Understanding the Key Differences Between NFTs and Semi-Fungible Tokens

The cryptocurrency landscape continues to evolve rapidly. After blockchain and cryptocurrencies captured mainstream attention, Non-Fungible Tokens (NFTs) emerged as a revolutionary asset class. Now, a new tokenized asset category—semi-fungible tokens (SFTs)—is gaining traction in both developer communities and investment discussions. While many people are familiar with NFTs, SFTs represent a more nuanced approach to digital asset creation and trading. Let’s explore what distinguishes these two token types and why each matters.

The Foundation: Fungibility vs. Non-Fungibility

Before diving into NFTs and semi-fungible tokens specifically, it’s essential to understand the core principle of fungibility.

Fungible assets are interchangeable on a 1:1 basis. Think of fiat currency: one dollar bill has identical value to another dollar bill, regardless of its physical condition. Similarly, cryptocurrencies and traditional currencies are fungible—they can be exchanged without losing monetary value.

Non-fungible assets operate on a different principle. Each asset possesses distinct characteristics that prevent equal exchange. Two seemingly similar assets cannot be substituted for each other because they carry different rarity levels, historical significance, or market valuations.

This fundamental distinction shapes how NFTs and semi-fungible tokens function within blockchain ecosystems.

Non-Fungible Tokens: Unique Digital Ownership

Non-Fungible Tokens are blockchain-based digital assets that carry unique identifiers and metadata proving authenticity and ownership. They can represent digital art, music files, videos, virtual real estate, gaming assets, and virtually any creatable digital item.

The defining characteristic of NFTs is their uniqueness. Even if two NFTs share identical visual or functional properties, they remain distinct assets that cannot be traded 1:1. Each carries its own valuation based on rarity, creator reputation, historical significance, and market demand.

Historical Development of NFTs:

The concept predates modern blockchain technology. In 2012, Meni Rosenfield introduced “colored coins” for Bitcoin, proposing a method to represent real-world items on the blockchain with unique identifiers. Though Bitcoin’s technical constraints prevented full implementation, this concept laid crucial groundwork.

The first verifiable NFT, “Quantum,” was minted in 2014 by artist Kevin McCoy on the Namecoin blockchain—a pixelated octagon with dynamic color-shifting properties. From 2016 onward, meme-based NFTs proliferated. The momentum shifted significantly to Ethereum starting in 2017, when developers created Cryptopunks following the success of Rare Pepes. Cryptokitties, launched during an Ethereum hackathon, subsequently drove mainstream NFT adoption through gaming integration.

The timeline accelerated dramatically:

• 2017-2020: Gaming and metaverse projects like Decentraland launched NFT-based virtual worlds
• 2021: Major auction houses began selling digital art as NFTs, with record-breaking prices set for artist collections
• Post-2021: Additional blockchains including Cardano, Solana, Tezos, and Flow began supporting NFT standards, diversifying the ecosystem

The adoption extends across industries: art galleries now feature digital pieces, musicians release albums as NFT collections, and gaming studios use NFTs as core in-game assets.

Semi-Fungible Tokens: Flexible Hybrid Assets

Semi-fungible tokens represent a middle ground between purely fungible and purely non-fungible assets. An SFT can function as an interchangeable asset under certain conditions while transforming into a unique, non-interchangeable asset under different circumstances—essentially operating as both simultaneously depending on context and use case.

Consider a concert ticket: before the event, thousands of identical tickets are interchangeable and tradeable commodities (fungible). After the concert concludes, that same ticket transforms into a one-of-a-kind collectible souvenir (non-fungible). An SFT encodes this transformation within its smart contract logic.

The Technology Behind Semi-Fungible Tokens:

Semi-fungible tokens operate on the Ethereum blockchain using the ERC-1155 token standard. Developers Enjin and Horizon Games created this standard to manage multiple token types within a single smart contract, eliminating the need for separate contracts. This represents a significant efficiency improvement over earlier standards.

The ERC-1155 standard combines functionality from both ERC-20 (fungible token protocol) and ERC-721 (non-fungible token protocol). This hybrid approach enables unprecedented flexibility and reduces transaction overhead.

Token Standards Comparison: ERC-721, ERC-1155, and ERC-404

ERC-721 Standard: This protocol powers the majority of existing NFTs. Each token possesses a unique identifier and immutable metadata, enabling true ownership verification and provenance tracking. However, the standard’s limitation is significant: only one NFT can be transferred per blockchain transaction. Sending fifty NFTs requires fifty separate transactions, consuming excessive gas fees and network resources. While developers can add custom features and authenticity measures, the transaction inefficiency represents a fundamental constraint.

ERC-1155 Standard: This multi-token protocol merges ERC-20 and ERC-721 capabilities, enabling a single smart contract to manage multiple fungible and non-fungible tokens simultaneously. Semi-fungible tokens utilize this standard exclusively. The major advantage: multiple tokens transfer in a single transaction, dramatically reducing gas fees and network congestion. Additionally, SFTs can incorporate revocable transactions, allowing correction of accidental transfers—a capability absent in purely fungible tokens.

ERC-404 Standard: Recently introduced by pseudonymous developers “ctrl” and “Acme,” the ERC-404 standard proposes a novel approach. It enables tokens to function as interchangeable units and unique assets simultaneously, depending on usage context. This creates hybrid tokens combining ERC-20 fungibility with ERC-721 uniqueness, theoretically offering enhanced liquidity and fractional NFT trading capabilities. However, ERC-404 has not undergone formal Ethereum Improvement Proposal (EIP) processes, raising security concerns and audit scrutiny. Projects like Pandora, DeFrogs, and Rug are exploring ERC-404’s possibilities despite these uncertainties.

Current and Future Applications

NFT Use Cases: NFTs dominate the art market, gaming sector, and collectibles space. Virtual real estate in metaverse environments represents a growing segment, while digital creators leverage NFTs for direct monetization without intermediaries.

Semi-Fungible Token Applications: SFTs currently concentrate in blockchain gaming environments, where in-game items seamlessly transition between fungible currency and non-fungible collectibles based on game mechanics. Event ticketing represents another emerging application—tickets function as tradeable commodities pre-event and become commemorative keepsakes post-event.

Real-World Asset Tokenization: SFTs show particular promise for RWA tokenization, enabling fractional ownership of indivisible assets like real estate. Property shares can begin as interchangeable fungible tokens for liquidity purposes, then transition to non-fungible status for regulatory compliance and tracking. This flexibility addresses liquidity challenges inherent in traditional asset markets while maintaining proper ownership documentation.

Key Distinctions at a Glance

NFTs remain optimal for representing unique digital and physical assets where authenticity and scarcity drive value. Semi-fungible tokens excel in dynamic environments requiring flexibility—gaming economies, event management, and fractional ownership structures where assets shift between fungible and non-fungible states based on conditions.

The evolution toward semi-fungible tokens demonstrates blockchain technology’s maturation. Rather than viewing NFTs and SFTs as competitive, recognize them as complementary tools serving different asset classes and market dynamics. As tokenization expands across industries, SFTs will likely emerge beyond gaming applications, fundamentally reshaping how we represent ownership and value in digital ecosystems.

The convergence of these token standards represents the next chapter in blockchain’s impact on finance, collectibles, gaming, and real-world asset management.