Non-Fungible Tokens (NFTs) and Swap Tokens: The Difference in the Blockchain Ecosystem

Digital finance is developing at a rapid pace that many of us find hard to keep up with. After blockchain and cryptocurrencies became familiar concepts, the world of digital assets entered a new phase with the emergence of non-fungible tokens (NFT). Now, a new hybrid asset called semi-fungible token (SFT) is attracting increasing attention from the crypto community. If you are still confused about these two types of tokens, the following article will help you understand better.

Basic Concepts: Fungible and Non-Fungible Assets

To grasp the concepts of NFT and SFT, we first need to understand the “fungibility” (fungibility) property of assets.

Fungible assets are those that can be exchanged 1-1 without losing value. Imagine you have a dollar bill and your friend also has another dollar bill. Regardless of the condition of the bills, (new or old), their value remains the same and can be exchanged. Cryptocurrencies and fiat money are both fungible.

Non-fungible assets are highly unique assets. Each such asset differs in characteristics, value, rarity, and popularity. You cannot simply exchange two non-fungible tokens because each is unique, even if created by the same person.

In summary: fungible assets can be freely exchanged, while non-fungible assets cannot.

What is a (NFT) (Non-Fungible Token)?

NFTs are digital assets with a unique digital identity recorded on the blockchain, proving authenticity and ownership rights. They can be artworks, music, images, videos, virtual real estate, or in-game items.

Each NFT is unique, even if priced the same on the market. They cannot be swapped for each other because each has its own distinct attributes.

NFTs are developed to protect the creative rights of digital content creators, allowing them to monetize their work without worrying about copyright infringement. Since 2020, NFTs have suddenly surged, with trading volumes reaching billions of dollars by the end of 2021.

The Development History of NFTs

The concept of non-fungible tokens has origins much deeper than many imagine. In 2012, Meni Rosenfield introduced “colored coins” on the Bitcoin blockchain—an unusual but pioneering idea to represent real-world assets on the blockchain. However, Bitcoin’s limitations prevented this idea from being realized, but it laid the foundation for the later development of NFTs.

Key milestones:

• 2014: “Quantum” was created—the first NFT minted, a pixelated octagon by Kevin McCoy on the Namecoin blockchain.
• 2016: Memes began to be minted as NFTs.
• 2017-2020: The ERC-721 standard on Ethereum became popular, and NFTs migrated to Ethereum.
• CryptoPunks were created, followed by CryptoKitties, which caused a craze and spurred NFT development.
• 2021: NFTs appeared at prestigious auction houses. Beeple’s artwork was sold for a record price.
• Many other blockchains (Cardano, Solana, Tezos, Flow) started supporting NFTs.
• NFTs became highly sought after in the metaverse, especially virtual real estate.
• Facebook rebranded as Meta, prioritizing metaverse development.

Practical Applications of NFTs

Currently, NFTs are mainly applied in three fields: gaming, art, and music. However, the potential applications of NFTs are not limited to these three industries—any real asset can be encoded into a rare collectible item on the blockchain.

What is a (SFT) (Semi-Fungible Token)?

A semi-fungible token is a hybrid asset that can switch between fungible and non-fungible states depending on the use case.

Illustrative example: When you buy a concert ticket, it is initially a fungible token because you can exchange it with any other ticket in the same row. But after the concert ends, the ticket becomes non-fungible—a unique memento of yours, not interchangeable with other concert tickets. Its value will depend on the rarity and popularity of that event.

SFTs are built on the ERC-1155 standard on Ethereum, allowing a single smart contract to support multiple SFTs, unlike ERC-20 (fungible tokens) and ERC-721 (non-fungible tokens).

How to Create SFTs and Pioneers

SFTs are minted on Ethereum using the ERC-1155 standard, combining features of ERC-20 and ERC-721.

Enjin and The Sandbox are pioneers, creating the ERC-1155 standard to manage semi-fungible tokens in gaming, using a single smart contract.

Current Applications of SFTs

Currently, SFTs are mainly used in the blockchain gaming industry, representing all in-game assets that can be both fungible and non-fungible. However, increasing awareness of SFTs comes with expectations to expand their application into other industries.

