Understanding the Core Differences Between NFTs and Semi-Fungible Tokens

The digital asset landscape has evolved dramatically over the past few years. First came blockchain and cryptocurrencies. Then NFTs captured mainstream attention. Now, semi-fungible tokens (SFTs) are emerging as a powerful hybrid solution that combines properties of both fungible and non-fungible assets. While many understand NFTs intuitively, the concept of SFTs—and how it differs from traditional NFTs—remains less clear. Let’s break down these two token types and explore their practical implications.

Fungibility and Non-Fungibility: The Foundation

To grasp NFT vs SFT distinctions, we must first understand what makes an asset fungible or non-fungible.

Fungible assets are perfectly interchangeable. Consider two one-dollar notes: they have identical monetary value regardless of condition. You can swap them without any loss. Fiat currencies and most cryptocurrencies operate this way—each unit is equal and replaceable.

Non-fungible assets, by contrast, are unique and cannot be substituted 1-to-1. Each possesses distinct characteristics, rarity, and value. Two paintings by the same artist may have different prices. This uniqueness defines non-fungibility.

Semi-fungible tokens blur this boundary entirely. They exist as fungible assets initially but can transition into non-fungible assets depending on usage conditions—or vice versa.

What Makes NFTs Unique?

Non-fungible tokens are blockchain-based digital certificates that prove ownership and authenticity of unique digital assets. These can include digital art, music, videos, virtual real estate, gaming items, and collectibles.

The core innovation of NFTs lies in their immutability and provenance verification. Once minted, an NFT cannot be duplicated. This capability allows digital creators—artists, musicians, and content producers—to monetize their work while maintaining proof of ownership and preventing unauthorized replication.

The NFT Timeline: From Theory to Mainstream

The concept predates the recent boom. In 2012, “colored coins” were proposed as a way to represent real-world items on the Bitcoin blockchain with unique properties. Bitcoin’s technical limitations prevented widespread adoption, but the concept laid the groundwork.

The actual evolution began in 2014 when “Quantum,” the first NFT artwork, was created on the Namecoin blockchain—a pixelated octagon that shifts color rhythmically. The real catalyst came with Ethereum’s smart contract capabilities. By 2017, Cryptopunks launched on Ethereum and sparked broader adoption. Cryptokitties followed and exploded in popularity during 2017-2018. From there, NFTs expanded into gaming, metaverse environments, and virtual real estate. By 2021, major auction houses legitimized the space with high-profile sales, and new blockchains like Solana, Cardano, Tezos, and Flow began minting their own NFTs.

Where NFTs Are Being Used Today

NFTs currently dominate three sectors: digital art, gaming, and entertainment. Within these spaces, they serve as collectibles, virtual goods, and event memorabilia. However, the technology’s potential extends far beyond these categories—virtually any asset with provable uniqueness can be tokenized.

Semi-Fungible Tokens: The Hybrid Solution

Semi-fungible tokens represent a significant innovation in token design. They begin their lifecycle as fungible assets—meaning they can be freely traded with similar tokens in their class. Upon meeting specific conditions, they transform into non-fungible assets with distinct values.

Practical Example: Consider event tickets. Before the event, tickets in the same seating section are fungible—you can trade your ticket for another in the same row without loss. After the event concludes, your ticket becomes non-fungible. It transforms into a collectible keepsake with unique sentimental and potentially monetary value based on the event’s rarity and prestige.

How SFTs Function Differently

SFTs operate on the ERC-1155 standard on Ethereum, which allows a single smart contract to manage multiple token types simultaneously. This is fundamentally different from ERC-20 (purely fungible) and ERC-721 (purely non-fungible) standards.

In gaming contexts, an SFT might function as an in-game item that acts as an NFT collectible but can be traded for fungible currency. If converted back into an NFT weapon, its properties may evolve based on game mechanics and player progression. The game’s smart contract governs these transitions, providing the game developer with economic control impossible in traditional MMO environments.

