From Non-Fungible to Flexible Swap: An In-Depth Analysis of the Differences and Applications of NFT and SFT

When we talk about the digital asset revolution, an unavoidable topic is non-fungible tokens. But did you know? Before the NFT boom, this concept had already been quietly developing in the blockchain space for several years. Now, a new type of asset—semi-fungible tokens (SFT)—is changing our understanding of digital ownership.

Understanding Interchangeability: Starting from Basic Concepts

To truly understand the essence of non-fungible tokens, we need to clarify what “interchangeability” means.

In traditional finance, interchangeability refers to assets that can be exchanged on a 1:1 basis of equal value. For example: a hundred-dollar bill in your hand and a hundred-dollar bill your friend holds—regardless of whether they have been folded or worn, their value is exactly the same and they can be exchanged directly. All fiat currencies and mainstream cryptocurrencies possess this characteristic—they are fully interchangeable.

But when it comes to non-interchangeable assets, the situation is entirely different. Imagine two paintings—even if they are by the same artist and have similar styles, due to differences in rarity, features, historical value, and other factors, they cannot be exchanged on a 1:1 basis at the same price. This is the core characteristic of non-fungible assets.

The Birth and Evolution of Non-fungible Tokens

Non-fungible tokens (NFTs) are essentially digital assets on the blockchain with a unique identity. From artworks, music files, and videos to virtual land and game items, almost anything can be marked as an NFT. The uniqueness of these tokens lies in—they are non-replicable, each with its own distinct value.

The original intention behind NFTs was pure: to protect the rights of digital creators. In an era of rampant internet piracy, NFTs provide proof of ownership that cannot be tampered with, allowing artists, musicians, and content creators to truly control their works and profit from them.

NFT’s Historical Context

Although NFTs experienced explosive growth in 2021, the concept appeared long before that.

Early Exploration Phase (2012-2016)

In 2012, developer Meni Rosenfeld first proposed the concept of “colored coins” in a paper. This idea aimed to represent and manage real-world assets on the Bitcoin blockchain by assigning different features to different tokens to achieve uniqueness. Although Bitcoin’s technical limitations prevented this idea from being realized at the time, it laid the theoretical groundwork for later NFTs.

In 2014, Kevin McCoy created the first widely recognized non-fungible token—“Quantum”—on the Namecoin blockchain. This pixelated octagonal artwork would change color and rhythmically contract like an octopus. Although it looks primitive now, it was revolutionary at the time.

Large-Scale Adoption Phase (2017-2021)

Starting in 2017, the Ethereum smart contract standards quickly gained popularity. The emergence of ERC-721 paved the way for large-scale NFT applications. The famous CryptoPunks project launched in 2017, followed by CryptoKitties debuting at an Ethereum hackathon, which sparked massive interest in the NFT market.

2021 marked a turning point for NFTs. Major auction houses began showcasing NFT artworks, with Beeple’s digital art fetching record-breaking prices. That same year, Facebook rebranded as Meta, announcing its entry into the metaverse, further fueling public enthusiasm for NFTs.

Multi-Chain Ecosystem Stage (2022 to Present)

NFTs are no longer limited to Ethereum. Blockchains like Cardano, Solana, Tezos, and Flow have launched their own NFT standards and ecosystems, competing for market share. Virtual real estate has become a hot asset in the metaverse, and gaming and art platforms have supported a multi-billion dollar industry.

NFT Application Domains

Currently, NFTs are most active in three fields: gaming, art, and music. But this is far from the whole picture. Any industry that requires proof of rarity and ownership could adopt NFTs—from virtual real estate representation, to limited-edition digital fashion by brands, to sports memorabilia.

Between the Two: In-Depth Analysis of Semi-fungible Tokens

If NFTs represent complete uniqueness, then semi-fungible tokens (SFT) carve out an intermediate path.

SFT Core Mechanism

Semi-fungible tokens are a class of digital assets that can flexibly switch between interchangeable and non-interchangeable states. Sounds complicated? Let’s illustrate with a common example.

Suppose you buy a concert ticket. Before the event, this ticket is essentially interchangeable—you can exchange it with another ticket in the same row without losing value. But after the event, the situation changes. The ticket now becomes a unique souvenir, witnessing a special performance. Its value is now determined by the rarity and popularity of that event, and it can no longer be simply exchanged.

This is the brilliance of SFT: the same token can exhibit completely different characteristics at different stages of its lifecycle.

SFT Technical Foundation

Semi-fungible tokens are built on Ethereum’s ERC-1155 standard. This standard’s innovation lies in allowing a single smart contract to manage multiple types of tokens, which can be either interchangeable or non-interchangeable. In contrast, ERC-20 handles only fungible tokens, and ERC-721 is dedicated to non-fungible tokens. The advent of ERC-1155 addressed the limitations of previous standards.

ERC-1155 was developed jointly by Enjin and Horizon Games, aiming to provide more flexible asset management solutions for blockchain gaming. Platforms like The Sandbox are early adopters of this standard.

How SFT Improves Existing Systems

In the traditional world of interchangeable tokens, a major flaw is the irreversibility of transactions. If you accidentally send cryptocurrency to the wrong wallet address, it’s lost forever. The reversible transaction feature of SFT can correct such human errors.

