Semi-fungible tokens — coins that travel between the worlds of cryptocurrency and NFTs

Madana PrathapDec 24, 2021, 00:36 IST

Business Insider India

Semi-fungible tokens, travelling between two worldsBI India

Semi-fungible tokens (SFTs) are the underdogs of the crypto world.
They start out as fungible tokens and then provide value as a non-fungible token (NFT).
Minted on the Ethereum blockchain, SFTs are only just beginning to break onto the crypto scene with limited use cases.
Proponents argue that the flexibility SFTs provide could make them ideal for concert tickets or in-game purchases.

There are normal tokens like Bitcoin, which are fungible. This means that one is exactly the same as the other. And, then there are non-fungible tokens (NFTs) like the Bored Ape collection or Beeple’s digital artwork that was sold for a massive $69 million, that can’t just be switched out for each other.

And, then come semi-fungible tokens (SFTs), which traverse between these two worlds. As compared to cryptocurrencies and NFTs, the concept of SFTs is still very nascent. What makes it unique is that the token starts off as a fungible asset and then transforms into an NFT.

Imagine this. You bought a pen and put it in your pocket. At this time, it’s fungible. One pen of the same brand can be exchanged for another. However, an hour later you can command it to turn into a feather quill that remembers that used to be a pen and where the pen had originally been bought. That is close to how a semi-fungible token (SFT) behaves today, especially in the blockchain gaming universe.

The flexibility in how an SFT behaves has opened new options in how cryptocurrencies can be used. SFTs have limited use cases as of right now but have begun to receive more attention in a world where NFTs are earning millions of dollars for creators.

What is fungibility — fungibles vs NFTs?

A fungible item is one that can be replaced by another identical item with no practical difference. For example, a couple of ₹10 notes in your wallet, three copies of the same computer file, or ten identical milk packets are all fungible.

At the other end are non-fungibles, such as your vehicle or pet dog. They have specific identifiers that allow these items to be one-of-a-kind — memory or behaviour traits that mark them out as unique.

In the context of crypto, Bitcoin or Ether currency is fungible, while a token of the “Leave Britney alone,” video is non-fungible.

What makes an SFT possible?

Standards make it possible to communicate effectively. In the real world, examples include the definition of ‘what is a meter’ or how your browser displays text on this website. In the world of blockchain, each platform has a set of standards for how the tokens that live within the ecosystem will behave. Simply put, it’s the set of rules that define the nature of tokens.

When it comes to SFTs, they are currently minted on the Ethereum blockchain and function as per the EIP-1155 standardisation. In comparison, the EIP-20 standard is used for fungible ETH tokens and EIP-721 for non-fungible tokens.

What is an SFT?

SFTs are uniquely positioned, in that they begin circulation as a fungible item, and then become non-fungible.

To understand this, consider a ticket to the final match of the IPL T20 cricket season. The ticket would be valued at a certain amount, and is interchangeable for any other ticket of the same match, of the same seating class. After the match is over, the ticket can no longer be used for entry to the stadium – but becomes a collector’s item instead, memorable for fans with a different value assigned to it.

In other words, using the ticket turns it from being fungible to a non-fungible token. That is how semi-fungible tokens get their name. However, SFTs do not ‘expire’ in the same manner and switch fungibility based on ‘smart contracts’ pre-programmed into them by the SFT’s developer.

How are SFTs created?

SFTs are created by developers by purchasing Ethereum tokens and transacted by paying ‘gas’ fees, albeit at lower transaction costs than normal Ethereum tokens, according to SFT proponents. SFTs are currently being tried out in metaverse game environments.

Some game environments developed by Enjin, Horizon Games and The Sandbox support the use of SFTs. Games may have both, fungible items like in-game currency — gold bars or game-dollars — as well as non-fungible objects like collectibles and weapons. This way, the SFTs underlying the game let players trade for example, game-dollars for weapons, or vice versa.

How SFT usage helps game experience, players and developers

As an in-game example, you may see a token that begins life as an NFT that can be harvested to obtain ten game dollars that function as fungible currency. The player may then trade that currency to others or buy a flintlock musket, turning it back into an NFT. As the player advances to level 45, the musket could turn into an assault rifle. These changes aren’t due to external instructions, but dictated by the SFT’s inbuilt ‘smart contract’ as created by the developer.

The way a token can morph, lends itself to ‘converting’ old games for an online multiplayer world, with assets/currency trackable by the game developer allowing for more control - as against the unbridled inflation seen in older MMO games. Depending on game mechanics, the same token might have a different value to users when traded in currency form or when in rifle form.

The SFT mechanics described above lead to a lower cost for both developers and users/players, compared to using the older EIP-721 NFTs type. Consider the free ‘mutant serum’ that was given to some paid holders of the ‘Bored Ape’ NFT. That action worked like a stock buyback - it was an additional cost for the developer, pushed up the price of the ‘free’ serum and its base NFT, and inflated prices all around. By contrast, SFTs being used for the same purpose could allow for a more stable in-game economy. <does this para help illustrate? Is it too much maybe?>

SFT versus NFT

The biggest positive in favour of semi-fungible tokens, is that they are able to retain their ‘fungibility’, until transition to NFT and vice versa, as explained above.

When in NFT form, it can ‘remember’ history or attributes. In a game for example, it could remember that the DJ console you purchased must work as a level 89 item, and used to belong to these three other players.

An SFT in NFT form could still provide advantages of NFTs, of being verifiable, indivisible and indestructible.

For app developers, the advantage of bundling tokens, using a single smart contract for a token that is both fungible and NFT, as well as faster transaction times, serve as an argument to give the technology a chance.

The flexibility of semi-fungible tokens currently offers a lot of opportunities to developers, content creators and sponsors of projects. There is a waiting period for regular users and investors however, since publicly accessible marketplaces, DApps and metaverse environments are yet to open the SFT floodgates.

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