Interchangeability and Uniqueness in Digital Assets: NFT, SFT, and ERC-404 Explained

The crypto world is constantly expanding with new concepts. If previously the main discussion was about the difference between Bitcoin and altcoins, now the crypto community actively discusses the classification of digital assets. At the forefront are three concepts that are changing the understanding of ownership on the blockchain: non-fungible tokens (NFT), semi-fungible tokens (SFT), and the new ERC-404 standard. Although these terms may sound confusing, at their core lies a simple question: what does fungible mean in the context of digital assets?

Asset Fungibility: Understanding the Basics

To understand NFT and SFT, it is necessary to first grasp the essence of fungibility. This concept determines whether one asset can be exchanged for another while maintaining the same value.

Let’s take a simple example: two US dollars. Regardless of the condition of the bills, one dollar always equals one dollar. These are called fungible assets — cryptocurrencies, fiat money, fuel. They are interchangeable in a 1:1 ratio.

The opposite situation applies to unique objects. Two paintings by the same artist can have very different prices. Here, each asset has special characteristics, rarity, and value. This understanding of fungible mean is crucial for understanding the digital economy.

On the blockchain, these principles materialize as tokens that acquire their unique nature through smart contracts and metadata.

Non-Fungible Tokens (NFT): Digital Stamps of Uniqueness

NFTs are digital assets with unique identifiers on the blockchain that confirm ownership rights and authenticity. They cannot be considered interchangeable since each token represents a specific object with special properties.

NFT formats are diverse: digital art pieces, music compositions, images, videos, land parcels in virtual worlds, rare items in games. The main function is to give creators and artists the opportunity to monetize their work without fear of piracy.

Demand for NFTs surged sharply in 2020-2021, bringing billions of dollars in trading volume. Digital works were sold at prestigious auctions, reaching record prices. Today, NFTs are used in the gaming industry, collecting, and metaverse environments.

Origin and Evolution of NFTs on the Blockchain

The idea that NFTs are exclusively a 21st-century phenomenon is mistaken. The concept dates back to 2012 when Manny Rosenfeld proposed the idea of “colored coins” for Bitcoin. Although Bitcoin lacked sufficient capabilities for implementation, this foundation became the basis for development.

In 2014, the creation of the first true NFT called “Quantum” on the Namecoin blockchain took place. It was a pixelated octagon that changed color.

2017-2020 marked a breakthrough. Ethereum with its powerful smart contracts became the home for NFTs. Projects like Cryptopunks and Cryptokitties gained widespread popularity. Cryptokitties became one of the first “games” demonstrating the real potential of NFTs.

In early 2021, the level of prestige reached new heights. Digital art sales began in prestigious auction houses. Additional blockchains — Cardano, Solana, Tezos, Flow — started developing their own NFT ecosystems. Facebook rebranded as Meta, making the metaverse a priority.

Semi-Fungible Tokens (SFT): A Hybrid Approach

In contrast to NFTs, SFTs occupy a middle ground between interchangeable and non-interchangeable assets. These are assets that can change their status depending on the context of use.

Practical example: you buy a ticket to a concert. Until the event occurs, the ticket is a fungible asset — it can be exchanged for any other ticket in the same row. After the concert, the ticket loses its function as an entry tool but gains value as a collectible souvenir. Now, it is a unique asset with value determined by rarity and event popularity.

On the blockchain, SFTs are implemented via the ERC-1155 standard on Ethereum. This standard allows a single smart contract to manage both fungible and non-fungible tokens, providing developers with flexibility.

ERC-1155 was developed jointly by Enjin and Horizon Games for the game The Sandbox. The standard addresses issues present in previous versions: it allows multiple tokens to be sent in one transaction, reducing gas fees and network load.

Current applications of SFTs are limited to the gaming industry — in-game assets, limited-use items, loyalty programs. However, their future potential is much broader.

ERC-404: A Revolution in Token Standards

Recently, a new player appeared — the ERC-404 standard. Developed by anonymous creators under the pseudonyms “ctrl” and “Acme,” this standard aims to combine the best aspects of ERC-20 (fungible tokens), ERC-721 (NFT), and ERC-1155 (SFT).

The main innovation of ERC-404: tokens can function as interchangeable units and simultaneously as unique assets depending on certain conditions. This creates a new level of flexibility. For example, fractional trading of NFTs becomes possible — assets can be divided and traded in parts but then reassembled into a whole unique token.

The hybrid nature of ERC-404 also addresses the liquidity problem that has long plagued NFTs. Traditional auction models often leave assets illiquid. ERC-404 allows continuous trading and capital movement.

Important caution: unlike ERC-721 and ERC-1155, ERC-404 has not undergone the official Ethereum Improvement Proposal (EIP) process. It lacks formal auditing, raising concerns about security. Projects like Pandora, DeFrogs are already experimenting with this standard, but its legal and technical status remains a topic of debate.

Comparison of the Three Standards: ERC-721, ERC-1155, ERC-404

Tokenization of Real Assets: SFTs Find New Life

Semi-fungible tokens expand horizons beyond gaming. They become key in tokenizing real-world assets (RWA) — the process where physical objects (real estate, securities, raw materials) receive digital representations.

SFTs initially allow representing an asset as a fungible share (stocks, shares), facilitating fractional ownership. People can invest smaller amounts. However, under certain conditions, these shares can acquire uniqueness, for example, upon reaching a certain value or completing contractual conditions.

This solves the critical liquidity problem of traditional indivisible assets. Real estate, art collections, manufacturing capacities — all can be tokenized, traded, and tracked on the blockchain with greater flexibility.

Additionally, SFTs can encode specific rights, rewards, and obligations related to the asset, complying with regulatory requirements. Transitioning from fungibility to uniqueness can be programmed to adhere to legislation.

How Fungibility Understanding Changes the Game

In practical trading, understanding fungible mean is critical for choosing the right tool. If you are collecting digital art — NFT is indispensable. If you are developing a game with an economy where players trade resources and rare items — SFT is the optimal choice. If you are exploring innovative models of RWA or fractional assets — ERC-404 becomes an interesting experimental platform.

Conclusion: Evolution Continues

The world of tokenized assets is rapidly evolving. From the simple concept of NFTs to hybrid models like ERC-404 — each stage expands blockchain capabilities.

Tokenization allows creators, artists, game developers, and investors to gain control over digital ownership on an unprecedented scale. NFTs legitimized unique digital assets. SFTs added flexibility. ERC-404 offers new horizons.

Although SFTs are currently mainly used in gaming, they will inevitably find applications in other industries. Tokenization of real assets will drive the next stage of crypto expansion.

A blockchain-based financial system where assets can be simultaneously fungible and unique, liquid and scarce — this is not science fiction but the next chapter of the digital economy.