Understanding the Two Worlds of Crypto Assets: An In-Depth Comparison of Fungible and Non-fungible Tokens

The ecosystem of digital assets is evolving at an astonishing speed. From the initial blockchain and cryptocurrencies, to the subsequent NFT wave, and now the emergence of SFT (Semi-Fungible Tokens), each wave of innovation is reshaping our understanding of asset ownership and liquidity. This evolution is not just technological innovation but also represents a major trend toward asset tokenization.

Understanding Digital Assets from the Perspective of Fungibility: The Essential Difference Between Fungible and Non-Fungible

To understand the difference between NFTs and SFTs, one must first grasp the core concepts of fungibility and non-fungibility.

What are Fungible Assets?

Fungible assets refer to asset classes that can be completely exchanged on a 1:1 basis. Imagine you have a 100 yuan banknote, and your friend also has a 100 yuan banknote. Whether they are brand new or slightly wrinkled, their value is identical, and they can be exchanged directly. This is the characteristic of fungibility—units are fully interchangeable and equivalent. Cryptocurrencies like Bitcoin and Ethereum, as well as fiat currencies like USD and EUR, are all fungible assets.

The Uniqueness of Non-Fungible Assets

In contrast, non-fungible assets emphasize uniqueness. Each non-fungible asset has different scarcity, features, value, and recognition. In the world of non-fungible tokens, two seemingly similar assets cannot be exchanged on an equal footing because they carry unique identifiers.

In short: fungible assets can be exchanged with each other, while non-fungible assets each have their own characteristics and are difficult to compare directly.

NFT: Ownership Certificates in the Digital Creative Era

Non-Fungible Tokens (NFTs) are assets on the blockchain with a unique digital marker or identification code, used to prove the authenticity and ownership of digital assets. These digital assets are diverse—ranging from digital artworks, music files, images, videos, virtual real estate, to virtual items in blockchain games.

The key feature is non-fungibility—even if two NFTs are created by the same artist or look identical, they cannot be exchanged on the market. Each NFT is unique, even if priced the same.

The emergence of NFTs has a vital mission: to protect the labor of digital creators, enabling artists, musicians, and content creators to monetize their works while preventing piracy and infringement. The NFT topic gained popularity starting in 2020, and by 2021, it became unstoppable, with trading volumes reaching billions of dollars.

The Evolution Path of NFTs: From Concept to Explosion

You might not realize that the history of NFTs predates their moment of explosive popularity by a long shot. In 2012, developer Meni Rosenfeld first proposed the concept of “Colored Coins” in a paper, aiming to manage and represent real-world items on the Bitcoin blockchain, marking ownership and usage rights via tokens to give them uniqueness. However, due to Bitcoin’s technical limitations and original design, this idea was not realized, but it laid the groundwork for later NFTs.

Major Development Milestones:

• 2014: The first true NFT artwork “Quantum” was created—a pixel octagon that changes color and can stretch like an octopus. Creator Kevin McCoy completed this on the Namecoin blockchain.

• 2016: Memes in internet culture began to be issued as NFTs.

• 2017-2020: Ethereum’s smart contract standards matured gradually, and the NFT ecosystem migrated to this more powerful blockchain. Projects like Cryptopunks and Rare Pepes sparked market enthusiasm.

• The turning point of Cryptokitties: This game launched during an Ethereum hackathon, gained fame, and completely ignited the NFT market.

• Rise of gaming and metaverse: NFT games and metaverse projects like Decentraland launched successively.

• 2021 Art Auction Year: Major auction houses began accepting NFT artworks for bidding, with works like Beeple’s setting record prices.

• Multi-chain ecosystem expansion: Cardano, Solana, Tezos, Flow, and other blockchains joined the NFT camp, breaking Ethereum’s monopoly.

• Virtual real estate boom in the metaverse: Virtual real estate NFTs became investment hotspots, and Meta (formerly Facebook) rebranded and invested heavily in the metaverse strategy, marking mainstream recognition.

The Practical Application Map of NFTs

Currently, NFT applications mainly focus on gaming, art, and music industries. However, in theory, any physical asset can be tokenized into a rare collectible, making the potential uses of NFTs limitless.

SFT: Flexible Boundaries Between Fungible and Non-Fungible

Semi-Fungible Tokens (SFTs) are a class of assets capable of switching flexibly between fungible and non-fungible states. They combine features of both asset types, offering greater flexibility and functionality.

Initially, SFTs behave as fungible tokens, exchangeable with similar tokens on a 1:1 basis. But when used or under certain conditions, they transform into assets with unique value, becoming non-fungible.

A Practical Example:

Imagine you buy a concert ticket. Before the event, the ticket is fungible—you can easily exchange it with other tickets in the same row, with equal value. After the concert, the ticket’s fungibility disappears. You can no longer exchange it for a valid ticket because it has lost its functional purpose. At this point, it becomes a souvenir or a unique memory carrier. Its value is now determined by the scarcity and fame of the event.

SFTs are built based on Ethereum’s ERC-1155 standard. The innovation of this standard is that a single smart contract can support multiple SFTs, contrasting with the management of individual tokens via ERC-20 (fungible) and ERC-721 (non-fungible).

