded as Meta, emphasizing metaverse development

Currently, the NFT industry is mainly focused on gaming, art, and music, though NFTs have the potential for broader applications across most industries.

Semi-Fungible Tokens (SFTs): The Perfect Hybrid

SFTs are assets capable of flexible transition between fungibility and non-fungibility. In other words, SFTs combine both types of assets, offering greater flexibility than standalone NFTs or fungible tokens.

Initially, SFTs exist as fungible tokens that can be easily exchanged. However, when used in specific contexts, they transform into non-fungible tokens with unique attributes.

To clarify, imagine buying a concert ticket. Before the event, your ticket is a fungible token—you can exchange it for any other ticket in the same seat category. But after the concert, the ticket no longer has exchange value. It becomes a unique souvenir—an NFT—and its value depends on the rarity of the event.

SFTs are built on the ERC-1155 standard on the Ethereum blockchain. This standard uniquely supports a single smart contract managing multiple SFTs, unlike ERC-20 (for fungible tokens) or ERC-721 (for NFTs).

Origins and Applications of SFTs

SFTs were developed by Enjin and Horizon Games, which created the ERC-1155 standard to manage semi-fungible assets in blockchain gaming, including The Sandbox. Today, SFTs are mainly used in blockchain gaming, representing all in-game assets that can be both fungible and non-fungible.

However, growing awareness of SFTs is opening up possibilities for applications in other industries.

Token Standards: ERC-721, ERC-1155, and ERC-404

ERC-721 Standard

ERC-721 is the original standard for NFTs on Ethereum. It defines the functions and capabilities of NFTs, enabling their transfer and creation.

Advantages of ERC-721 include the ability for developers to add unique features, such as provenance verification. The main drawback is transaction limitations: a single ERC-721 smart contract can only transfer one NFT per transaction. To transfer 50 NFTs, you must perform 50 separate transactions, increasing fees and network congestion.

ERC-1155 Standard

ERC-1155 combines features of ERC-721 and ERC-20, offering greater flexibility and functionality. Semi-fungible tokens are created based on this standard, positioned between fully fungible and non-fungible tokens.

ERC-1155 addresses the limitations of both previous standards:

• For fungible tokens, the main issue is non-reversible transactions. ERC-1155 allows reversible transactions in case of errors.
• For NFTs, the problem is that a smart contract can only send one token at a time. ERC-1155 enables batch transactions, reducing gas fees and network congestion.

ERC-404 Standard: The Latest Innovation

ERC-404 is a novel approach aiming to combine features of ERC-20 (fungible tokens) and ERC-721 (NFTs) to create semi-fungible tokens. Developed by anonymous creators “ctrl” and “Acme,” this standard allows tokens to behave as fungible under certain conditions and as non-fungible under others.

This hybrid nature offers more market flexibility, enhances liquidity, and enables fractional trading of NFTs—addressing liquidity challenges often faced by NFTs.

However, ERC-404 has not yet undergone the official Ethereum Improvement Proposal (EIP) process, lacking thorough review and auditing. This raises concerns about security and potential rug pulls. Nonetheless, projects like Pandora, DeFrogs, and Rug are exploring ERC-404’s potential, indicating growing interest in hybrid token models.

Detailed Comparison: SFT vs NFT

Real-World Operation

NFTs operate on blockchain platforms, mainly Ethereum. They serve as digital representations of real-world assets, functioning as proof of ownership. Once minted, NFTs cannot be duplicated, ensuring artists, content creators, and musicians receive accurate monetary value for their work.

SFTs work differently. In blockchain gaming, you might start with an NFT, then collect it to earn in-game currency (a fungible token). You can trade that currency with other players or use it to buy weapons—at which point it may revert to an NFT on the marketplace. For example, a weapon can become more valuable as you level up.

The integrated smart contract of SFTs, programmed by developers, automatically facilitates these transformations. The ability for a token to easily switch between fungible and non-fungible states helps “convert” traditional games into multiplayer environments where developers can track assets and cash flows, offering better control over the game economy compared to uncontrolled inflation in older MMOs.

SFTs and Real-World Asset Tokenization (RWA)

SFTs offer a unique approach to tokenizing real-world assets (RWA), addressing challenges related to fully fungible or non-fungible tokens.

They provide flexible ownership and trading by representing portions of original assets that can be either fungible or non-fungible under certain conditions, thus increasing liquidity and accessibility for investors.

SFTs can also dynamically represent the value, status, or changing conditions of an asset. They enable fractional ownership of assets that are typically indivisible, lowering participation barriers. Additionally, SFTs enhance liquidity for traditional assets that are hard to trade digitally by enabling digital transactions.

They can encode rights, rewards, or obligations related to RWAs, with conversion processes designed to comply with regulations. Ultimately, SFTs facilitate innovative financial structures, combining the liquidity of fungible tokens with the uniqueness of non-fungible tokens, opening new investment products and opportunities.

Conclusion: NFTs and SFTs Shaping the Future of Digital Assets

Asset tokenization is rapidly becoming a major focus in the digital finance world. The NFT ecosystem is evolving swiftly, with SFTs and NFTs driving innovation, redefining profit models for digital content creators, artists, blockchain game developers, gamers, and communities.

Blockchain technology makes the implementation and representation of ownership possible in unprecedented ways. While NFTs are mainly used in gaming, art, and music, SFTs are primarily focused on in-game assets, but both will soon find broader applications across various industries.

The difference between SFTs and NFTs is not just theoretical—it’s foundational for how we will manage, own, and trade digital assets in the future.