With the immense growth and rise in popularity of Non-Fungible Tokens (NFTs), mostly in these recent times, the concept of Fungibility has become a staple thing to understand. Let’s gain a small background on how NFTs have been performing in this year of 2022. The numbers for NFTs in Q1 of 2022 have managed to exceed many expectations.
According to information taken from multiple data sources, the trade for NFTs have managed to score more than $2 Billion in only Q1, which comparing to the records from the previous months, is a jaw dropping 20 times increase. As for Q2, it seems like the performance level is expected to gain even more score.
NFT trading platform based on the popular Ethereum blockchain has also managed to score around $49 million as of the start of August.
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One of the most popular NFTs, formally named as CryptoPunks has also managed to gain a price valuation of around 66.9 Ethereum for each NFT piece, which is equal to around $220,000 at the time of writing.
Seeing this amazing level of growth, not only have non-fungible tokens gotten massively popular, but a fresh contenders called Semi-Fungible tokens have also started to creep their way into the market.
Since this guide is focused towards understanding what Semi-Fungible tokens are, we will keep it that way, however, to understand them better, we will first need to learn about fungible and non-fungible tokens in order to have a clear idea on how Semi-Fungible tokens operate.
Understanding Fungible and Non-Fungible Crypto Tokens
Firstly, we will take a comprehensive look at fungible tokens and then move to non-fungible tokens. As of today, the leading cryptocurrencies that investors are focused towards are mostly said to be fungible. This means that they can be easily traded around. To better understand this, we can take an example of a Cardano (ADA) cryptocurrency.
Suppose there are two entities looking to trade ADA, so they would easily trade it without any loss in valuation, providing the two entities a practical level of equality.
This is mostly due to the fact that both entities having ADA have no difference in valuation, meaning that the price valuation would be same for both entities having ADA. Just like cryptocurrencies, traditional currencies like the pound are also fungible, as every single pound has the same valuation.
Moving to non-fungible tokens, they are also assets, but their function is completely different compared to fungible tokens. NFTs are tokens that are powered by the concept of blockchain and are mostly referred to as items that carry digital ownership and value for the one holding it.
Due to this nature, NFTs are not able to be directly exchanged, so traders are required to purchase cryptocurrencies in order to buy them from the holders.
Each and every non-fungible asset has its own identity and value, meaning that they are distinguished. Taking an example from a traditional market, land is only purchasable via money or cryptocurrencies, as no one will be willing to trade land for items, due to the differentiation of the two assets.
There are four aspects that are associated with NFTs, which distinguish them from other types of assets. Below mentioned are the four accordingly:
- An NFT cannot be sold in parts and must be sold as a complete asset.
- Once generated, NFTs are unbreakable.
- Any aspect of the NFT like name, type cannot be changed once it is registered in the blockchain.
- NFTs have a trivial verification process because of their unique identification, due the blockchain that they reside over bring public in nature.
There are several different types of digital items that can be minted as NFTs. Items such as images, logos, animated images, cards, videos, music files, 3D collectibles and many more are examples digital items that can be minted as NFTs.
Once the items gain a unique identification, they are now ready to be registered and traded over trading platforms such as OpenSea, Nifty Gateway, Rarible and many others more.
Now that we have a good grip over both fungible and non-fungible tokens, we will now move towards understanding what Semi-Fungible tokens are in the next section of this guide.
Semi-Fungible Crypto Tokens (SFTs)
Semi-Fungible tokens is a fairly fresh new take towards tokens. In short, semi-fungible tokens are a sort of hybrid between fungible and non-fungible tokens, meaning that with the time they are present, they have the characteristics for both fungible and non-fungible tokens.
During its initial stages, a semi-fungible token has the functionality of fungible tokens as they are easily exchanged with the same valuation. To have a clearer view, we can take the example of two Google Play $5 vouchers. As long as they have the same valuation and the same expiry period, they can be easily exchanged.
Now what makes semi-fungible tokens part non-fungible is the latter functionality. Considering the previous example, we looked at, if one of the $5 Google Play voucher is used, then that supposedly fungible token losses its valuation, having a significant drop. This change in value makes it different from the un-used voucher, thus making it non-fungible.
We can take a look at another example, making the idea much clearer. For instance, a person buys a ticket to the final match of a football game held between the best teams.
After the final has ended, the nature of that same ticket changes, shifting its purpose from being an entry point to the match venue to an item that makes that final match memorable for everyone around the world. Not only does the purpose of the ticket change, so does its valuation, thus making it a semi-fungible token.
