Difference Between Fungible and Non-Fungible Tokens: The Complete Guide

The cryptocurrency world is developing rapidly, with new innovations emerging every month. After blockchain and cryptocurrencies became established in our consciousness, non-fungible tokens (NFTs) entered the scene, and now a new class of digital assets is appearing — semi-fungible tokens (SFTs). Whether you’re just getting familiar with these concepts or already understand the basics, this article will help you fully grasp the difference between fungible and non-fungible assets and their role in the modern digital world.

The Concept of Fungibility: Key Differences

To understand the complex systems of non-fungible and semi-fungible assets, you first need to understand what fungibility is. This term describes assets that are identical to each other and can be exchanged at a 1:1 ratio without loss of value.

Imagine two identical dollar bills. Regardless of their physical condition — whether new or worn — their monetary value remains unchanged. Both fiat currencies and cryptocurrencies fall into this category: one Bitcoin is always equal to another Bitcoin.

A very different situation exists with non-fungible assets. Each such asset has unique characteristics, rarity, and value. You cannot simply exchange one unique digital asset for another “similar” one — they are not equivalent. This is the key difference between fungible tokens (like money) and non-fungible tokens (like unique artworks).

Non-Fungible Tokens: A Revolution in the Digital World

Non-fungible tokens are unique digital certificates of ownership recorded on the blockchain. Each token has its own identifier confirming its originality and ownership rights to a digital asset.

These assets can take many forms: digital art, music, videos, virtual land, rare gaming items, and much more. Their main quality is the impossibility of duplication and exchange. Even if two works look identical and have the same market price, each remains unique and irreplaceable.

Initially, non-fungible tokens were created to protect creative property: artists, musicians, and content creators gained the ability to monetize their works without fear of piracy. The peak of their popularity occurred in 2020-2021, when the market attracted billions of dollars in trading volume.

Development History: From Idea to Revolution

An astonishing fact: the concept of non-fungible assets appeared long before they became a global phenomenon. The origin of the idea dates back to 2012, when researcher Meny Rosenfield proposed the concept of “colored coins” for the Bitcoin blockchain. His idea was to assign real-world objects unique characteristics in a distributed ledger, making them distinctive and non-reproducible.

However, Bitcoin’s limitations prevented this idea from being realized. But it laid the foundation for future innovations:

• 2014: Kevin McCoy created the first non-fungible token “Quantum” — an animated octagon encoding color changes. This was on the Namecoin blockchain.

• 2016: Digital memes began to be issued as non-fungible assets.

• 2017-2020: Ethereum introduced revolutionary standards for smart contracts (ERC-20, ERC-721), enabling mass adoption of these tokens.

• 2017: After the success of Rare Pepes, the CryptoPunks project was launched by John Watkinson and Matt Hall.

• 2018: CryptoKitties exploded onto the market, attracting so many users that they overloaded the Ethereum network.

• 2021: Sales of digital art works reached prestigious auction houses. A record price was set for Beeple’s work.

• 2022-2024: Alternative blockchains like Cardano, Solana, Tezos, and Flow joined the ecosystem.

• 2024: The trend of virtual real estate in metaverses intensified. Facebook rebranded as Meta, emphasizing the strategic importance of this direction.

Practical Use of Non-Fungible Tokens Today

Today, non-fungible assets are used mainly in three sectors: gaming, art, and music. However, their potential is much broader — any physical asset can be turned into a rare collectible digital object, opening opportunities for real estate, licenses, intellectual property rights, and more.

Semi-Fungible Tokens: A Hybrid Solution

Semi-fungible tokens (SFTs) represent an innovative class of assets combining features of both categories. They can function as fungible assets that are easily exchanged, but at certain moments, they transform into unique, non-fungible objects.

For example, consider a ticket to your favorite artist’s concert. Before the event, the ticket is a fungible asset — it can be exchanged for any other ticket in your row. But after the concert, the ticket loses its fungibility and becomes a memorable collectible, unique to you, with value determined by the rarity of the event and the popularity of the performer.

