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Non-Fungible Tokens Vs Semi-Fungible Tokens: What’s the Difference?

  • NFTs are digital certificates of authenticity associated with any digital piece of data.
  • SFTs combine the features of fungible and non-fungible tokens and improve the biggest weaknesses of them both.

Non-fungible tokens (NFTs) conquered the world like a storm. The hype surrounding NFTs is enormous, the prices keep breaking new records and they are dominating the headlines each day.

Away from the spotlight, another tokenized asset class is emerging: semi fungible tokens (SFT). Much more flexible than fungible and non-fungible tokens, SFTs are here to merge the two worlds into one, solve insufficiencies and open new possibilities.

The problem is – SFTs are much less known. Meet both of them in this article and quickly learn why and how they are different.

What are Non-Fungible Tokens (NFTs)?

NFTs are digital certificates of authenticity associated with any digital piece of data. This could be anything digital: image, video, audio etc.

The key word here is ‘non-fungible’, meaning that each NFT cannot be exchanged into any other NFT without a change in its value. For example, each movie ticket is unique, especially in terms of seats and rows; if you want to exchange it for another ticket, the seats will differ.

Contrary to cryptocurrencies, NFTs can’t be divided into fractions. They come as a unique indivisible piece. They may have copies but copies will have different values to the original.

NFTs are created and stored on the blockchain, an immutable digital ledger that records every single transaction. Because of the blockchain, each NFT has a certificate of authenticity. They can not be deleted, destroyed, or changed. Whenever you own an NFT, you get the ownership of its digital record on the blockchain.

ERC-721 Standard

The majority of NFTs are implemented on Ethereum’s ERC-721 standard. This is the set of rules defining the functions and capabilities of the tokens. The ERC-721 standard is the most popular NFT standard that allows the creation and trade of non-fungible tokens.

Each NFT standard token is unique and can’t be transformed or destroyed. It is meant to function as the collectible; rarity is the intrinsic value of any non-fungible token.

  • Pros

The key advantages of the ERC-721 token standard is that creators can link more attributes to them. One such attribute is authenticity provenance, which makes NFTs special and one of a kind compared with fungible tokens.

  • Cons

The downside of the NFT token standard is their limited transfer capabilities. Each NFT can be transferred in separate transactions, meaning that to transfer 20 separate CryptoPunk NFTs you’ll have to do 20 transactions. This creates higher network congestion, increases gas fees and thus lifts up transaction prices. Not to mention the fact that it is also time consuming and contributes to higher CO2 emissions.

Where Are NFTs Used?

The global interest in NFTs is enormous. Since anything digital can be tokenized into an NFT, there are multiple different use cases for non-fungible tokens. Art, music and gaming industries have become the most prominent ones in terms of NFT adoption.

NFTs are establishing themselves as the new class of speculative assets. They open possibilities for artists and gamers (like a way to sell their artworks without intermediaries or own and earn from in-game assets) but are also treated as a means of investment.

What Are Semi Fungible Tokens (SFTs)?

Semi fungible tokens (SFTs) combine the features of fungible and non-fungible tokens and improve the biggest weaknesses of them both.

SFTs act like fungible tokens until they get used. To better understand the concept, imagine a shopping mall’s gift card; you may exchange it for an identical gift card of the same value, thus it is a fungible asset. However, at the moment when a gift card is used or expires it loses its value and can’t be exchanged into a valid one. This is the moment when it becomes a non-fungible asset.

SFTs represent the unique and flexible ERC-1155 standard that enables creation of tokens with multiple functions. Moreover, a single smart contract is able to govern an unlimited number of SFT tokens.

ERC-1155 Standard

Semi-fungible tokens are built on the ERC-1155 standard. This multi-token Ethereum standard combines the features of fungible tokens (ERC-20) and non-fungible tokens (ERC-721 standard) and enables creating tokens with multiple functions.

Semi-fungible tokens solve incompatibility issues between different standard tokens, and overcomes the limitations of both fungible (ERC-20) and non-fungible (ERC-721) tokens.

The critical limitation of fungible tokens is their irreversible transactions. If you send coins to an incorrect address, you lose them forever. There is no possibility to get your funds back without the good will of the wallet owner.

Semi-fungible tokens, meanwhile, are built on smart contracts that allow transfer mistakes. Token transactions to the wrong addresses are reversible. The sender has the ability to get back his tokens, if a mistake occurs.

Contrary to NFTs, semi-fungible tokens support batch transfers. You may transfer multiple SFTs in a single transaction, which leads to lower network congestion, lower gas fees and lower costs.

Where Are SFTs Used?

Semi fungible tokens are a relatively young token standard. Created by blockchain gaming developers, Enjin, STFs are mostly used in the gaming industry.

As multifunctional tokens they allow game creators to offer in-game items with the functionalities of both fungible and non-fungible tokens. Game players, in the meantime, can easily trade fungible in-game items for NFTs and vice versa.

On The Flipside

  • NFTs, especially in the form of tokenized art, became trendy in 2021. Their prices skyrocketed, mostly driven by expectations that their growth will continue. The NFT market entered the zone where risk of being overpriced is the greatest.
  • SFTs still need to step out of their video game token concept to take off to wider adoption.

Why You Should Care?

Tokenization is an irrevocable process. It is already transforming various industries, creating opportunities that never existed before and bringing revolutionary changes in their working models.

Creators can gain exposure to new markets directly, with no need to hire third parties and pay fees for their services. Prominent brands can use NFTs as new media to reach their fan bases. Thousands of gamers worldwide already reap the benefits from selling their tokenized in-game assets and earning real money. It’s all evolution and we can’t stay behind.

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    This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed to be financial legal or tax advice. Trading Forex, cryptocurrencies, and CFDs poses a considerable risk of loss

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    Author

    Simona is a fintech journalist and content editor at DailyCoin Academy, which focuses on educating new crypto investors. She entered the crypto space in early 2018, got burned, but discovered a passion for trading, and now it’s her hobby. Simona covers crypto and blockchain-related topics and takes a deeper look at what lies behind the latest industry trends.