Following the rapid growth of NFTs, fungibility has
been a recurring topic in 2021. But what exactly are "semi-fungible"
tokens and how do they function?
In the first part of this year, interest in
non-fungible tokens (NFTs) soared to new heights. According to NonFungible, NFT
revenues soared to $2.4 billion in the first quarter, a 20-fold increase over
the previous three months. So far in the second half of the year, that
enthusiasm hasn't slowed, with the largest Ethereum-based NFT marketplace,
OpenSea, seeing a record high trading volume of $49 million on Aug. 1, up from
its daily average trading volume of $8.3 million. During the same month, the
average price of CryptoPunks, one of the first collections of NFTs to launch on
Ethereum's blockchain, reached a new high of 66.919 ETH per NFT (about $220,000
at press time).
The rapid expansion has sparked a new wave of
innovation surrounding non-fungible assets, including the development of a new
kind of "semi-fungible" token (SFT), which begins as fungible and
then turns non-fungible. Let's take a closer look at these words.
Tokens that are fungible
The bulk of crypto assets that investors track and
trade on a daily basis are fungible, meaning they can be swapped out simply. If
two individuals traded one ether for another, for example, there would be no
value loss and neither party would be better off. That's because there's no
difference in value between any two ether coins, or any two bitcoin coins for
that matter (with the exception of "tainted coins," which have been
stolen or used in illegal activities).
Fiat money, such as the US dollar, is likewise
fungible. To put it another way, fungibility refers to a token's (or
currency's) capacity to be swapped or replaced with other tokens of the same
kind with no change in value.
Tokens that aren't fungible
NFTs are blockchain-based tokens that may be used to
represent digital ownership of something rare and distinctive, including
artwork, collectibles, in-game hours, soundtracks, or virtual real estate. NFTs
cannot be traded like ether or US dollars since each object has a unique value
depending on intrinsic qualities such as who produced it or how uncommon it is.
A digital baseball card, for example, could not be
swapped 1:1 for a virtual piece of land. The two assets are diametrically
opposed. Not to mention that the digital baseball card might be part of a very
rare collection, and the virtual property plot could be at an inconvenient
position.
Because NFTs are kept on a blockchain, each token must
meet the following requirements:
Indivisible:
It is not feasible to buy NFT fractions.
Indestructible:
It is impossible to delete or erase it.
Immutable: It's impossible
to alter the underlying data after it's been saved.
Verifiable:
Because NFTs are kept on public blockchains, anybody can readily verify their
validity and ownership at any moment.
What are semi-fungible tokens, and how do you use them?
SFTs are a novel kind of token that may be both
fungible and non-fungible throughout the course of its lifetime. SFTs work like
normal fungible tokens at first, in that they can be exchanged like-for-like
with other SFTs.
For example, a token representing a valid $10 Amazon coupon
would be interchangeable with another token representing the same voucher with
the same expiry date.
The feature that distinguishes these unique tokens as
"semi-fungible" is that once redeemed, the fungible tokens lose their
face value. The non-fungibility of the expiring tokens is due to their lack of
exchangeable value.
Another way to think about it is to picture having a
token that represented a ticket to The Beatles' last performance. The ticket
would have a face value and could be exchanged for another similar concert
ticket, as long as it was for the same band, date, and seating location. When
the performance was over, the token that represented the ticket became valuable
memorabilia with a whole new worth. It would also rule out the possibility of
exchanging the token for a legitimate concert ticket with the same face value
to watch a different band.
Semi-fungible tokens receive their name from the
process of converting from a fungible to a non-fungible token upon redemption.
What is the best way to make semi-fungible tokens?
SFTs may now be created using Ethereum's ERC-1155
standard. That's one of many Ethereum token standards, which are blueprints for
building Ethereum blockchain tokens that work with all other ERC-based
projects.
In 2017, blockchain game creators Enjin, Horizon Games,
and The Sandbox created the ERC-1155 standard, which is basically a mix of the
ERC-20 (fungible token) and ERC-721 (non-fungible token) standards. This
enables the creation and management of both fungible and non-fungible tokens
via a single smart contract — a computer program that runs itself when specific
circumstances are met.
SFTs are very helpful in the gaming business, where there are both fungible and non-fungible components such as in-game money such as gold bars or V-Bucks, as well as collectibles and weaponry. As a result, gaming firms may develop both kinds of tokens and guarantee that they are interoperable, allowing players to simply exchange guns for gold bars and vice versa.
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