SFT significance in the cryptocurrency ecosystem: How semi-fungible tokens are changing blockchain

The financial world is moving intentionally faster than we can adapt. After the wave of popularity of NFTs in the crypto market, a new category of digital assets has emerged — semi-fungible tokens (SFT), which offer a more flexible approach to managing digital objects on the blockchain. While NFTs captured attention with their uniqueness, the significance of SFT lies precisely in its ability to transform depending on the context of use.

Fundamental Differences: from Fungibility to Uniqueness

To understand the meaning of SFT and its relation to NFTs, it is necessary to start with the basic concept. Fungibility is the property of an asset being interchangeable. Imagine two dollars: they are exactly the same in value and can be exchanged without issues. Cryptocurrencies and regular money are classic examples of fungible assets.

The opposite situation arises with non-fungible assets. Two portraits by different artists, even if they cost the same, are not interchangeable — each has its own individuality, history, and value for collectors. It was in this realm that NFTs grew in 2020-2021, bringing billions of dollars in trading volume to the crypto market.

What Are Non-Fungible Tokens (NFT)?

Non-fungible tokens are digital assets, each with a unique identifier on the Ethereum blockchain or another distributed ledger. These can be artworks, music files, video content, virtual real estate, or gaming items. Each NFT is one-of-a-kind, and even if two tokens have similar characteristics, they cannot be exchanged as equivalents.

NFTs were primarily developed to protect the rights of digital creators — artists, musicians, game developers. Blockchain technology allows confirming authorship and ownership, preventing piracy and ensuring fair monetization of creative work.

Historical Evolution: From Concept to Mass Adoption

You might be surprised to learn that the idea of NFTs existed earlier than it seems. In 2012, Manny Rosenfeld proposed the concept of “colored coins” for the Bitcoin blockchain — a system for managing real assets on a distributed ledger. This idea was ahead of its time, but Bitcoin’s limitations prevented its development.

A real breakthrough occurred in 2014 when artist Kevin McCoy created the first NFT called “Quantum” on the Namecoin blockchain — a pixelated octagon that changed color. However, widespread recognition of NFTs came only after 2017, when the Ethereum ecosystem became sufficiently developed to manage complex smart contracts.

Projects like Cryptopunks (2017) and Cryptokitties (2018) became turning points. Cryptokitties popularized NFTs so much that they created a real breakthrough for the category. Games and metaverses (such as Decentraland) began building on NFT technology. By 2021, prestigious auction houses started selling NFT art, and Beeple’s work set a record price, confirming the legitimacy of the new market.

Alongside NFTs on Ethereum, other blockchains (Cardano, Solana, Tezos, Flow) began actively implementing NFT functionality, democratizing access to the technology.

Where and How Are NFTs Used?

Today, NFTs are most recognized in three segments: gaming, art, and music. The gaming industry uses NFTs for unique in-game items that can be traded on secondary markets. Artists and musicians use NFTs to protect copyright and receive fair compensation. However, the potential of NFTs extends far beyond these areas — theoretically, any real asset can be tokenized.

Semi-Fungible Tokens (SFT): A Hybrid Solution for Complex Scenarios

The significance of SFT lies precisely in its hybrid nature. A semi-fungible token is a class of assets that can exist simultaneously as interchangeable and non-interchangeable depending on the usage state. This allows solving problems that arise when applying pure NFTs or pure fungible tokens.

Let’s consider a specific example: you buy a ticket to a concert of your favorite artist. Before the event, this ticket can be exchanged for any other ticket of the same level in the hall — it functions as a regular interchangeable token. However, after the concert, the ticket loses this property. It transforms into a unique collectible item, a souvenir, which can no longer be exchanged but retains emotional and potential monetary value for its owner.

Technical Implementation: ERC-1155 and Its Role

SFTs are implemented on Ethereum through the ERC-1155 standard, created by Enjin and Horizon Games as a universal solution for managing semi-fungible assets. This standard is a hybrid between ERC-20 (standard for fungible tokens and cryptocurrencies) and ERC-721 (standard for NFTs).

The technical advantage of ERC-1155 lies in efficiency. Unlike ERC-721, where one smart contract can transfer only one NFT per transaction (which means 50 separate operations to send 50 items), ERC-1155 allows one contract to manage multiple tokens simultaneously. This significantly reduces gas fees and network load on Ethereum.

ERC-404: A New Wave of Innovation

Recently, a new standard emerged — ERC-404, developed by anonymous creators “ctrl” and “Acme”. This standard offers an innovative approach to combining ERC-20 and ERC-721 functionality, allowing tokens to dynamically transform between fungible and non-fungible states.

Projects like Pandora, DeFrogs, and Rug have already begun experimenting with ERC-404. However, it is important to note that this standard has not undergone the official Ethereum Improvement Proposal (EIP) process and lacks formal auditing, which introduces certain security risks and the potential for unforeseen consequences.

Comparing Standards: How They Work Differently

ERC-721 (classic NFT standard):

• Each token has a unique identifier
• Developers can add authorization and authenticity verification
• Main drawback: one transaction per NFT, which is costly for bulk operations

ERC-1155 (semi-fungible tokens):

• One smart contract manages multiple asset types simultaneously
• Transactions can be reverted in case of errors (unlike the irreversibility of ERC-20)
• Significantly lower fees and less network load
• Flexibility in representing assets that combine fungibility with uniqueness

ERC-404 (experimental hybrid):

• Dynamic transformation between fungibility and uniqueness
• Improved liquidity and the ability to trade parts of an NFT
• Solves liquidity issues inherent in classic NFTs
• Not officially approved, thus carries technical risks

Practical Application of SFT: From Theory to Reality

Currently, SFTs are actively used in the blockchain gaming industry. In-game items can start as a regular (fungible asset), then transform during use into a unique weapon or artifact (non-fungible asset). This allows developers to more flexibly control the game economy, prevent excessive inflation, and create a real link between the rarity of items and their value.

For example, a player can complete ordinary quests and earn 10 game dollars (fungible currency). Then, they exchange this currency for a unique weapon on the NFT marketplace. When the player reaches a higher level, this same weapon becomes more valuable and influential. All of this is managed by a smart contract embedded by the developer.

SFT and Tokenization of Real Assets (RWA)

The most promising application of SFT is evident in the context of tokenizing real assets. SFTs allow representing a real asset — say, real estate (— initially as fractional securities )fungible units for investment(, which can then transform into specific ownership rights )unique conditions(. This increases liquidity of traditionally illiquid assets and lowers entry barriers for small investors.

SFTs also address regulatory challenges: transitioning from fungible to non-fungible states can be programmed to comply with legal requirements and track assets.

The Future: Beyond Gaming

Although current dissemination of SFTs is limited to the gaming industry, the range of potential applications is much broader. Event tickets, coupons, loyalty programs, insured contracts — all these scenarios could be much more effective with the use of hybrid SFT architecture.

Blockchain technology revolutionizes the representation of ownership of assets and data protection as previously unimaginable. NFTs and SFTs bring true evolution, redefining profitability for digital creators, artists, developers, and users. Although SFTs are still mostly associated with gaming, soon these hybrid tokens will find applications across the entire economy, from finance to culture.

Final thought: if yesterday the world was enchanted by NFTs as a symbol of uniqueness, today the flexibility of SFTs and their ability to adapt to various scenarios promise a real revolution in managing digital assets on the blockchain.