What is a Semi-Fungible Token (SFT)?

The NFT bubble may be over, but have you heard about semi-fungible tokens (SFTs)?

Your first thoughts could be skeptical. So many investor traps started with “this time it’s different,” only to end the same way. But what if we told you SFTs have been around for over five years, and that they could solve some of the biggest problems with NFTs?

Lack of liquidity, irreversible transactions, overpriced gas fees?

What’s certain is the media eclipsed SFTs with NFTs, and it’s not until 2023 that they started to catch up. NFTs aren’t “dead,” but their trading volume is far from early 2022’s.

Will semi-fungible tokens be able to revive interest in digital assets and add to their utility? Or will they follow the same trend?

Quick Takes

• Semi-fungible tokens (SFTs or ERC-1155s) are digital assets that start as identical within their collection. Once they’re expired, claimed, or used, they switch from fungible (FTs) to non-fungible tokens (NTFs).
•  SFTs appeared in 2018 but didn’t take off like NFTs did because of their niche-specific use cases: in-game items, online-store vouchers, and event tickets.
• SFTs and NFTs are a terrific combination to cover each other's weaknesses, such as low liquidity, centralized ownership, or indivisibility.

What Are Semi-Fungible Tokens?

Semi-fungible tokens (SFTs) are fungible tokens (FTs) that turn into non-fungible tokens (NFTs) once redeemed. These appeared in mid-2018 after the 1155th Ethereum Improvement Proposal (EIP), hence the token standard called ERC-1155. Semi-fungible tokens are technically only NFTs (ERC-721) that at first behave like FTs (ERC-20).

Semi-fungible tokens add utility to NFTs while solving common problems such as: 

• Liquidity: There are no NFT exchanges, only peer-to-peer marketplaces (P2P). There’s no guarantee you’ll ever be able to sell or buy one.
• Cost-efficiency: NFT marketplaces have improved this with “lazy minting,” meaning that your assets don’t exist on-chain until after the first buyer. With SFTs, the cost isn’t a big barrier, because you can create infinite SFTs within the same transaction and pay gas once.
• Indivisibility: It’s too complex to implement fractional NFT ownership. But SFTs start as fungible and don’t have this problem.

(To achieve the first two, for example, Pulsechain is airdropping every single NFT held in the Ethereum blockchain.)

Generally, semi-fungible tokens can only switch once from FT to NFT. It might be possible to convert the NFT into a different SFT, but there aren’t yet enough examples of this reversion. The best-known use cases for semi-fungible tokens are ecommerce vouchers, event tickets, and in-game assets.

For example:

An SFT game offers loot boxes for 100 in-game currency (an ERC-20 gaming token). You can buy dozens of boxes or sell them effortlessly for 0.001 each because they’re identical. Let’s say you open one, and it turns into a sword with different traits worth a different amount (NFT). The game might also have a smelting mechanic, so if you don’t want this sword, you can destroy it and extract 40 in-game coins.

Properties of Semi-Fungible Tokens with Examples

The three following examples describe three main properties of semi-fungible tokens and how they work for different use cases.

SFTs Start Liquid

Semi-fungible tokens start all as identical NFTs and become unique after their redemption. 

Imagine a band is hosting a concert for 5,000 people with $100 per person. There’s the option to buy tickets as NFTs up to 10 per person. One perk for this might be a pre-sale of three days before the actual tickets are buyable.

Some people will claim spots with NFTs and others with conventional payment methods. Either way, the owner can burn ticket NFTs to ensure there are never more than 5,000 available. If 1,000 people buy physical ones and 500 buy NFTs, there shouldn’t be 4,500 NFTs left but 3,500 (delete or deactivate 1,000 listings).

Suppose hundreds of people bought, and you too have 10 tickets. But some people won’t come, and now you only need 6. You can return four NFTs to the owner for a refund until the concert day. You could also sell them at a premium if all official tickets sell out.

You can then present those tickets to access the concert. You will still keep the tickets, but they’re no longer valid once the event ends. However, the band could use them as a receipt for future loyalty programs.

E.g, Whoever owns ticket no.1, 100, or 1000 gets a discount for the next concert

E.g, If you present NFT tickets of previous concerts, you get priority for closer seats to the stage. As verification, only the first ticket owner will benefit

E.g, After the concert, ticket NFTs might change the ticket image to a picture taken in the concert.

