NFTs vs SFTs: Key Differences

Blockchain has evolved, and over the years, we have seen innovations in the web3 space, with NFTs being among the biggest. Both NFTs – and SFTs for that matter – lead in terms of redefining ownership and utility in the digital space, and they have helped shape industries such as modern gaming, art, real estate, and much more. 

The primary focus of this content piece is to provide readers with an in-depth understanding of NFTs and SFTs. NFTs have gained widespread recognition for their role in the crypto industry, but SFTs are a very versatile counterpart that blends both fungibility and non-fungibility for different applications. Therefore, it is important to understand the differences between NFTs and SFTs for all enthusiasts, investors, developers, and collectors in the blockchain space. 

What are NFTs?

Non-fungible tokens, NFTs, are a digital asset type built on blockchain technology. Unlike crypto, NFTs are unique and non-interchangeable. In essence, an NFT provides an ideal representation of one-of-a-kind items. The term “non-fungible” suggests that no two NFTs are identical. Each NFT has unique metadata that makes it different from the rest. Such an NFT can be anything: a piece of digital art, virtual land, virtual character, and so on. This is what makes NFTs unique.

An NFT is indivisible. NFTs cannot be split into smaller units. Instead, they are only traded as whole tokens. Additionally, NFT ownership and transaction history are permanently recorded on a blockchain. This makes them transparent and secure assets.

Use Cases

NFTs are not merely speculative assets. They have plenty of utility in various industries because of the ability to represent ownership of unique digital and physical assets. 

NFTs have transformed the art world by enabling artists to monetize their work directly. Perhaps one of the best-known examples would be Beeple’s Every Day: The First 5000 Days,” which sold for $69 million at Christie’s. Artists can also gain royalties on secondary sales. 

Besides that, NFTs gained momentum due to digital collectibles such as CryptoPunks and Bored Apes becoming NFT success stories. These collectibles serve as status symbols as well, where the holder of NFTs of a collection has access to communities, events, merch, and other advantages (i.e. airdrops).

In recent years, NFTs have seen usage from musicians as well. NFTs can help provide direct-to-fan revenue streams. Some artists have released albums and exclusive content as NFTs, with fans owning unique, limited-edition music assets.

NFTs have also helped fuel the web3 gaming sphere. In-game assets (i.e. weapons, skins, land) can be tokenized as NFTs, and players gain true ownership of these assets. They can then trade or sell them outside the game. 

Last but not least, NFTs are now used for virtual real estate. People can buy, sell, and develop land parcels as NFTs. Moreover, some real estate companies also sell via the NFTs, so that the buyer would have ownership of real estate both physically and digitally.

How NFTs Work on the Blockchain

Powered by blockchain technology, users can create, store, and transfer NFTs. The first blockchain to come up with NFTs is the Ethereum blockchain. The latter remains one of the most used networks for NFTs, primarily using the ERC-721 token standard. 

NFTs are created using smart contracts, which are self-executing contracts with the terms of the agreement directly written into code. These contracts define ownership, transfer rules, and any additional data associated with the NFT. This data includes crucial information such as a unique identifier for the token, ownership details and transfer history, and/or other links to external resources. 

The first standard for NFTs is the ERC-721. This is the standard that makes digital assets unique and indivisible. Later on, other token standards were introduced. Every transaction involving ERC-721 tokens is recorded on the blockchain to ensure authenticity. 

Today, NFTs can be used across various platforms and networks, and their versatility has made them highly applicable to some of the biggest companies in the world. Besides benefitting both businesses and creators, NFTs also help promote better communities by giving holders voting rights on how to shape the community.

In the sense of paradigm shifts in the digital space, crypto did its toll. But it is safe to say that smart contracts and NFTs did the same to the crypto market. They are building blocks for decentralized ecosystems. 

What are SFTs?

SFTs, short for Semi-Fungible Tokens, are a hybrid approach of blockchain tokens that combines the characteristics of fungible and non-fungible tokens. SFTs function just as fungible tokens, meaning that they are interchangeable and have uniform value. But, under certain conditions, they can transition into non-fungible tokens and become non-interchangeable. Because of this dual functionality, SFTs can adapt to more applications than NFTs.

Most easily explained would be to say that SFTs are used when an asset needs to change its utility or state under a certain lifecycle. For example, a ticket to a virtual concert on the entrance to a certain community can be an SFT first, but when it is activated (or is past its lifecycle), it is turned into a unique, non-transferable item. 

So, SFTs can be exchanged on a one-to-one basis with other identical tokens, but after certain conditions are met, SFTs become unique assets. This transition is seamless (from fungible to non-fungible). 

The batch transfer capability of SFTs reduces transaction costs. SFTs can also be used for bulk operations (transfer on a large scale), unlike NFTs. SFTs use the ERC-1155 standard, meaning that developers can create both fungible and non-fungible tokens within one smart contract to reduce complexity and increase scalability. 

Use Cases

Similar to NFTs, SFTs can also be used in a wide range of applications. For example, they can also be used in the gaming industry. In-game currencies can start as fungible tokens and transition to non-fungible items when upgraded (i.e. a weapon or skin with unique attributes). 

