What Is a Crypto Token That Is "Semi-Fungible"?

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.