Semi-fungible tokens are created based on the ERC-1155 standard on the Ethereum network. This standard allows a single smart contract to support hundreds of semi-fungible assets, which is fundamentally different from ERC-20 (for fungible tokens) and ERC-721 (for non-fungible tokens).

The Origin of Semi-Fungible Assets

The ERC-1155 standard was developed by Enjin and Horizon Games for managing gaming assets within the blockchain ecosystem. The Sandbox project became one of the first successful applications of this standard, demonstrating how semi-fungible tokens can transform gaming economies.

Where Are Semi-Fungible Assets Used?

Currently, semi-fungible tokens are mainly used in blockchain gaming. Each in-game asset can serve as both a fungible (traded as currency) and a non-fungible (a unique weapon or artifact) asset simultaneously. As awareness grows, this standard is gradually finding applications in other industries.

ERC-404: The Next Generation of Hybrid Tokens

Recently, an innovative standard called ERC-404 was introduced, developed by “ctrl” and “Acme”. This standard combines the functionality of fungible (ERC-20) and non-fungible (ERC-721) tokens, allowing the creation of assets that can function both as homogeneous units and as unique objects depending on the context.

This duality addresses a long-standing liquidity problem faced by non-fungible assets in traditional auction systems. It enables trading fractional parts of unique assets, significantly increasing market activity.

However, ERC-404 has not yet undergone the official Ethereum Improvement Proposal (EIP) approval process. It lacks full formal analysis and audits, raising some security concerns. Nonetheless, projects like Pandora, DeFrogs, and others are already experimenting with this standard, indicating growing interest in hybrid models.

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

ERC-721 Standard: The Classic Approach to Non-Fungible Assets

ERC-721 remains the most common standard for creating non-fungible tokens. It defines all functional characteristics and allows developers to add additional features confirming authenticity and provenance.

The main drawback is the need for multiple transactions. A smart contract can send only one token at a time. To transfer 50 assets, 50 separate operations are required. This slows down the network, increases fees, and overloads Ethereum.

ERC-1155 Standard: Efficiency and Flexibility

ERC-1155 (also called the multi-token standard) addresses the limitations of ERC-721 by combining capabilities for both fungible and non-fungible assets. One smart contract can now manage multiple semi-fungible assets simultaneously.

This solves critical issues: the number of transactions decreases, gas fees are reduced, and the network is less congested. Additionally, semi-fungible assets allow for transaction rollback in case of errors, which is impossible with purely fungible tokens.

ERC-404 Standard: An Innovative Synthesis

ERC-404 goes further, creating fully hybrid assets that can radically change their nature — from fungible to non-fungible and vice versa — depending on usage conditions. This opens possibilities for more complex and dynamic financial models.

How Non-Fungible and Semi-Fungible Assets Work: Practical Analysis

Functional Differences

How They Work in Practice

Non-fungible assets function as unique digital certificates recorded on the blockchain, incapable of duplication. One token always remains a single token, maintaining its identity and value.

Semi-fungible assets in a blockchain game can start as a non-fungible item (rare weapon), be collected to obtain in-game currency (fungible), and then revert to a unique item upon upgrading. These transformations are managed by the developer’s smart contract, providing full control over the game economy.

Semi-Fungible Assets and Tokenization of Real Assets

Semi-fungible tokens open new horizons for tokenizing real-world assets. They allow representing physical real estate, securities, and other assets as fractional interchangeable shares that become non-fungible under certain conditions.

This increases liquidity of traditionally illiquid assets, lowers barriers for investors, and enables encoding complex rights and obligations directly into the token. Innovative financial structures combining interchangeable liquidity with non-fungible uniqueness open new investment opportunities.

Conclusion: The Future of Asset Tokenization

Tokenization is becoming one of the main trends of the modern economy, opening new opportunities for all market participants. Non-fungible and semi-fungible assets are transforming how digital creators, artists, game developers, and investors interact with property.

While semi-fungible assets are currently concentrated in the gaming industry, their application is gradually expanding into other sectors. Blockchain technology provides an unprecedented level of transparency and ownership protection, transforming perceptions of ownership and access to digital assets.