In-depth Analysis: From NFT to SFT, and then to ERC-404—The Evolution Path of Blockchain Tokenization Standards

The speed of iteration in the crypto finance world is astonishing. After the first wave triggered by blockchain and cryptocurrencies, NFTs quickly gained market recognition for their uniqueness. Now, a more flexible type of digital asset—Semi-Fungible Tokens (SFT)—is quietly rewriting the rules of digital ownership. Furthermore, the emerging ERC-404 standard aims to break the constraints of existing classifications. Whether you’re a seasoned crypto veteran or a newcomer exploring the space, understanding the technological evolution of token standards is essential.

Starting from the Basics: The Fundamental Difference Between Fungibility and Non-Fungibility

To truly grasp the core differences between Non-Fungible Tokens (NFTs) and Semi-Fungible Tokens (SFTs), you first need to understand the basic concepts of “fungible” and “non-fungible.”

Fungible assets are relatively simple—they follow the 1:1 complete equivalence exchange principle. Imagine you have a dollar bill and your friend has a dollar bill. Regardless of the physical condition (flat or wrinkled), they are completely equal in value and can be exchanged seamlessly. This is why fiat currencies and most cryptocurrencies are considered fungible assets.

Non-fungible assets are entirely different. Each non-fungible asset carries unique attributes. In the world of NFTs, even if two tokens come from the same creator and have similar visual features, their value differs due to rarity, historical background, market recognition, and other factors. Two NFTs can never be truly exchanged on a 1:1 basis with complete equivalence.

In other words: fungible assets emphasize interchangeability, while non-fungible assets emphasize uniqueness.

The Development of NFT Standards: A Decade from Theory to Reality

Origins of the NFT Concept

Many mistakenly believe NFTs emerged in 2021, but this is a misconception. The theoretical foundation of non-fungible tokens dates back to 2012. At that time, researcher Meni Rosenfeld proposed the concept of “colored coins”—a Bitcoin blockchain-based scheme aimed at mapping real-world assets onto the chain and regulating their usage rights via tokens. Although this idea was cutting-edge, limitations inherent in Bitcoin’s design and functionality prevented its realization at the time.

However, it provided a direction for later developments.

From 2014 to 2021: Accelerated Evolution of the NFT Ecosystem

2014—Internet user Kevin McCoy created the first verifiable NFT “Quantum” on the Namecoin blockchain. It is a pixelated octagon that changes colors and exhibits octopus-like movements. Although this creative work was largely ignored at the time, it officially marked the beginning of the NFT era.

2016—Internet meme culture began issuing NFTs. This shift signaled NFTs moving from an abstract technology to mainstream culture.

2017-2020—Ethereum’s (ETH) smart contract standards were optimized and gained widespread recognition. Many NFT projects migrated to the Ethereum ecosystem. John Watkinson and Matt Hall launched CryptoPunks after the popularity of Rare Pepes, becoming pioneers widely recognized later. Meanwhile, CryptoKitties debuted at an Ethereum hackathon, with explosive growth causing network congestion.

2020-2021—NFT ecosystem experienced explosive growth. Demand for gaming NFTs and virtual assets in the metaverse surged, with projects like Decentraland gaining attention. Top artworks began selling at traditional auction houses as NFTs, with Beeple’s work setting record sales.

At the same time, multiple blockchains such as Cardano, Solana, Tezos, and Flow launched their own NFT ecosystems. Meta rebranded itself and shifted corporate strategy toward the metaverse.

The Practical Application Landscape of NFTs

Currently, NFTs are deeply rooted in three fields: gaming, digital art, and music creation. In these areas, NFTs serve as tools for ownership verification, anti-piracy, and direct creator monetization, becoming indispensable technical solutions. But the potential of NFTs extends far beyond these fields—any real-world asset with scarcity or uniqueness can theoretically be tokenized.

The Rise of SFTs: A Hybrid Solution Born for Flexibility

What Are Semi-Fungible Tokens

Semi-Fungible Tokens (SFT) are a class of digital assets with dual identities. They can switch between “fungible” and “non-fungible” states under certain conditions, offering greater application flexibility than single-type assets.

This concept may sound abstract, but a daily example clarifies it—concert tickets.

Suppose you buy a ticket for your favorite artist’s concert. Before the event, your ticket can be exchanged with other tickets in the same row—at that moment, the ticket is fungible. After the concert, the ticket loses its exchange value and becomes a unique souvenir. Its value now depends on the concert’s popularity, the date’s significance, and your personal memories. It has transformed into a non-fungible asset.

The Technical Foundation of SFTs: ERC-1155 Standard

SFTs are implemented via the ERC-1155 standard in the Ethereum ecosystem. This standard’s innovation lies in allowing a single smart contract to manage multiple SFTs simultaneously, unlike ERC-721 (designed for individual NFTs) which requires handling each separately, or ERC-20 (optimized for fungible tokens) which lacks support for diversity.

The ERC-1155 standard was developed by Enjin and Horizon Games for gaming ecosystems, later adopted by projects like The Sandbox.

Current Applications and Future of SFTs

Currently, SFTs are mainly used in blockchain gaming—each in-game asset can be traded as a fungible token at one stage and as a unique item at another. The industry generally sees huge potential for SFTs in event tickets, membership cards, limited-time coupons, and similar areas.

