Understanding NFTs vs. SFTs: Which Tokenized Asset Class Fits Your Needs?

The tokenization landscape has evolved dramatically. While cryptocurrencies and blockchain established the foundation, non-fungible tokens (NFTs) captured mainstream attention, and now semi-fungible tokens (SFTs) are emerging as a more flexible middle ground. But what separates these asset classes, and why does it matter? Let’s break down the key differences between NFT and SFT technologies.

The Foundation: What Makes Assets Fungible or Non-Fungible?

Before diving into NFTs and SFTs, understanding fungibility is essential. Fungibility describes whether identical units can be exchanged one-to-one without losing value. Two dollars are interchangeable—their form doesn’t matter. The same applies to cryptocurrencies: one Bitcoin can be traded for another without distinction.

Non-fungibility works differently. It refers to the unique properties that make each asset irreplaceable. A concert ticket that grants entry tomorrow is worth far more than the same ticket after the event ends. Once used, it transforms from a tradeable asset into a one-of-a-kind souvenir. This principle underpins how we distinguish between exchangeable and unique digital assets on the blockchain.

What Defines a Non-Fungible Token?

NFTs are blockchain-based digital records proving ownership and authenticity of unique assets. They represent everything from digital art and music to virtual real estate and in-game items. The critical distinction: no two NFTs are identical, even if created by the same artist or with identical prices.

NFTs gained significant traction starting in 2020, with trading volumes surging into the billions by 2021. The journey wasn’t instant, though. The concept traces back to 2012 when Meni Rosenfield proposed “colored coins” for managing real-world asset representation on the Bitcoin blockchain—an idea ahead of its time given Bitcoin’s technical constraints.

The true NFT evolution accelerated on Ethereum:

• 2014: “Quantum,” a pixelated octagon NFT, was minted on Namecoin by artist Kevin McCoy
• 2016-2017: Meme-based NFTs gained traction; Cryptopunks launched on Ethereum following the Rare Pepes success
• 2017-2020: Cryptokitties sparked mainstream awareness during an Ethereum hackathon; gaming and metaverse environments exploded
• 2021: High-profile NFT art sales at auction houses and record-breaking single-asset sales

The adoption expanded beyond Ethereum to include blockchains like Cardano, Solana, Tezos, and Flow, with gaming and metaverse applications driving demand.

Introducing Semi-Fungible Tokens: The Hybrid Solution

SFTs occupy a unique space—they function as fungible tokens under certain conditions and transform into non-fungible assets under others. This flexibility addresses limitations of pure NFTs or fungible tokens alone.

Consider a concert ticket again. Before the event, tickets are interchangeable fungible assets—sell yours, buy another in the same section. The moment the concert ends, your ticket loses its fungibility and becomes a collectible souvenir. That’s an SFT in action.

SFTs operate on the ERC-1155 token standard on Ethereum, enabling a single smart contract to manage multiple token types simultaneously. This differs sharply from ERC-20 (fungible tokens) and ERC-721 (NFTs), which require separate contracts.

The Technical Backbone: Comparing Token Standards

ERC-721: The Original NFT Standard

ERC-721 powers the vast majority of existing NFTs. Its strength lies in enforcing uniqueness—developers can embed detailed metadata and provenance information. However, it comes with a critical inefficiency: sending 50 NFTs requires 50 separate transactions, congesting networks and inflating gas fees.

ERC-1155: The Multi-Token Upgrade

ERC-1155 solves this by consolidating multiple token types within one smart contract. It combines ERC-20 and ERC-721 capabilities, allowing batch transactions that reduce network strain and transaction costs. For fungible tokens, it enables revocable transactions, addressing the irreversibility problem. For non-fungible tokens, batch processing dramatically cuts fees.

ERC-404: The Emerging Hybrid Standard

Developed by anonymous creators “ctrl” and “Acme,” the ERC-404 standard represents a new frontier. It blends ERC-20 and ERC-721 characteristics, enabling tokens to function as both fungible units and unique assets depending on context. This creates better liquidity for NFTs—holders can trade fractional amounts rather than being locked into all-or-nothing sales.

However, ERC-404 has not undergone formal Ethereum Improvement Proposal (EIP) scrutiny. Early projects like Pandora and DeFrogs are testing the standard, but security concerns remain. Despite these risks, the innovation signals growing demand for hybrid token models.

Where NFTs and SFTs Create Value

NFTs dominate in:

• Digital art and collectibles
• Virtual real estate and metaverse assets
• Unique in-game items
• Gaming achievements and exclusive content

SFTs excel in:

• Event ticketing systems
• Gaming economies where assets fluctuate between tradeable and unique states
• Loyalty and rewards programs
• Emerging real-world asset (RWA) tokenization

The SFT Advantage for Real-World Assets

SFTs open new possibilities for RWA tokenization. Fractional property ownership could begin as fungible shares (interchangeable with other shares of the same property) and become non-fungible upon transfer of full ownership. This dual nature enhances liquidity while enabling regulatory compliance tracking.

SFTs lower entry barriers for fractional asset ownership, dynamically represent asset state changes, and encode specific rights or obligations. They combine fungible liquidity with non-fungible uniqueness—an innovation that traditional finance has long sought.

Looking Ahead: The Evolution Continues

The NFT vs. SFT comparison reveals that neither is simply “better”—they solve different problems. NFTs proved digital ownership is verifiable and tradeable. SFTs acknowledged that real-world complexity often demands flexibility between fungible and non-fungible states.

As blockchain technology matures, expect SFTs to expand beyond gaming into property, securities, and insurance markets. The innovation cycle that began with Bitcoin and Bitcoin is far from over; the next phase may belong to hybrid tokenization models that blur the lines between categories entirely.