Creation Mechanism and Origin of SFT

SFTs are entirely created on the Ethereum blockchain using the ERC-1155 standard, which cleverly combines features of ERC-20 and ERC-721.

Originally designed by teams like Enjin and Horizon Games for gaming ecosystems, the goal was to manage and regulate semi-fungible tokens within a single smart contract, facilitating game assets in platforms like The Sandbox.

Currently, SFTs are mainly used in blockchain gaming, representing game items that can be both fungible and non-fungible. As understanding deepens, more industries are exploring how to integrate SFT functionalities.

Emerging Standard: The Appearance of ERC-404

ERC-404 is an innovative token standard in the Ethereum ecosystem, aiming to merge ERC-20 (fungible) and ERC-721 (non-fungible) features to create a new generation of semi-fungible tokens. Developed by anonymous developers “ctrl” and “Acme,” this standard allows tokens to operate as interchangeable units in certain scenarios and as unique assets in others, achieving a perfect blend of both.

This hybrid feature opens new forms of digital assets—possessing the liquidity and universality of fungible tokens while maintaining the uniqueness of NFTs, with broader application scenarios and liquidity potential than previous standards.

Comparing the Three Main Standards: ERC-721, ERC-1155, and ERC-404

The Status and Limitations of ERC-721

ERC-721 is the dominant standard for existing NFTs, defining token functionality and interaction capabilities, and serving as the foundation for most NFT creation and trading. To create true NFTs on Ethereum, strict adherence to ERC-721 rules is required.

Advantages: Developers can add extra features such as authenticity verification and provenance tracking, emphasizing the uniqueness of NFTs compared to fungible assets.

Disadvantages: Each smart contract can only handle one NFT transfer at a time. To send 50 NFTs, 50 separate transactions are needed. This is time-consuming and congests the Ethereum network, increasing gas fees.

The Innovation of ERC-1155: Multi-Token Standard

ERC-1155 (Multi-Token Standard) successfully combines ERC-721 and ERC-20, providing flexibility and diverse functionalities for created tokens.

Semi-fungible tokens bridge the gap between fungible and non-fungible assets, alleviating limitations of both. For example:

• Pain points of fungible tokens: Transactions are irreversible. If sent to the wrong wallet, they cannot be recovered. SFTs improve this by allowing transaction revocation in case of human error.

• Pain points of non-fungible tokens: Single transaction limit. SFTs enable multiple transactions within one contract, reducing transaction and gas costs, easing network load.

The Different Approach of ERC-404

ERC-404 takes an innovative path in the Ethereum ecosystem, blending ERC-20 and ERC-721 features. Unlike standards focused solely on non-fungibility (ERC-721) or enhanced flexibility (ERC-1155), ERC-404 introduces a new concept: tokens can freely switch between fungible and non-fungible states based on application scenarios, achieving a seamless integration.

This dual functionality opens new forms of digital assets—combining the liquidity and universality of fungible tokens with the uniqueness of NFTs, with application scenarios and liquidity potential far exceeding previous standards.

The Positive Competition Between NFT and SFT: Working Principles and Application Scenarios

Deep Dive into Operational Mechanisms

NFTs mainly operate on Ethereum and other blockchains, representing real assets digitally. They serve as identity verification mechanisms, proving data ownership, with diverse forms. The key point is that once created, NFTs cannot be duplicated—allowing artists, creators, musicians, and enterprises to earn rightful economic returns.

SFTs are more complex. Imagine in a game, you acquire an SFT equipment that initially exists as an NFT. Through collection actions, you can convert it into 10 game coins (fungible assets). Later, you can trade these coins with other players or buy new equipment, then revert to a unique asset on the NFT marketplace. As players upgrade, the same equipment may appreciate in value.

The state transition of SFTs is controlled by embedded smart contracts, not external protocols. Tokens can easily switch to fungible forms, enabling developers to “reconstruct” early game economies in multiplayer online environments—addressing issues like uncontrolled inflation common in early MMOs. The same token can have different values depending on the game mechanics: traded as currency or used as equipment.

The Potential of SFT in Real Asset Tokenization

SFTs offer a unique perspective for tokenizing real-world assets (RWA), addressing the limitations of fully fungible or non-fungible tokens. They provide ownership and trading flexibility, initially appearing as fractional shares of assets (like equity), then transforming into non-fungible forms under certain conditions, enhancing liquidity and accessibility.

SFTs can dynamically reflect changes in asset value, status, or conditions. In practice:

• They support fractional ownership of indivisible assets, lowering investment barriers
• Improve tradability of traditional illiquid assets on digital platforms
• Encode specific rights, rewards, or obligations related to RWAs
• State transitions can be designed to meet regulatory requirements and asset tracking
• Enable innovative financing and investment structures, combining fungible liquidity with non-fungible uniqueness

Looking Ahead

Asset tokenization is becoming a significant trend, opening vast possibilities. The NFT ecosystem is driving profound changes across multiple industries and gaining increasing recognition. Blockchain technology allows us to realize asset ownership and data protection in unprecedented ways.

NFTs and SFTs together are fueling a wave of evolution, reshaping revenue models for content creators, artists, game developers, and players, while enhancing accessibility for users and fans. Although SFTs are currently mainly active in gaming, their applications are expected to expand into entertainment, finance, supply chain, and other industries, ushering in broader development prospects.