SFTs also streamline the ticketing processes by starting as identical tickets and transitioning into unique assets after being redeemed. Additionally, SFTs enable businesses to create flexible rewards, such as exclusive discounts, perks, and much more. Last but not least, SFTs can represent other metaverse assets in items that are needed as fungible for trade purposes but there is also distinct ownership. 

How SFTs Work on the Blockchain

As suggested SFTs use the ERC-1155 token standard. This combines the functionality of fungible tokens (ERC-20) with non-fungible tokens (erC-721_/

Similar to NFTs, SFTs include digital data that includes fungible and non-fungible attributes. The state of an SFT is managed by its smart contract, which updates the data as the token transitions from one state to the other. The use of the ERC-1155 standard has helped individuals and communities optimize resource usage so that token management is efficient across various web3 platforms. 

But this makes SFTs more versatile than NFTs since they offer more adaptability, in addition to reducing gas fees for batch transactions. Hence, SFTs do have a broader market appeal, even though that may not necessarily be the case. 

Still, SFTs represent another addition to the innovative space of crypto. With its hybrid approach, SFTs can be powerful tools for various industries that want to leverage blockchain technology for their applications. 

Key Differences Between NFTs and SFTs

In a nutshell, there are plenty of differences between NFTs and SFTs. Here is a table that summarizes most of it:

So, while NFTs are best suited for assets that require permanent uniqueness, SFTs are ideal for apps where assets NEED to evolve over time. 

Why Do NFTs and SFTs Matter? 

Both NFTs and SFTs are crucial for the blockchain ecosystem. They drive innovation and help other entities when it comes to digital ownership, value, and utility. They have seen huge adoption in recent years, which further shows their importance in the digital space. This adoption spans multiple sectors, but there is still a lot to do in certain areas. 

We have seen innovation in the gaming industry. Games like Axie Infinity show how NFTs and SFTs can create vibrant in-game economies, and successful ones for that matter. Artists, filmmakers, influencers, and others in the entertainment industry can leverage these technologies to offer their consumers unique experiences and innovative reward mechanisms. 

The metaverse was one of the most talked about concepts in the 2021 bull cycle. Major companies even rebranded and turned their full focus on using metaverse as an applicable model to foster new avenues for digital commerce. 

While their hype is not at the peak of where they once were, NFTs and SFTs are still synonymous with decentralization, and they help make blockchain technology much more significant globally. 

Future of NFTs and SFTs

We have seen a major development in the crypto space, and the same can be said for NFTs and SFTs. There have been many developments that enhanced the abilities of NFTs and SFTs to function seamlessly, such as making them interoperable. Furthermore, over the years, developers have addressed scalability issues (such as Layer 2s) and have made NFTs and SFTs more scalable as well. Therefore, it is quite possible that more innovation is coming in this sector that makes both these asset types more accessible, efficient, and groundbreaking. 

Nonetheless, as with each innovation, NFTs and SFTs can also be subject to various challenges.

The classification of NFTs and SFTs under securities laws remains ambiguous, not just in the United States, but in multiple jurisdictions. So, we could see changes in terms of how such assets are regulated given their distinct nature from other cryptocurrencies. 

Market volatility is no stranger in the NFT market. The latter has experienced fluctuations, with periods of rapid growth but also sharp declines. The likes of OpenSea have seen massive reductions in trading volume and market share at times. Therefore, even if awareness grows and NFTs and SFTs see broader adoption, these asset types may see lower interest at times. 

However, new technologies that complement NFTs and SFTs, such as augmented and virtual reality, the Internet of Things (IoT), and other technologies can help create immersive and interactive experiences. 

Conclusion

NFTs and SFTs have changed the blockchain ecosystem with distinct strengths and applications. NFTs redefine digital ownership, focusing on uniqueness and exclusivity. SFTs add flexibility, combining fungibility with adaptability across evolving use cases. Both contribute to industries like gaming, art, and ticketing while fostering innovation in digital economies.

Understanding these token types is important for navigating the future of Web3. NFTs offer new opportunities for creators, while SFTs provide scalable solutions for businesses. NFTs and SFTs may continue to shape decentralized applications and transform digital interactions globally.

FAQ

Can an SFT turn into an NFT?

Yes, SFTs transition into NFTs after predefined conditions, such as usage or redemption, are met.

What are some real-world applications of SFTs?

SFTs are used in gaming, event ticketing, loyalty programs, and dynamic assets like coupons or rewards.

Are NFTs more valuable than SFTs?

NFTs typically hold higher subjective value due to their uniqueness, while SFTs focus on practicality and scalability.

Which blockchain standards are used for NFTs and SFTs?

NFTs use ERC-721, while SFTs use the more flexible ERC-1155 token standard.

How do NFTs and SFTs impact the gaming industry?

NFTs enable true ownership of unique assets, while SFTs streamline in-game economies with their fungibility.

Can SFTs replace NFTs in the future?

SFTs won’t replace NFTs but will complement them by offering greater flexibility in dynamic use cases.

Are SFTs cost-efficient compared to NFTs?

Yes, SFTs reduce costs through batch transfers and multi-token support, unlike the one-to-one transactions of NFTs.