From NFT to SFT: The Evolution of Tokenized Assets

The emergence of blockchain and cryptocurrencies is no longer news, but innovation in the digital asset space continues to accelerate. Following non-fungible tokens (NFTs), a new type of tokenized asset—semi-fungible tokens (SFT)—is quietly changing the market landscape. For many, NFTs are no longer unfamiliar, while SFTs may seem somewhat new. Regardless of your current understanding, join us as we delve into the fundamental differences and application prospects of these two types of tokens.

Starting with Fungibility: Understanding Asset Exchangeability

To truly understand non-fungible tokens and semi-fungible tokens, first grasp the core concept of “fungibility.”

Fungibility refers to an asset that can be exchanged on a 1:1 basis. For example: you have a one-dollar bill, and your friend also has one. Can you exchange these two bills without affecting their actual value? The answer is yes. Whether the bills are flat or crumpled, their monetary value is identical, and they can be exchanged equivalently. Fiat currencies and cryptocurrencies both fall into this category.

Non-fungibility, on the other hand, emphasizes the uniqueness of each digital asset. This characteristic is embodied in non-fungible tokens, which act like unique digital certificates proving true ownership of an asset. You cannot exchange two non-fungible tokens on an equal basis because each has different rarity, attributes, value, and market demand.

In short: fungible assets are interchangeable, non-fungible assets are not.

Definition and Role of Non-Fungible Tokens (NFTs)

Non-fungible tokens are blockchain assets with unique digital identifiers or certificates that can verify the authenticity and ownership of digital assets. These digital assets can include artworks, music files (MP3), images (JPEG), videos (MP4), virtual real estate, and various in-game assets within blockchain-based games.

“Non-fungible” means that even if two tokens share similar features or originate from the same creator, they cannot be exchanged with each other. Each asset is one-of-a-kind, even if labeled with the same price tag in the NFT marketplace.

NFTs partly originated from the need to protect digital creators’ works—ensuring creators can monetize their labor through legitimate channels while effectively preventing piracy and infringement. Reports on NFTs began to surge in 2020, reaching billions of dollars in trading volume by the end of that year and in 2021, with market enthusiasm hitting record highs.

The Historical Context of NFTs: From Concept to Explosion

Many are surprised to learn that the core idea of NFTs existed before their breakout in 2021. Tracing back, we go to 2012—Meni Rosenfeld first proposed the concept of “Colored Coins” in an academic paper, attempting to manage and represent real-world assets on the Bitcoin blockchain. The goal was to track ownership and regulate usage rights of physical objects, giving them unique features. However, due to space limitations and the original design goals of the Bitcoin protocol, this idea was not realized on that chain, but it laid the conceptual groundwork for later NFT development.

Key milestones include:

• 2014: The first true NFT project “Quantum” was created—a pixelated octagon that changes color and shrinks rhythmically, by Kevin McCoy on the Namecoin chain.
• 2016: Internet memes began to be issued as NFTs.
• 2017-2020: Ethereum’s smart contract standards gained widespread recognition, and NFTs gradually migrated to Ethereum.
• John Watkinson and Matt Hall launched Cryptopunks on Ethereum, building on the success of Rare Pepes.
• CryptoKitties debuted during Ethereum’s largest hackathon, igniting the NFT market with their popularity.
• NFT-based games and metaverse concepts (like Decentraland) gained traction.
• 2021: High-end art NFTs appeared in major auction houses.
• Digital artist Beeple’s NFT works set price records.
• As NFT trading volume increased, more blockchain networks joined the competition (Cardano, Solana, Tezos, Flow, etc.).
• Demand for NFTs in the metaverse ecosystem surged, especially virtual real estate transactions.
• Facebook rebranded as Meta, announcing a shift toward metaverse strategies.

Since then, the market continues to evolve, with more innovative applications expected to emerge.

Current Application Fields of NFTs

Currently, NFTs are mainly adopted by the gaming, art, and music industries. While these three dominate the market, the potential applications of NFTs extend far beyond—virtually any real-world asset can be tokenized into rare collectibles, opening application possibilities across nearly all industries.