This flexibility addresses critical limitations of both pure fungible and non-fungible tokens:

• Unlike fungible tokens, SFTs allow reversible transactions, protecting against accidental transfers to wrong addresses
• Unlike NFTs, SFTs enable batch transactions through a single smart contract, reducing gas fees and network congestion

Origins and Development of SFTs

Enjin and Horizon Games created the ERC-1155 standard specifically to manage semi-fungible tokens in gaming environments. The Sandbox later became a prominent platform utilizing this standard for in-game asset management.

Currently, SFTs are confined to blockchain gaming. However, industry observers anticipate expansion into event ticketing, loyalty programs, and reward systems.

Emerging Standard: ERC-404

A new contender has recently entered the space: ERC-404. Created by pseudonymous developers “ctrl” and “Acme,” this experimental standard aims to provide a more fluid bridge between fungibility and non-fungibility.

ERC-404 enables tokens to function simultaneously as interchangeable units and as unique assets, depending on use case requirements. This flexibility could enhance liquidity in NFT markets by enabling fractional ownership and trading—addressing a long-standing challenge where NFTs suffer from limited tradability in auction-based environments.

However, ERC-404 bypassed the formal Ethereum Improvement Proposal (EIP) process. This informal introduction raises security concerns and the potential for exploitation. Despite these risks, projects like Pandora, DeFrogs, and Rug are actively exploring ERC-404 possibilities, signaling market interest in hybrid token models.

Comparing Token Standards: ERC-721 vs. ERC-1155 vs. ERC-404

ERC-721 (NFT Standard): The dominant standard for NFTs, ERC-721 allows developers to embed rich metadata and authentication features reflecting each token’s uniqueness. The tradeoff is inefficiency: each NFT requires a separate transaction. Transferring 50 NFTs means 50 separate transactions, consuming substantial gas fees and congesting the network.

ERC-1155 (SFT Standard): This multi-token standard combines ERC-20 and ERC-721 capabilities within a single smart contract. It enables batch operations, dramatically reducing gas costs and network impact. For gaming and ticketing applications requiring both liquidity and uniqueness at different lifecycle stages, ERC-1155 provides superior efficiency.

ERC-404 (Hybrid Standard): Positioned as an experimental alternative, ERC-404 offers more granular control over how tokens transition between fungible and non-fungible states. It theoretically provides better liquidity for fractional ownership scenarios, though security auditing remains incomplete.

NFT vs SFT: Direct Comparison

Real-World Applications: Where SFTs Make Sense

SFTs excel in scenarios requiring flexibility:

Gaming: In-game items that function as tradeable currency until equipped as unique, level-dependent gear Ticketing: Event tickets that become collectibles post-event Loyalty Programs: Points that remain interchangeable until redeemed for exclusive non-fungible rewards Fractional Ownership: Shares of indivisible real-world assets that maintain fungible trading properties while representing non-fungible underlying assets

The Real-World Asset Tokenization Connection

SFTs show particular promise for tokenizing real-world assets (RWAs). Property shares, for instance, can exist as fungible instruments in secondary markets while representing ownership claims on non-fungible underlying assets. SFTs can dynamically reflect changes in asset value or condition while facilitating fractional ownership at lower investor barriers.

By encoding specific rights, rewards, and regulatory compliance mechanisms, SFTs provide more sophisticated solutions than pure NFT or pure fungible approaches. This positions SFTs as a potentially transformative standard for asset financing and novel investment structures.

What’s Next for NFTs and SFTs?

The digital asset space continues evolving rapidly. NFTs have transcended niche adoption and now engage mainstream audiences and institutions. SFTs remain primarily gaming-focused but are beginning to expand into ticketing and loyalty programs. Emerging standards like ERC-404 indicate growing interest in increasingly sophisticated token hybrids.

As blockchain infrastructure matures and real-world asset tokenization gains regulatory clarity, both NFTs and SFTs will likely discover applications beyond current use cases. The key distinction—NFTs for proven uniqueness and SFTs for flexible, conditional functionality—positions each for different economic scenarios.

The future suggests neither technology will dominate entirely. Instead, the ecosystem will stratify, with NFTs maintaining relevance for provably unique digital assets, SFTs handling hybrid scenarios requiring flexibility, and newer standards experimenting with novel combinations. For blockchain developers, businesses, and users, understanding the NFT vs SFT distinction remains essential for navigating this increasingly complex digital asset landscape.