Semi-Fungible Tokens: All You Need To Know

Bishal Kumar Chanda
26.01.2022

Cryptocurrencies have been a consistent theme in 2021, followed by the worldwide craze surrounding NFTs (Non-fungible Tokens) that summed more than $23 Billion annual trades. With no signs of slowing in the momentum of NFTs, leading Ethereum-based NFT marketplace OpenSea Already Surpassed $1 Billion in Volume Within a Week of Entering 2022. The phenomenon of NFTs has been disrupting industries as diverse as art, music, gaming, and finance. Some predict that in ten years from now, all physical sales such as real estate and luxury goods will be accompanied by NFTs. So what are Semi-fungible Tokens (SFTs), and why are they important?

The insane growth in cryptocurrencies and NFTs led to tremendous growth in the blockchain community and various innovations around it. One such innovation is the Semi-fungible Tokens (SFTs) that have both fungible (cryptocurrencies) and non-fungible (NFTs) properties. Compared to the existing and widely adopted technologies of cryptocurrencies and NFTs, Semi-fungible Tokens are still nascent. To understand the concept of SFTs properly, we first need to understand the concepts of fungible and non-fungible tokens properly. 


What are Fungible Tokens?

Most investors invest and trade in fungible tokens regularly in the crypto space. Fungible tokens are assets that can be divided, are not unique, and can be interchanged with another token of the same kind. For example, if you and your friend have one Bitcoin each, you can interchange them without incurring any loss in value on either side. That is because both Bitcoins are equal in value, and this stands true for all mainstream cryptocurrencies such as Ether (unless it's marked to be stolen or used for illicit activities). Like cryptocurrencies, fiat money such as US dollars or UK pounds can also be called fungible. You can easily exchange a $100 note with another $100 note without any change in value. The concept of fungibility can also be applied to all identical objects such as milk bottles, copies of the same file, etc. 

What are Non-Fungible Tokens?

Non-fungible tokens or NFTs are non-interchangeable blockchain-based tokens that store units of data. NFTs can be used to provide an authenticity certificate or proof of ownership of different types of data such as art, music, in-game assets, or even virtual real estate. NFTs differ from fungible tokens as every NFT is distinct in its characteristics and can not be interchanged with another NFT without loss or gain in value. For example, NFTs can be considered trading cards, where every card has a different rarity and value. You wouldn't want to exchange your rare cards for some other common card, would you? Similarly, you do not wish to exchange a rare CryptoPunk NFT with a random NFT from an unknown collection.

NFTs are stored on the blockchain and have the following features:

  1. Indivisible: You can not buy a fraction of any NFT (although fractional ownership has been made possible by some NFT lending platforms, the original NFTs remain indivisible). 
  2. Indestructible: NFTs are indestructible as a token asset built on blockchain, even if the asset represented by it is destroyed.
  3. Immutable: It is impossible to change the underlying information of an NFT once it is minted on the blockchain.
  4. Verifiable: The authenticity and ownership of NFTs can easily be verified as they are tokens on public blockchains.

Want to know more about NFTs? Read What are NFTs: How They Work and Why They're a Game Changer



What are Semi-Fungible Tokens?

If we blend the concepts of both fungible tokens and non-fungible tokens, we get a unique group of tokens known as Semi-fungible Tokens (SFTs). At the start of their lifecycle, SFTs behave like other fungible tokens and are interchangeable with other identical SFTs. After a specific period or after certain conditions are met, SFTs switch their fungibility to non-fungible based on their pre-programmed smart contracts. For example, a $50 Amazon gift voucher has the same value as any other identical gift voucher with the same expiration date. After redeeming the voucher or after the validity expires, it is no longer the same as other non-redeemed and unexpired vouchers. The coupon becomes non-fungible as it has lost its exchangeable value.

Another good example would be imagining SFTs as a concert ticket for your favourite band's live performance. The ticket's face value at the beginning of circulation can change later depending on supply and demand. You can exchange your concert ticket for an identical ticket as long as it belongs to the same band, has the same date, and gives you a spot in the same seating area. After the concert, you can no longer exchange the token for another concert ticket for a later date or any other band on the same day. But you can collect the expired ticket as a good memory with a different value. Like the Amazon gift voucher and the concert ticket, the journey of a token from being fungible to non-fungible makes it semi-fungible.



