NFT vs SFT – What’s the Difference

With recent developments in the digital asset and blockchain industry, NFT vs SFT is becoming an increasingly relevant debate. Both Non-Fungible Tokens (NFTs) and Semi-Fungible Tokens (SFTs) are innovative approaches to managing ownership and transferability in blockchain ecosystems. 

However, both serve different purposes and offer distinct functionalities. Understanding the difference between these token types is absolutely necessary for anyone involved in blockchain, cryptocurrency, or digital assets. 

This article will serve as a guide to understanding these two token types by examining the specific characteristics of NFTs and SFTs, as well as comparing the two within the broader decentralized ecosystem. 

Key Takeaways

• Fungibility refers to the ability of an asset to be exchanged on a one-to-one basis with another asset of the same value and type, such as currency or cryptocurrencies.
• NFTs represent ownership of distinct digital or physical assets, such as art and unique digital collectibles, where each token is verifiably one-of-a-kind and non-interchangeable.
• SFTs are partially interchangeable tokens that can be divided into smaller units, making them suitable for representing assets with fractional ownership or divisible quantities.
• NFTs typically use the ERC-721 standard, while SFTs implement the more flexible ERC-1155, which allows for batch transfers and fractional ownership.
• NFTs require individual transfers, often making transactions costly, while SFTs can be batch-transferred, reducing costs and improving efficiency.
• NFTs remain unique throughout their existence, while SFTs can transition between fungible and non-fungible states.

What is Fungibility?

Before we examine and compare NFT vs SFT, it’s essential to understand the core concept of fungibility in the context of blockchain assets. 

In technical terms, fungibility refers to the interchangeability of assets. In other words, a fungible asset is one that can be easily exchanged for another asset of the same type and value without any difference between them. For example, a one-dollar bill is fungible because it is equivalent to any other one-dollar bill, and both can be interchanged without any change in the value of each. 

In the context of blockchain, fungibility plays a key role in defining how digital assets function. Cryptocurrencies like Bitcoin or Ethereum are fungible because each unit of Bitcoin or Ether is identical to another, making them easily tradable. This uniformity simplifies transactions and allows these digital assets to be used as mediums of exchange.

What are Non-Fungible Tokens (NFTs)?

Non-fungible tokens (NFTs) are unique digital assets that exist on a blockchain. In contrast to cryptocurrencies like Bitcoin or Ethereum, which are fungible and identical to one another, NFTs are one-of-a-kind or limited-edition assets that cannot be exchanged on a one-to-one basis. 

This uniqueness is what gives NFTs their value, as they represent ownership of a specific item or piece of content – whether it’s digital artwork, music, virtual real estate, or even in-game items. Each non-fungible token is created using smart contracts, which define the ownership, transferability, and other key aspects of the token. 

Once minted, the token contains metadata that makes it verifiably unique, providing proof of authenticity and ownership that can be tracked and traded across various platforms. As a result, an NFT can serve as a digital certificate of ownership for an asset that exists either entirely within the digital space or is tied to a physical counterpart. 

Unlike traditional collectibles or physical property, NFTs cannot be forged or duplicated, as they are cryptographically secured. This makes NFTs particularly valuable in industries where provenance and authenticity are critical, such as in art and entertainment.

The introduction of NFTs has brought drastic changes to various industries by offering a new way to represent ownership and value. Naturally, some of the most notable use cases for NFTs can be found in digital art, music, gaming, and collectibles. 

For example, digital artwork by Beeple, “Everydays: The First 5000 Days” was sold for over $69 million at Christie’s, establishing NFTs as a legitimate medium for art sales. 

Token Standard

Most NFTs are built on the Ethereum blockchain, though other blockchains like BNB Chain, Solana, and Cardano also support the creation and transfer of NFTs. The Ethereum blockchain, in particular, uses the ERC-721 token standard, which is specifically designed for non-fungible assets. This standard defines how ownership is managed, how NFTs are transferred, and what data is stored in the token’s metadata.

The ERC-721 standard introduced the concept of unique tokens, differentiating them from Ethereum’s native fungible token standard, ERC-20. While ERC-20 tokens can be split into smaller parts (like Bitcoin, which is divisible into satoshis), ERC-721 tokens are indivisible assets, meaning you can only buy, sell, or hold the entire token as a single unit.

Pros

• NFTs provide verifiable proof of ownership, ensuring that each token is unique and cannot be duplicated or forged.
• Artists, musicians, and creators can directly monetize their work without needing intermediaries, allowing for better royalty structures and recurring income.
• Blockchain technology ensures that all transactions related to NFTs are transparent, secure, and easily traceable.
• NFTs have opened up entirely new markets for digital art, virtual real estate, and gaming assets, creating value where none existed before.
• NFTs allow creators to offer exclusive perks or experiences, building deeper connections with fans and communities.

Cons

• One of the significant drawbacks of NFTs is the high gas fees associated with transferring and interacting with digital assets on the Ethereum network.
• NFTs cannot be divided into smaller units, which makes it difficult for users to fractionalize ownership or trade smaller portions of high-value assets.
• The ERC-721 standard does not natively support batch transfers or batch minting of tokens. This limitation means users must individually handle each token, resulting in higher transaction costs and more complexity when managing large collections of NFTs.

