A semi-fungible token (SFT) can change state from being fungible like a bitcoin to non-fungible like any NFT. Put simply, SFTs start as a fungible token and then transform into a non-fungible token.

The NFT ecosystem has been evolving, especially in the past year. Data from NonFungible show NFT sales surged to over $2.4 billion in the first quarter of 2021 – 20 times more than the previous three months. And as the year went on, NFTs showed no sign of stopping, with Ethereum-based NFT marketplace, OpenSea, getting a record high trading volume of $49 million on August 1st.

This astounding growth of NFTs made the headway for semi-fungible tokens, an asset that traverses between the worlds of fungible and non-fungible assets. SFTs have a limited use now, mostly pertaining to the gaming industry, where it’s being used to gap the bridge between fungible in-game currency and non-fungible collectables like weapons.

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Fungible vs non-fungible

Before unwrapping the concept of SFT, it is essential to understand the difference between fungible and non-fungible assets. Fungible assets are entirely interchangeable with each other. For example, if you have one bitcoin, you can exchange it with another bitcoin without any loss of value, as there is no distinction between one bitcoin token and another. Even traditional fiat money like rupees is fungible. You can exchange a Rs 10 note with another Rs 10 note held by another person.

Non-fungible tokens represent ownership of a unique asset. It could be a painting, song, or virtual real estate. Each item’s value will be based on the inherent properties of the asset, like how rare it is and the popularity of the creator of the asset. This means there can’t be a 1:1 swap of two NFTs, as they can have a different rarity. For example, you cannot exchange one painting with another as their value will be different. In addition, unlike fungible tokens, people can purchase fractions of an NFT.

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How semi-fungible tokens work

In the life cycle of a semi-fungible token, they are initially fungible and can be traded with other identical SFT. When the holder redeems these SFTs, they become non-fungible.

Let us take an example to simplify the concept of SFTs further. Imagine that you have a concert ticket for your favourite band. Before the concert takes place, you can exchange the concert ticket for another ticket for the same show, if the seating is in the same area. At this time, the concert ticket is a fungible asset. After watching the concert, the ticket does not have a traditional monetary value. Instead, it becomes collectable or memorabilia with a different value than what it had when it was bought.

The best thing about SFTs is that it has the characteristics of both fungible and non-fungible tokens. When it becomes an NFT, it is indivisible, verifiable, and indestructible. And when it is fungible, it is highly liquid and can be exchanged easily with anyone.

The creation of semi-fungible tokens

Currently, the minting of SFTs occurs only on the Ethereum network using Ethereum’s EIP-1155 standard. The EIP-1155 standard on the network is a combination of EIP-20 (fungible) and EIP-721 (non-fungible) standards.

Blockchain game developers Enjin, Horizon Games and The Sandbox created the standard EIP-1155 to manage fungible and non-fungible tokens using a single smart contract.

Most SFTs are being used in metaverse games for in-game assets. Still, the ability to use a single smart contract for fungible and non-fungible assets can lower transaction time and fees substantially. This can have a considerable impact on the crypto and NFT markets in the future.

(Edited by : Priyanka Deshpande)