Tickets are no longer interchangeable. But they can be sold at NFTs at custom prices, either for their utility or value as memories.

SFTs Are Divisible

Owners of semi-fungible tokens can trade each of their traits independently.

The most visual example is the gaming use case. Metaverse games might have thousands of random items for players, each with different traits and rarities. Rare traits have less chance of generating on NFTs, and one alone can make a common item valuable.

From the first loot box example, let’s say you pulled a simple metal sword.

But this sword has a blue-flame effect, which makes it more valuable and rare than, say, a golden sword without unique items. Maybe it grants a special ability, or it just looks cool. The question is, will players buy it?

Since cosmetics don’t usually affect stats, no one may want metal swords, which is unfortunate.

But let’s say the game supports semi-fungible tokens and NFT divisibility. You could decompose your sword and sell its parts separately.

So you can put your blue-flame cosmetic for sale and probably attract more buyers, as they can equip it for any gear. For the average player, it might be worthless. But imagine someone has a full set of armor and weapons of blue diamond (whatever the rarest material is), but they don’t have rare cosmetics.

The blue-flame effect would help the collector complete the set and exponentially increase its value. So they’re willing to pay far more, and you offset the loot box cost with huge profits. Win-win.

In the reverse case, you might have got the rarest sword in the game but with mediocre traits. You could look for players with bad swords (or any gear) that got ultra-rare traits and buy them for your sword.

SFTs Allow Sharing

SFT creators can lock NFTs in a smart contract wallet and share ownership via fungible NFT “shares.”

Suppose you’re an investor looking to buy a domain NFT, crypto.eth. It costs $1,000,000 worth of ETH, but you’re only willing to spend $50,000. There are also two other interested buyers willing to put in $100,000 each. Even if you three combine $250,000, the owner is still down $750,000. 

The creator can decline, but there’s a chance the $1M buyer never shows up. He could also accept, but since there’s an unpaid 75%, the owner might choose to keep the NFT and give buyers nothing. Also, why should buyers and owners trust that they won’t scam each other?

Let’s say there’s a platform similar to liquidity pools for NFTs. The creator locks the NFT in a smart contract wallet (that no one can access), and the protocol keeps track of exactly how much each person owns. Your $50,000 stands for 5% ownership, the other two investors for 10% each, and the creator for 75%.

Once locked, the creator could fractionalize this domain into $10,000 shares (1% each). As long as the NFT is locked, all shares are fungible. As for when to transfer ownership, it depends on the creators’ choice:

a. Improvise a DAO (decentralized autonomous organization) with multi-signature wallets to manage the domain based on a voting majority.

b. Whoever owns over 50% makes the decisions

If the domain is now worth $2,000,000, your own $100,000. Someone looking to spend $1M (original price) can now only get 50% ownership.

Let’s say a $2M buyer appears. Since that’s 100% ownership, the smart contract could send the NFT to the buyer wall and “liquidate” all fraction owners. That day, you instead find an extra $100,000 worth of ETH in your wallet.

Semi-Fungible Token Use Cases

By now, you may know most SFT use cases:

• Event organizers can use them as tickets that turn into NFTs after the event.
• Game developers can use semi-fungible tokens to enrich the in-game economy. Players can interact with SFTs as loot boxes or event game passes. They might also divide NFTs into SFTs to craft rarer ones.
• Online sellers can give SFT freebies to repeat customers. They’re also a refund alternative as vouchers to exchange for other products
• Users can share ownership of digital assets (domains, real estate) without having to trust the biggest investor with the NFT.

What’s The Future Of Semi-Fungible Tokens?

If NFTs have a bright future despite their limitations, SFTs will have a place as well. Especially once NFTs gain utility in specific niches, not just digital art. Early examples of this are NBA Top Shot (sports) Onlymusix (music), Enjin, Horizon Games, and The Sandbox (gaming).

It’s unlikely that semi-fungible tokens outgrow NFTs, among other reasons, because their value is in utility over storing value. Or else, they wouldn’t have been invisible for so long. SFTs make NFTs more accessible and flexible so that their adoption isn’t some volume spike, but a consistently growing digital marketplace.