Fungibility has been a consistent theme of 2021, following the meteoric rise of NFTs. But what’s the deal with “semi-fungible” tokens and how do they work?
The interest surrounding non-fungible tokens (NFTs) reached astounding levels in the first half of this year. Data from NonFungible showed NFT sales surged to over $2.4 billion in the first quarter – 20 times more than the previous three months. That momentum has showed no signs of slowing so far in the second half of the year, with the leading Ethereum-based NFT marketplace, OpenSea, experiencing a record high trading volume of $49 million on Aug. 1, up from its average daily average trading volume of $8.3 million. The average price of CryptoPunks – one of the first collections of NFTs to make their debut on Ethereum’s blockchain – also set a record during the same month of 66.919 ETH per NFT (about $220,000 at press time).
The explosive growth has kickstarted a new wave of innovation around non-fungible assets, including the emergence of a new type of “semi-fungible” token (SFT) that starts off fungible and becomes non-fungible. Let’s break down these terms.
The majority of crypto assets investors monitor and trade on a regular basis are fungible, i.e. they are easily interchangeable. For example, if two people exchanged one ether for another, there would be no loss of value and neither party would be better off than the other. That is because there is no value distinction between any two ether or any two bitcoin for that matter (excluding “tainted coins” – coins that had been previously stolen or used in illicit activities).
Fiat money like U.S dollars are also fungible. In other words, fungibility is the ability of a token (or currency) to be exchanged or replaced with other tokens of the same type resulting in no change in value.
NFTs are blockchain-based tokens that can be used to represent digital ownership of something unique and scarce such as artwork, collectibles, in-game times, soundtracks or virtual real estate. Because each item has a distinct value based on inherent characteristics like who created it or how rare it is, it means NFTs cannot be mutually exchanged like ether or U.S dollars. For example, a digital baseball card couldn't be exchanged 1:1 with a plot of virtual land. The two are completely different assets. Not to mention, the digital baseball card might be part of an exceptionally rare collection, and the plot of virtual land could be in an undesirable location.
Because NFTs are stored on a blockchain, it means each token has the following characteristics:
- Indivisible: It’s not possible to purchase fractions of NFTs
- Indestructible: Cannot be destroyed or removed
- Immutable: Impossible to change the underlying information once it's stored
- Verifiable: Because NFTs are stored on public blockchains, authenticity and ownership can be easily verified by anyone at any time
What are semi-fungible tokens?
SFTs are a relatively new group of tokens that can be both fungible and non-fungible during their lifecycle. Initially, SFTs act like regular fungible tokens in that they can be traded like-for-like with other identical SFTs.
For example, a token that represents a valid $10 Amazon voucher would have the same value as an identical voucher with the same expiration date and would therefore be interchangeable.
The distinguishing factor that makes these special types of tokens “semi-fungible” is that once they’re redeemed, the fungible tokens lose their face value. That loss of exchangeable value makes the expired tokens non-fungible.
Another way to understand this is to imagine owning a token that represented a concert ticket to see The Beatles’ last-ever performance. The ticket would have a face value and could be exchanged for another identical concert ticket, provided it was the same band on the same date and in the same seating area. Once the concert ended, the token representing the ticket would then become collectible memorabilia and have an entirely new value. It would also mean that the token could no longer be exchanged for a valid concert ticket of the same initial face value to see a different band.
That process of transforming from a fungible to a non-fungible token upon redemption is where semi-fungible tokens get their name.
How to create semi-fungible tokens
Today, it’s possible to mint SFTs using Ethereum’s ERC-1155 standard. That is one of several Ethereum token standards – blueprints for creating tokens on the Ethereum blockchain that are compatible with all other ERC-based projects.
The ERC-1155 standard was developed by blockchain game developers Enjin, Horizon Games and The Sandbox in 2017, and is essentially a combination of the ERC-20 (fungible token) and ERC-721 (non-fungible token) standards. This makes it possible to create and manage both fungible and non-fungible tokens using a single smart contract – a computer program that self-executes when certain conditions arise.
SFTs are particularly useful in the gaming industry where there are fungible elements such as in-game currency like gold bars or V-Bucks, as well as non-fungible items like collectibles and weapons. This means gaming companies can create both types of tokens and ensure they’re interoperable so that gamers can easily trade things like weapons for gold bars and vice versa.