Replaceable and Non-Replaceable Tokens: The Key Difference Between NFTs and SFTs

The world of crypto and blockchain is rapidly evolving. The shape of the financial markets is witnessing a transition from blockchain and cryptocurrencies to NFTs, and now to a new asset class called semi-fungible tokens (SFTs). However, the fundamental principle underlying these concepts is whether an asset is interchangeable or non-fungible. In other words, can one token be exchanged equally for another token, or is each one unique and non-interchangeable? The answer to this question divides the digital asset universe into two main categories.

Fungibility and Non-Fungibility: Basic Definitions

To understand what a financial asset is, we first need to clarify the concepts of “fungibility” and “non-fungibility.”

Fungible assets are assets that can be exchanged on a one-to-one basis. Consider a dollar bill: one dollar bill is completely equivalent in monetary value to another dollar bill held by your friend. Whether the bill is old, new, crisp, or wrinkled, its value remains the same. Bank accounts, fiat currencies, and cryptocurrencies fall into this category. Any Bitcoin, for example, can be exchanged for another Bitcoin of equal value.

On the other hand, non-fungible assets are digital assets that are unique and cannot be exchanged on a one-to-one basis. Non-fungible tokens (NFTs) encode this uniqueness on the blockchain. Two separate NFTs, even if their prices are the same, cannot be exchanged directly. One might be more rare, more popular, originate from a different artist, or have different metadata and history. Each token carries its own identity, metadata, and provenance.

The distinction between these two categories fundamentally determines how the digital asset ecosystem functions.

What is a Non-Fungible Token (NFT) and How Does It Work?

NFTs are unique digital assets created on blockchain technology—most notably Ethereum—that prove the authenticity and ownership of any digital object, such as artwork, music files, videos, virtual land, or in-game items.

The core feature of an NFT is its uniqueness and non-copyable nature. Once an NFT is minted, it cannot be duplicated. This allows artists, musicians, and digital content creators to realize the true value of their work. Issues like piracy and unauthorized use are significantly mitigated.

Historical Development of NFTs

The idea of NFTs is not as new as it might seem today. Looking back on the timeline:

• 2012: Meni Rosenfield introduced the concept of “colored coins” on Bitcoin. This was an initial step toward managing real-world assets on blockchain.
• 2014: The artwork “Quantum” by Kevin McCoy, created on Namecoin, is recognized as the first NFT. It was a pixel art with changing colors.
• 2016: Memes began to be issued as NFTs.
• 2017-2020: Ethereum introduced the ERC-721 standard, laying the groundwork for the NFT revolution.
• 2017: Projects like Cryptopunks and Cryptokitties gained viral popularity. Cryptokitties, in particular, congested the Ethereum network due to high usage.
• 2021: NFT art sales entered prestigious auction houses like Sotheby’s and Christie’s. The $69 million sale of Beeple’s digital artwork drew global attention.

Encouraged by this success, other blockchains such as Cardano, Solana, Tezos, and Flow have also added support for NFTs.

Semi-Fungible Tokens (SFTs): A Hybrid Solution

What if we want the flexibility of fungible tokens but also the uniqueness of non-fungible tokens? The answer is semi-fungible tokens (SFTs).

SFTs start as fungible assets but can, under certain conditions, become non-fungible. For example, a concert ticket:

Suppose you buy a ticket to your favorite artist’s live concert. Before the concert, this ticket can be exchanged with another ticket for the same seat, as they hold the same value. However, after the concert ends, the ticket becomes non-exchangeable. The event is over, and the ticket now serves as a collectible memento of that unforgettable night. Its value depends solely on the enjoyment derived from the event.

How Are SFTs Technically Created?

SFTs are created using the ERC-1155 standard on the Ethereum blockchain. ERC-1155 allows managing both fungible (like ERC-20) and non-fungible (like ERC-721) tokens within a single smart contract.

Enjin and Horizon Games have developed the ERC-1155 standard, creating new methods for in-game asset management in platforms like The Sandbox.

Comparing Token Standards: ERC-20, ERC-721, ERC-1155, ERC-404

Different token standards on blockchain are designed to address various issues:

ERC-20: Fungible Tokens

Defines cryptocurrencies like Bitcoin. Each token is identical. Its advantage is simplicity; its drawback is lack of flexibility.

ERC-721: Non-Fungible Tokens (NFTs)

Ensures each NFT is unique. However, it has a limitation: a single smart contract can only transfer one NFT per transaction. Sending 50 NFTs requires 50 separate transactions, increasing gas fees and network congestion.

ERC-1155: Multi-Token Standard

Addresses these issues by enabling management of both fungible and non-fungible assets within a single contract. It reduces gas costs and increases transaction speed.

ERC-404: The Latest Approach

ERC-404 is an innovative step in Ethereum. Developed by creators under the pseudonyms “ctrl” and “Acme,” this standard allows tokens to be conditionally interchangeable—some aspects can be swapped, others cannot. Projects like Pandora, DeFrogs, and Rug are experimenting with this standard.

Note that ERC-404 has not yet been officially adopted through an Ethereum Improvement Proposal (EIP). Caution is advised due to potential security concerns and rug pull risks.

Practical Applications: From Gaming Economies to Real-World Asset Tokenization

Power of SFTs in Gaming

The most prominent practical application of SFTs is in gaming economies. A player might purchase a weapon initially issued as an NFT. Once added to their collection, the weapon becomes non-fungible. However, if the player wishes to trade it with another player, it can revert to a fungible form.

This mechanism gives game developers full control over the economy, solving issues like uncontrolled inflation seen in older MMORPGs.

Tokenization of Real-World Assets (RWA)

SFTs open new doors for tokenizing real-world assets:

• Property Shares: A real estate property can be divided into fungible shares. Under certain conditions (e.g., upon sale), these shares can become non-fungible, enabling precise asset tracking.
• Increased Liquidity: Traditionally illiquid assets can be bought and sold easily on digital platforms.
• Lower Barriers to Entry: Fractional ownership allows more investors to participate.

NFT vs. SFT: Final Comparison

Conclusion: The Future of Asset Tokenization

The distinction between fungible and non-fungible assets highlights blockchain technology’s enormous potential. NFTs have redefined digital ownership, while SFTs blend both worlds, creating broader application possibilities.

Today, SFTs are mainly used in gaming, but in the near future, they could revolutionize real estate, energy, and finance sectors. Asset tokenization is no longer just an option—it’s a reality unfolding before our eyes.