Immutable Tokens (NFTs) and Semi-Fungible Tokens (SFTs): New Asset Classes in Blockchain

After cryptocurrencies and blockchain technology, new players are emerging in the digital asset world. Non-fungible tokens (NFTs) have rapidly become mainstream, but now a more flexible asset class called semi-fungible tokens (SFTs) is on the rise. This article explores the fundamental differences, technical infrastructure, and real-world applications of these two token types in depth.

The Concept of Fungibility: Understanding the Basics

To understand how assets operate within the blockchain ecosystem, it is essential to know two fundamental concepts: fungibility and non-fungibility.

Fungible Assets: These are interchangeable assets that can be exchanged on a 1-1 basis. Imagine you have a dollar, and your friend has another dollar. Exchanging these two dollars keeps the monetary value the same. Cryptocurrencies and fiat currencies fall into this category—each unit is equivalent.

Non-Fungible Assets: Each is unique and cannot be exchanged on a one-to-one basis. Even if two NFTs have the same price, they differ in features, rarity, and history. This uniqueness uses ownership and authenticity verification mechanisms as a defense (protection) mechanism for digital assets.

Non-Fungible Tokens (NFTs): Proof of Digital Ownership

NFTs are assets with unique digital signatures on the blockchain. They verify the authenticity and ownership of digital content such as art, music files, videos, virtual land, and game items.

Basic Features of NFTs

• Uniqueness: Each NFT carries a distinct identity and metadata
• Verifiability: Blockchain technology allows tracking origin and ownership history
• Transferability: Can be bought and sold on the market
• Immutability: Cannot be copied after minting, protecting creators’ rights

NFTs enable digital creators, artists, and content producers to monetize their work while providing protection against piracy. This concept gained momentum in 2020 and reached billions of dollars in transaction volume in 2021.

Evolution of NFTs

The NFT concept has older roots:

• 2012: Meni Rosenfield introduced the “Colored Coins” concept on the Bitcoin blockchain, originating from the idea of representing real-world assets.

• 2014: The first NFT, “Quantum,” was minted by artist Kevin McCoy on the Namecoin blockchain—a pixel-based octagon that changes color.

• 2016: Meme tokens started to be created in NFT format.

• 2017-2020: Ethereum’s smart contract standards (especially ERC-721) gained popularity. Projects like Cryptopunks and Cryptokitties triggered NFT hype. Metaverse applications and games accelerated.

• 2021: NFT art sales attracted the attention of prestigious auctions. Beeple’s digital artwork sold for record prices. Different blockchains like Cardano, Solana, Tezos, and Flow began supporting NFT ecosystems.

• Today: NFTs have become fundamental in virtual real estate, collectibles, and gaming economies.

Semi-Fungible Tokens (SFTs): A Flexible Hybrid Solution

SFTs are a new class of tokens bridging the gap between fungible and non-fungible assets. An SFT initially functions as a fungible (exchangeable) asset but can transform into a non-fungible (non-exchangeable) asset under certain conditions.

( Example: Concert Ticket

Imagine you buy a ticket for your favorite artist’s concert. Before the concert, tickets in the same row are interchangeable—fungible. However, after the concert, this ticket becomes a physical NFT: proof of an unforgettable moment, a collectible item, an irreplaceable asset. SFTs provide this duality.

) Technical Infrastructure of SFTs

SFTs are created using the ERC-1155 token standard on the Ethereum blockchain. This standard combines features of ERC-20 ###fungible tokens### and ERC-721 (NFTs), allowing management of multiple SFTs within a single smart contract.

Creators of SFTs: Enjin and Horizon Games developed the ERC-1155 standard and implemented these tokens in gaming environments with The Sandbox.

In-Depth Comparison of Token Standards

( ERC-721 )NFT Standard###

• Use: Over 80% of existing NFTs
• Advantages: Developers can add extra features to tokens (e.g., provenance history proving authenticity)
• Disadvantages: Can only send 1 NFT per transaction with a single smart contract. Sending 50 NFTs requires 50 separate transactions—raising gas fees and network congestion.

( ERC-1155 )SFT Standard###

• Use: Gaming industry and metaverse applications
• Advantages: Multiple token transactions are handled within a single contract. Reduces gas fees and transaction time. Manages both fungible and non-fungible assets under one standard.
• Disadvantages: Slightly more complex structure

( ERC-404 )Next-Generation Standard###

Pseudonymous developers “ctrl” and “Acme” created ERC-404, combining features of ERC-20 and ERC-721 to offer a true hybrid token experience. It can operate as fungible under certain conditions and non-fungible under others. It enables trading of NFT fractions, solving liquidity issues.

Important Note: ERC-404 has not yet undergone the official Ethereum Improvement Proposal (EIP) process. Projects like Pandora and DeFrogs are testing this standard, but security concerns remain.

Practical Applications of NFTs and SFTs

( Real-World Scenario: Gaming Economy

In a blockchain game, a player earns a weapon in NFT form. Within the game, the weapon can be collected multiple times and used as in-game currency )fungible###. However, due to its history and rarity, it can also be a unique SFT. The player can trade this weapon with others or sell it on the marketplace—both managed independently of external protocols via smart contracts.

SFTs and Tokenization of Real-World Assets (RWA)

SFTs could revolutionize tokenization of real estate, art collections, and investment instruments. By initially representing property shares as tradable units, they provide liquidity, and under certain conditions (e.g., when legal status of the property changes), they become non-fungible. This approach:

• Reduces entry barriers: Investors can buy partial shares instead of full property
• Increases liquidity: Assets can be bought and sold outside traditional markets
• Ensures regulatory compliance: Rights and obligations can be dynamically encoded

Current Limitations and Future Outlook

Currently, SFTs are mainly applied in the gaming sector. However, as technology matures, widespread adoption in finance, real estate, insurance, and logistics sectors is expected. New standards like ERC-404 aim to address liquidity issues of NFTs—yet security and official approval remain challenges.

Conclusion

Blockchain technology elevates asset ownership and liquidation to new levels. NFTs serve as mechanisms for digital authenticity—protecting artists’ and creators’ rights. SFTs increase flexibility, enabling financial instruments, gaming economies, and real-world asset integration.

The digital asset ecosystem is rapidly evolving. NFTs offer collection and uniqueness, while SFTs bring liquidity and functionality. Both token types are foundational to blockchain economies, and with developing standards like (ERC-404), broader applications are inevitable.