Combining SFTs with Real-World Asset Tokenization (RWA)

Semi-fungible tokens show unique advantages in real-world asset tokenization (RWA). Through SFTs, real assets like real estate, artworks, or business rights can be divided into multiple initially fungible shares, lowering investment barriers. These shares can transform into non-fungible forms under certain conditions (e.g., holding periods, transfer restrictions), enhancing market liquidity.

This hybrid model can also automatically reflect value fluctuations as asset states change, support complex rights encoding (dividends, voting rights), and flexibly adjust token attributes according to regulatory requirements—features that single-type tokens cannot provide.

The Emergence of ERC-404: An Radical Experiment to Break Duality

What Is ERC-404

ERC-404 is an experimental standard proposed in 2024 within the Ethereum community by anonymous developers “ctrl” and “Acme.” Its core goal is to dissolve the boundary between ERC-20 (fungible) and ERC-721 (non-fungible), creating a new type of asset that balances liquidity and uniqueness.

Compared to the strict binary of ERC-721 and ERC-1155, ERC-404 allows a single token to dynamically change its properties based on market conditions and usage scenarios. This addresses a key challenge faced by traditional NFTs—lack of liquidity. In traditional auctions, NFTs are difficult to trade in fractions, but ERC-404 enables investors to buy fractional shares, expanding market participation.

Risks and Future of ERC-404

It must be acknowledged that ERC-404 has not undergone formal review through the Ethereum Improvement Proposal (EIP) process. In contrast, ERC-721 and ERC-1155 have been rigorously vetted and audited by the community. The informal release of ERC-404 raises concerns about its security—risks like rug pulls, smart contract signature flaws, etc., need to be tested in practice.

Nevertheless, this new standard has attracted early projects like Pandora, DeFrogs, and Rug, indicating a genuine market demand for hybrid token models.

A Direct Comparison of the Three Major Standards

ERC-721: The Cornerstone of NFT Standards

ERC-721 is the foundation of the current NFT ecosystem, supporting most issued non-fungible tokens. As a protocol standard, it defines the boundaries of NFT functionality, regulating minting, trading, and transferring.

Its advantages are clear—developers can add extra features (like authenticity verification, provenance tracking) within the ERC-721 framework, emphasizing each asset’s uniqueness.

Its disadvantages are also prominent—each transaction involving a single NFT requires a separate smart contract call. Transferring 50 NFTs at once results in 50 individual transactions, causing network congestion, high Gas fees, and delays.

ERC-1155: Flexibility of Multi-Token Standard

ERC-1155 (also known as the multi-token standard) is a hybrid of ERC-721 and ERC-20. Since semi-fungible tokens borrow features from both, it can partially mitigate their limitations.

Specifically:

• For issues like irreversible transactions in fungible tokens, ERC-1155 offers conditional revocation mechanisms, allowing remedies for errors (like sending to wrong address).
• For NFT transaction bottlenecks, ERC-1155 enables handling multiple token transfers in a single operation, significantly reducing Gas costs and network load.

ERC-404: The Boundary Breaker’s Ultimate Attempt

The core innovation of ERC-404 is true dynamic property transformation. Unlike ERC-1155’s “hybrid but separate” approach, ERC-404 achieves “seamless integration”—the same token can freely switch between exchangeable and non-exchangeable states depending on the scenario.

This dual functionality theoretically opens new asset design spaces—investors can enjoy the liquidity benefits of fungible tokens while maintaining the rarity premium of NFTs. However, this innovation also introduces untested systemic risks.

A Complete Comparison Table: NFT vs. SFT—Functions and Applications

Practical Operation Mechanisms of NFT and SFT

How NFTs Work

Technically, NFTs operate on public blockchains like Ethereum. Each NFT is a digital certificate of ownership for a specific asset. This certificate is non-reproducible and indivisible. Once minted, no copies can be created, which is the fundamental reason NFTs provide value for creators (illustrators, musicians, designers, entrepreneurs)—their works are protected by true property rights rather than being arbitrarily copied.

The Hybrid Nature of SFTs

In gaming scenarios, SFT operation can be understood as follows: a player obtains a token initially representing a special piece of equipment. This token can be transferred to others (traded as a fungible asset). But once used for upgrades, synthesis, or activating special functions, it transforms into a non-fungible form, gaining personalized attributes and becoming non-transferable in a simple manner.

This transformation is pre-programmed into the smart contract by game developers, not relying on external protocols. It grants game designers finer control over the economy, effectively solving issues like rampant inflation faced by early MMORPGs. The same token can have vastly different valuations at different stages—being worth 10 units as currency, or doubling in value as a legendary item.

Tokenization and Asset Ownership Rebuilding

Fundamentally, asset tokenization is becoming a core driver of financial innovation. Blockchain technology enables unprecedented ways to record, verify, and transfer asset ownership.

NFTs and SFTs are two key tools in this revolution, rewriting how content creators, artists, game developers, investors, and consumers interact economically. While SFTs are currently mainly applied in gaming, their potential across industries is emerging—from supply chain transparency and real estate fractional investment to copyright management and carbon credit trading.

The appearance of standards like ERC-404, though still requiring time to establish secure operation, clearly points toward a future with greater flexibility, liquidity, and complex application scenarios.

The future blockchain asset world will inevitably be an ecosystem with multiple standards coexisting, where different use cases will drive the development of various technical solutions. For participants seeking to seize opportunities in this ecosystem, understanding the core differences, applicable scenarios, and risk features of these standards is fundamental.