What are Semi-Fungible Tokens (SFTs)?

Semi-fungible tokens (SFTs) represent a unique class of tokens that combine characteristics of both fungible and non-fungible tokens. SFTs begin their lifecycle as fungible tokens, meaning they can be exchanged on a one-to-one basis with other tokens of the same kind, much like cryptocurrencies. 

However, as certain conditions are met – such as after being redeemed, used in a game, or reaching a specific point in their lifecycle – SFTs can transition into non-fungible tokens.

A key advantage of semi-fungible assets is their flexibility. They are particularly useful in gaming and digital platforms where certain assets can have both fungible and non-fungible properties at different stages. 

For example, in an online game, a token might initially represent a common in-game currency that can be exchanged or spent in large quantities. As it is used or upgraded, that same token could transform into a unique item – such as a rare sword or piece of virtual real estate – becoming non-fungible and tradable as a one-of-a-kind asset. 

This hybrid nature allows for greater utility across a range of digital ecosystems, providing users with more dynamic interactions with their tokens.

Token Standard

The most widely used token standard for creating SFTs is ERC-1155, which is a multi-token standard and was introduced as a more efficient alternative to the earlier ERC-721 standard. ERC-1155 allows developers to create both fungible and non-fungible tokens under a single smart contract, reducing the complexity and gas costs associated with creating multiple token types. 

The ERC-1155 standard simplifies the minting and transfer processes by allowing batch transactions, meaning multiple tokens can be minted or transferred in a single operation, significantly reducing transaction fees and increasing efficiency. This feature is particularly beneficial in scenarios where many identical tokens are issued at once, such as in gaming or event tickets platforms.

In addition to ERC-1155, the experimental ERC-404 token standard also plays a role in SFT development. ERC-404 offers a more advanced approach to fractionalizing NFTs, enabling both fungible and non-fungible properties to coexist within a token. While still experimental and not yet formally adopted as a standard, ERC-404 demonstrates the potential of blending fungibility and non-fungibility, especially for real estate, art, and DeFi applications. 

Pros

• SFTs can easily transition between fungible and non-fungible states, making them highly versatile for applications like gaming and digital collectibles.
• The ERC-1155 token standard allows for batch minting and transfers, significantly reducing transaction fees, especially when dealing with large quantities of tokens. 
• By allowing tokens to start as fungible and later become non-fungible, SFTs contribute in enhancing liquidity. Users can trade assets as fungible tokens when needed and convert them into unique assets when they become rare or valuable.
• The ability to manage various token types within a single smart contract makes SFTs highly scalable.
• SFTs allow for fractional ownership, which can be highly beneficial in sectors like real estate and art by making investment opportunities more accessible.

Cons

• The dual nature of SFTs introduces technical complexity. Developers need to account for both fungible and non-fungible states, which increases the challenge of managing smart contracts.
• While ERC-1155 tokens are gaining traction, they are still less widely adopted than more established standards like ERC-20 and ERC-721, limiting their usability across different platforms and marketplaces.
• The experimental nature of SFT-related standards like ERC-404 has yet to see widespread adoption, making it uncertain whether these standards will become mainstream​.

NFT vs SFT: Key Differences

Though both token standards represent significant developments in the digitalization of unique assets, there are some key differences in their approach, purpose, and execution.

1. Fungibility 

NFTs are non-fungible, meaning each token is unique and cannot be exchanged one-for-one with another token. SFTs, however, start as fungible tokens and can later become non-fungible, offering a flexible transition between fungibility and uniqueness.

2. Divisibility 

NFTs are indivisible, as one must own the entire token to trade it. SFTs, on the other hand, can be divided in the fungible state, allowing for fractional ownership and trading of portions of an asset.

3. Transferability

NFTs require individual transfers for each token, making batch transactions costly and inefficient. In contrast, SFTs (especially under the ERC-1155 standard) enable batch transfers, improving efficiency and reducing transaction costs.

4. Lifecycle

NFTs remain non-fungible throughout their lifecycle. SFTs start fungible, but as their use progresses, they can become non-fungible, offering more adaptability across their lifespan.

Final thoughts

In blockchain ecosystems, both NFTs and SFTs offer distinct yet complementary opportunities. NFTs, with their immutable non-fungibility, are ideal for representing unique digital assets such as digital art and collectibles. SFTs, on the other hand, combine the best of fungible and non-fungible standards, making them perfect for cases where assets may need to evolve over time. Ultimately, the choice between NFT vs SFT depends on the use case.

FAQs

What is SFT in crypto?

An SFT (Semi-Fungible Token) is a type of digital asset on the blockchain that combines properties of both fungible and non-fungible tokens, allowing for partial ownership and interchangeability.

What is the difference between NFT and SFT?

NFTs are unique and indivisible, representing ownership of a specific digital asset. SFTs, unlike NFTs, are partially interchangeable, allowing for the trading of units within the same asset class while retaining certain unique properties.

What is SFT used for?

SFTs have various applications, including fractional ownership of real-world assets like real estate or art, ticketing for events, and representing in-game items with varying attributes.

What is the SFT token standard?

The SFT token standard is typically ERC-1155, which allows for various token types within a single contract and facilitates batch creation and transfer.