In the world of non-fungible tokens, another serious issue is transaction inefficiency. To transfer 50 NFTs in bulk, the traditional ERC-721 standard requires 50 separate transactions, which consumes a lot of time and incurs high gas fees, putting pressure on the Ethereum network. SFT allows multiple transactions to be executed within a single smart contract, significantly reducing transaction costs and network load.

SFT in Gaming Applications

Currently, SFT is mainly used in blockchain gaming. Imagine a game scenario: you acquire an equipment-type SFT. Initially, this equipment can be traded within the game like virtual currency. But after you use and upgrade it to a certain level, it gains unique attributes and history, becoming a rare, non-exchangeable item.

This flexibility provides game developers with unprecedented economic management capabilities. Unlike the unlimited inflation in early MMORPGs, blockchain games can precisely control in-game economy through the dynamic features of SFT, benefiting both players and developers.

The Emergence of ERC-404

In early 2024, a new token standard, ERC-404, unexpectedly entered the crypto community. Although it did not go through the official Ethereum Improvement Proposal (EIP) process, it attracted widespread attention.

ERC-404 Innovation

ERC-404 attempts to do something—partially—by combining the capabilities of ERC-20 (interchangeable tokens) and ERC-721 (non-fungible tokens). Created by anonymous developers “ctrl” and “Acme,” this standard allows tokens to seamlessly switch between interchangeable and non-interchangeable states, depending on the application scenario.

This hybrid nature offers significant advantages: it improves liquidity issues in the NFT market, allowing users to trade fractional NFTs, injecting new vitality into traditional auction-based trading models.

Risks and Uncertainties of ERC-404

However, the unofficial status of ERC-404 raises serious security concerns. Lacking formal analysis and security audits, this standard is vulnerable to misuse. Hidden bugs in smart contracts, rug pull risks, or unforeseen consequences of token signature mechanisms are all issues to watch out for. Nonetheless, projects like Pandora and DeFrogs have begun experimenting with this standard, indicating strong market interest in this innovative hybrid model.

In-Depth Comparison of the Three Standards

ERC-721: The Pioneer of NFTs

This standard underpins the vast majority of existing non-fungible tokens. ERC-721 defines the functions and capabilities of tokens, allowing developers to create and trade NFTs. Additional features like authenticity verification and provenance proof can be added.

However, ERC-721 has a critical flaw: low transaction efficiency. Each transaction transfers only one NFT. For batch processing? It requires multiple transactions, leading to network congestion and soaring gas fees.

ERC-1155: The Multi-Token Standard

ERC-1155 (also known as multi-token standard) combines the advantages of ERC-721 and ERC-20. Semi-fungible tokens, by switching between two states, partially solve their respective limitations:

• For interchangeable tokens, ERC-1155 supports revocable transactions, reducing the risk of permanent loss due to incorrect address input.

• For non-interchangeable tokens, ERC-1155 allows multiple token transfers within a single smart contract, greatly lowering transaction costs and network load.

ERC-404: The Differentiated Solution

ERC-404’s uniqueness lies in its true dual functionality. Unlike ERC-1155, which switches between states, ERC-404 enables a single token to simultaneously or alternately exhibit interchangeable and non-interchangeable features based on conditions. This injects unprecedented liquidity into the NFT market but also introduces unknown risks.

Practical Comparison of NFT and SFT

Operational Mechanism Explained

NFTs operate on blockchain (mainly Ethereum), representing real assets in a unique digital form. Once created, NFTs are non-copyable, ensuring artists, content creators, and businesses can fairly earn from their work.

SFTs present more complex scenarios. Imagine a game where you acquire an SFT item equivalent to 10 game coins. You can trade these coins like regular currency. But after using them to purchase weapons and upgrading to a high level, the weapon becomes a rare, personalized, non-interchangeable asset. Its value now depends on your game progress and the weapon’s special attributes.

The key point: this transformation of SFTs is driven by embedded smart contracts, entirely set by game developers, without relying on external protocols. This grants the game ecosystem full control over its internal economy.

The Future of SFT and Real Asset Tokenization (RWA)

Semi-fungible tokens open new possibilities for tokenizing real-world assets (RWA). Traditional interchangeable or non-fungible tokens each have limitations, but SFT’s hybrid features offer a new path.

For example, real estate ownership could initially be divided into interchangeable shares, lowering entry barriers for investors. These shares can be freely traded on the market, increasing liquidity. When certain conditions are met (such as completion of construction or lease agreements), these shares could transform into fixed, non-exchangeable ownership certificates, satisfying regulatory requirements and ensuring asset traceability.

SFTs can also encode specific rights, rewards, or obligations. A real-world asset represented as an SFT could automatically execute contractual terms, or reflect real-time changes in asset value, status, or conditions. This opens the door for digitizing high-value assets like real estate, art, and commodities.

Summary: The Future of the Tokenization Wave

Asset tokenization is becoming an unstoppable trend. Non-fungible tokens have already caused disruptive changes in art, gaming, and collectibles, while SFTs are opening doors to more industries.

Blockchain technology enables us to realize ownership and data security in unprecedented ways. NFTs and SFTs are redefining profit models for digital creators, artists, game developers, and players, while breaking down participation barriers for users and fans.

Although SFTs are currently mainly rooted in the gaming industry, this is just the beginning. As understanding of this mechanism deepens, we expect to see SFTs in supply chains, insurance, real estate, and finance. The future of tokenization has only just begun.