Semi-Fungible Tokens (SFT): An Innovative Middle Ground

Semi-fungible tokens are a special class of assets capable of switching between fungible and non-fungible states, representing a hybrid of the two asset types, offering users greater flexibility and diverse functionalities.

Essentially, SFTs initially exist as fungible tokens, capable of being exchanged on an equal basis within their category. They only transform into unique, non-fungible assets when actually used. If this description isn’t clear enough, let’s look at a real-world example.

Suppose you buy a concert ticket to see your favorite artist perform. During purchase, the ticket is fungible—it can be easily exchanged with other tickets in the same row. But this exchangeability disappears immediately after the concert ends. Why? Because once the ticket loses its practical use, it can no longer be exchanged with valid tickets. It transforms into a souvenir, a permanent certificate of a memorable experience, becoming a non-fungible asset that is unique to you. Its subsequent value depends on the rarity and popularity of that particular event.

SFTs are built on the ERC-1155 standard on the Ethereum blockchain. This standard has a unique advantage—it allows a single smart contract to manage multiple semi-fungible tokens. In contrast, ERC-20 is used for fungible tokens (cryptocurrencies), and ERC-721 is used for non-fungible tokens.

Construction and Technical Foundation of SFTs

Semi-fungible tokens strictly adhere to Ethereum ecosystem standards, created using the ERC-1155 standard. This standard cleverly combines features of ERC-20 (fungible assets) and ERC-721 (non-fungible assets), enabling unified management of different token types.

Origin and Promoters of SFTs

Projects like Enjin, Horizon Games, and The Sandbox collectively developed the ERC-1155 standard to efficiently manage and regulate semi-fungible tokens within gaming environments, utilizing a single smart contract to handle all operations.

Current Application Fields of SFTs

So far, semi-fungible tokens are mainly limited to the blockchain gaming industry. In this domain, they represent each in-game asset, exhibiting both fungible and non-fungible properties simultaneously. As understanding of SFTs deepens, the industry is actively exploring potential applications in other sectors.

Emerging Standard: Exploration of ERC-404

ERC-404 token standard represents an innovative direction on Ethereum, designed to integrate the features of fungible tokens (like ERC-20) and non-fungible tokens (like ERC-721 NFTs) to create new semi-fungible assets. Created by developers using the pseudonyms “ctrl” and “Acme,” this standard allows tokens to switch flexibly between states depending on the application scenario—operating as fungible units in some cases, and as unique assets in others. This hybrid property offers market flexibility, such as improved liquidity and tradable NFT shares. It can help alleviate liquidity issues faced by NFTs on traditional auction platforms.

However, ERC-404 has not yet been formally approved through Ethereum Improvement Proposals (EIP). It lacks the rigorous analysis and security audits typically accompanying official standards. This informal market introduction has raised industry concerns about token standard security, as well as risks like rug pulls or unintended consequences in token signature mechanisms within smart contracts. Nonetheless, projects like Pandora, DeFrogs, and Rug have begun experimenting with ERC-404, indicating ongoing market interest in hybrid token models. Such innovations are expected to bring breakthrough solutions to the digital asset field.

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

To fully understand the advantages and disadvantages of different standards, we need to analyze and compare them one by one.

Characteristics and Limitations of ERC-721

This Ethereum token standard dominates the current NFT market share. ERC-721 defines the functions and capabilities of tokens, providing a framework for creating and trading NFTs. To create a non-fungible token on Ethereum, one must strictly follow all rules and conditions specified by ERC-721.

Its significant advantage is that developers can attach various functionalities, such as authenticity verification and provenance proof, highlighting the uniqueness of non-fungible assets compared to fungible ones. But the disadvantages are also clear: it requires many transactions. The underlying smart contract can only transfer one NFT per transaction. To send 50 NFTs, 50 separate transactions are needed. This not only consumes time but also congests the Ethereum network, increasing transaction fees and gas costs.