How to Create Semi-Fungible Tokens?

In 2018, blockchain game and metaverse developers The Sandbox, Horizon Games and Enjin developed the ERC-1155 multi-token standard. The ERC-1155 token standard was developed by improving and combining the functionalities of ERC-20 and ERC-721 standards. Developers can use smart contracts based on ERC-1155 to function as an ERC-20 fungible token or ERC-721 non-fungible token and even both at the same time. 

It is possible now to mint SFTs using Ethereum's ERC-1155 standard. Apart from the semi-fungible nature, using this standard gives certain additional features to the tokens.


NFTs vs SFT. Which one is Better?

1. Batch Transfer

ERC-721 is the most popular standard for non-fungible tokens, and it supports the transfer of only one token at a time. Each transfer on the Ethereum blockchain takes about 15 to 30 seconds. While this doesn't seem like much, the process becomes very slow and expensive if multiple tokens have to be sent.

The semi-fungible token standard ERC-1155 is an advanced version of the ERC-721 standard. Multiple tokens can be transferred in a single transaction using this standard, reducing the gas fees and transaction time. You can send hundreds of SFTs in a couple of seconds.


2. Multi-Token Functionality

Every new type of NFT needs a new ERC-721 contract. For example, Bored Ape Yacht Club will require a different smart contract than Doodles NFT.

In the case of SFTs, different tokens can be issued using a single ERC-1155 smart contract, and the possibilities are numerically infinite.


3. Accidental Locks

Accidental locks occur when an NFT (ERC-721 token) is sent to a contract that does not support its standard. This can lead to losing that particular NFT forever.

Unlike NFTs, SFTs(ERC-1155 tokens) are designed so that you can revert the tokens to the sender if the recipient contract doesn't support its standard. This helps in preventing the accidental loss of your digital assets.


4. Chain of Functions

The smart contracts underlying NFTs can not trigger a chain of functions as the ERC-721 standard supports non-safe transfers. This can be a significant hindrance in the future development of dApps with automated functionalities.

However, SFT smart contracts are written so that you can use a single token to trigger a set of pre-determined functions. 

From this comparison, it is evident that the ERC-721 token standard fails to provide some basic functionalities that are necessary for the NFT ecosystem. However, most of the shortcomings of NFTs can be handled by using SFTs.


Implementations of Semi-Fungible-Tokens

SFTs can prove to be very useful, particularly in the booking blockchain gaming industry, where both fungible (in-game currencies) and non-fungible (in-game assets) tokens are used. Using SFTs, game developers can develop both types of tokens and make them unique and interchangeable simultaneously. A particular in-game asset can also start as an ordinary fungible asset and grow as the player progresses. For example, in Axie Infinity, the Axies level up as you play the adventure mode. But once you transfer your Axies to another address, they lose all in-game progress. If Axies were SFTs instead of NFTs, it would have been possible to retain the hard-earned levels even when traded. 

Ubisoft has partnered with Aleph.im for implementing their concept of dynamic NFTs in mainstream games. That is very similar to SFTs in morphing and remembering the previous attributes. SFTs also help to lower the cost for both users and developers. A good example would be the Mutant Serum given to some Bored Ape Yacht Club holders. The developers could have avoided the additional cost of adding the functionality using SFTs with much better performance. 


Scope of Semi-Fungible Tokens in the Future

NFTs have successfully disrupted many mainstream industries such as art and gaming. However, there are still flaws that can become a significant hurdle in the future progress of digital assets. Semi-fungible tokens successfully solve most of the shortcomings of NFTs and hold lots of potential in becoming the next big revolution. SFTs are used mainly by metaverse game developers for their in-game assets. With ERC-1155, developers can now implement fungible and non-fungible tokens using a single contract with lower fees and transaction time. Even if the use cases of SFTs are limited now, they can have an enormous impact on future crypto and NFT markets. 

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