The ERC-404 Token Standard: The Latest Innovation

The ERC-404 token standard represents a groundbreaking approach in Ethereum, aiming to combine the features of (ERC-20) fungible tokens with (ERC-721) non-fungible tokens to create semi-fungible tokens.

Developed by anonymous creators “ctrl” and “Acme,” ERC-404 allows the creation of tokens that can function both as fungible units and as unique assets, depending on the use case.

This hybrid nature offers a more flexible market, increasing liquidity and enabling fractional trading of NFTs, addressing liquidity challenges faced by NFTs previously.

However, ERC-404 has not yet undergone the official Ethereum Improvement Proposal (EIP) process. It lacks the rigorous auditing typical of official standards. This unofficial release has raised concerns about security and rug pull risks.

Despite this, projects like Pandora, DeFrogs, and Rug have begun exploring ERC-404, indicating growing interest in hybrid token models.

Comparison: ERC-404 vs. ERC-721 vs. ERC-1155

ERC-721 Standard

ERC-721 is the most common standard for NFTs today. It defines the functions and capabilities of tokens, allowing NFTs to be traded and created. Developers can add new features such as provenance verification and increased uniqueness.

Main drawback: A single smart contract can only send one NFT per transaction. To send 50 NFTs, 50 separate transactions are needed—time-consuming, causing network congestion and higher gas fees.

ERC-1155 Standard

ERC-1155 (multi-token standard) combines ERC-721 and ERC-20, offering greater flexibility. Semi-fungible tokens sit in the middle, addressing the limitations of both types.

Benefits:

• Fungible tokens: allow for recoverable transactions if sent to the wrong address.
• Non-fungible tokens: smart contracts can perform multiple transactions, reducing gas fees and network congestion.

How is ERC-404 Different?

ERC-404 introduces a new concept: tokens that can operate as fungible tokens under some conditions and as non-fungible tokens under others.

This dual functionality creates a new form of digital asset, combining the flexibility of fungible tokens with the uniqueness of NFTs, offering more use cases and better liquidity.

NFT vs. SFT: A Comprehensive Comparison

How NFT and SFT Work

NFTs operate mainly on the Ethereum blockchain (,) representing the digital proof of ownership of real-world assets. They serve as authentication mechanisms, proving data ownership. Once minted, NFTs cannot be duplicated, enabling artists, musicians, and creators to receive accurate value for their work.

SFTs are more flexible. In gaming, a token can start as a unique NFT but, when collected, transform into in-game currency (token replacement). You can use this currency to buy weapons or items, then convert it back into an NFT via the NFT marketplace. The integrated smart contract, programmed by developers, facilitates these changes.

This capability helps “convert” games into multiplayer online environments, allowing developers to better control assets and game economies compared to uncontrolled inflation in previous MMOs.

SFT and Real-World Asset Tokenization (RWA)

Semi-fungible tokens offer a unique approach to tokenizing real-world assets (RWA), addressing the challenge of fully fungible or non-fungible tokens.

SFTs provide ownership flexibility by representing parts of the original asset that can be either fungible (e.g., real estate shares() or non-fungible under certain conditions, increasing liquidity and accessibility.

They enable fractional ownership efficiently, lowering participation barriers for investors. SFTs enhance liquidity for traditional assets that are hard to trade by allowing digital platform transactions.

The transition process from fungible to non-fungible states can be designed to comply with regulations and asset tracking, opening up innovative financial structures and investment products.

Conclusion

Asset tokenization is rapidly becoming a central issue in the digital ecosystem. The NFT ecosystem is quickly expanding the scope of applications across various industries.

Blockchain technology enables the realization and representation of asset ownership rights as well as data protection in unprecedented ways. NFTs and SFTs bring a wave of innovation, redefining profit models for digital content creators, artists, businesses, blockchain game developers, and gamers.

While SFTs are currently mainly used in the gaming industry, they are soon expected to find opportunities in many other fields, broadening the horizons of digital assets.