Optimization of ERC-1155 Standard

In contrast, ERC-1155 (also called multi-token standard) combines features of ERC-721 and ERC-20, adding flexibility and rich functionality to created tokens. Semi-fungible tokens sit at the intersection of fungible and non-fungible assets, partially overcoming the inherent limitations of both.

For example, fungible tokens mainly face the issue of irreversible transactions—if tokens are mistakenly sent to a wallet address, they cannot be recovered. Semi-fungible tokens offer the possibility of reversible transactions, addressing human errors. Regarding the transaction volume limit of non-fungible tokens (where a smart contract can only send one NFT at a time), semi-fungible tokens provide an alternative by allowing a single smart contract to execute multiple transactions. This directly reduces transaction fees, gas costs, and network congestion.

Innovation of ERC-404 Compared to the Previous Two

ERC-404 introduces a new concept to the Ethereum ecosystem, aiming to merge the features of ERC-20 (fungible tokens) and ERC-721 (NFTs). Unlike ERC-721, which is designed specifically for unique assets, and ERC-1155, which allows a single contract to represent multiple token types (both fungible and non-fungible), ERC-404 introduces a novel idea: tokens can switch between two states depending on the application environment—operating as fungible units in some cases and as non-fungible assets in others. This dual functionality creates a new form of digital assets, combining the versatility of fungible tokens with the uniqueness of NFTs, expanding application scenarios that previous standards could not cover, and significantly enhancing liquidity capabilities.

Detailed Comparison Table of NFT and SFT Functions

At this point, you should have a basic understanding of how these two types of tokens operate. Let’s review the key points again.

NFTs operate within blockchain environments, mainly on Ethereum. They are the digital counterparts of real-world assets, serving as identity verification mechanisms that confirm data ownership and exist in various forms. Once created, NFTs cannot be duplicated. This allows artists, content creators, musicians, and business operators to receive fair value for their creative labor.

For SFTs, you might encounter scenarios like this in gaming: a token initially appears as an NFT, which can be collected to earn ten game coins (fungible currency). These coins can be traded with other players, used to buy weapons, which in turn can be converted back into non-fungible form via the NFT marketplace. As players level up, the value of weapons may increase. The state change of SFTs is driven by embedded smart contracts written by developers, not relying on external protocols. The ability to quickly switch to a fungible form makes “modifying” traditional games in multiplayer online environments possible, enabling game creators to track assets and financial status, gaining greater control over the game economy—an improvement over the uncontrolled inflation seen in early large-scale multiplayer online games. Depending on game design, the same token may represent vastly different values to users—traded as gold coins or as in-game weapons.

The Integration of SFTs with Real-World Asset Tokenization (RWA)

Semi-fungible tokens offer a unique solution for real-world asset tokenization (RWA), capable of addressing issues that purely fungible or non-fungible tokens cannot solve. By providing flexible ownership and trading methods, SFTs initially present as exchangeable shares of ownership (e.g., fractional ownership), which can transform into non-fungible forms under certain conditions, enhancing liquidity and accessibility. Additionally, these tokens can dynamically reflect changes in asset value, status, or conditions.

In facilitating the effective division of indivisible assets, SFTs lower the entry barriers for investors. They activate markets for traditionally illiquid assets, enabling trading on digital platforms. SFTs can also encode specific rights, rewards, or obligations related to RWAs, with their evolution from exchangeable to non-exchangeable states carefully designed to meet regulatory standards and asset tracking needs. Ultimately, SFTs lay the groundwork for innovative financing and investment structures, combining exchangeable liquidity with non-exchangeable uniqueness to create new investment products and opportunities.

Conclusion: The Future of Tokenization

Asset tokenization is rapidly evolving into a key trend with broad application prospects. The NFT ecosystem has already achieved disruptive transformations across multiple industries and is gaining increasing market recognition. Blockchain technology enables us to realize the authenticity of asset ownership and data protection in unprecedented ways. NFTs and SFTs are driving a wave of deep evolution, redefining how digital content creators, artists, enterprises, blockchain game developers, and players benefit, while opening new avenues for users and fans. Although SFTs are currently focused on gaming, their applications are expected to quickly expand beyond the gaming industry into various other economic sectors.