The same semi-fungible token ticket can then be bought by collectors directly or at an auction, that are passionate about the sport, and its value will depend over the condition of the ticket.
Developing Semi-Fungible Crypto Tokens
Semi-fungible tokens are developed using the Ethereum-based ERC-1155 standard. Ethereum powers many other token minting standards. Standards are basically designs that help to register and develop a token onto the Ethereum blockchain, making it develop a level of interoperability between all assets and projects that are built over the ERC-1155 standard.
The ERC-1155 standard first originated back in the year of 2017 through the joint efforts of three separate blockchain gaming firms formally named as Enjin, Horizon Games and the Sandbox.
The factor that allows semi-fungible tokens to gain the aspects of both fungible and non-fungible tokens is that the ERC-1155 standard is basically a hybrid of the two ERC-20 and the ERC-721 standards.
Since the standard was originally designed by game development companies, semi-fungible tokens are an essential part of the gaming industry, helping developers to mint multiple in-game items at a give time frame, letting them achieve more efficiency and cost effectiveness. More on the benefits will be discussed in the next two sections of this guide.
Moving from the ERC-721 Standard to the ERC-1155 Standard
The most commonly used standard to issue NFTs has known to be the ERC-721 standard, however due to the issues and vulnerability factors of using this standard, individuals involved in the construction of smart contracts have started to look into the ERC-1155 standard that is associated with being semi-fungible.
The ERC-1155 standard is considered to much more efficient in terms of both cost and processing, because of its highlighted batch processing feature.
In comparison, the ERC-721 standard requires each token to be minted separately, which obviously makes it less efficient and more costly for users. Another cool feature of the ERC-11555 standard is that different tokens can also be processed in batch.
Advantages of Semi-Fungible Crypto Tokens
With the recent development of semi-fungible tokens, the technology has managed to be more robust compared to the issues that are associated with NFTs. Below mentioned are some advantages that enable semi-fungible tokens to play a vital role in the development of the crypto and NFT sectors.
- Loss Recovery
Semi-fungible tokens provide safe and secure transfers and act as shield towards losses that can happen during unfortunate circumstances.
The main concept behind this is that the tokens are not bound to a contract, which means that the assets can be exchanged efficiently, eliminating the doubts surrounding the trading activity. And since non-fungible tokens do not posses such a benefit, their traders are likely to suffer the issues.
- NFT Alternative
While not being completely non-fungible, semi-fungible tokens provide traders with the benefits of NFTs anyways.
As mentioned in the previous point, semi-fungible tokens solve many of the issues regarding NFTs, so traders looking to seek NFTs that are worried about potential losses can utilize semi-fungible tokens to keep them safe from the issues of NFTs, while also gaining the benefits of using NFTs.
This motivates traders to push more investment and traders in the system.
- Quick and Trivial Transactions
Transaction processing of semi-fungible tokens is not only easy, but it is also quicker. Users have the ability to trade multiple tokens in a single instance, however the time allocated for the trade is quite low, thus enabling users to conduct several transactions or traders within a single time frame, taking advantage of the excellent efficiency aspect.
Semi-fungible means that traders are able to enjoy the features and advantages of both fungible and non-fungible tokens, while also eliminating the issues associated with both the token types. This not only makes trading more efficient, but also makes it secure.
- Cost Efficient
As previously mentioned, multiple processes can be done within a single transaction, so this makes it very cost efficient as the users only have to pay for a single transaction.
According to the founders of semi-fungible tokens, it makes trading a massive 90% more efficient in terms of cost, making them quite an attractive choice for investors and traders that wish to trade on lower prices and want to save valuation.
- Atomic Swapping
Another advantage coming in with semi-fungible tokens is atomic swapping. This means that semi-fungible assets originating from completely different blockchains are able to be exchanged easily without needing a third-party to either validate or process the entire transaction. This makes transactions easier and also contribute towards the quickness aspect of semi-fungible tokens.
In the next section, we will discuss the several use-cases that are currently associated with semi-fungible tokens that give them practicality.
Usage for Semi-Fungible Crypto Tokens
As they carry the aspects of both fungible and non-fungible tokens, there are many ways that semi-fungible tokens can be utilized effectively, making the lives of traders easier. Considering the examples from the previous sections, ticketing and coupons are one of the major use-cases for semi-fungible tokens.
BPM is one platform that offers a smart ticketing wallet and allows users to trade semi-fungible tokens like tickets and coupons.
Kelvin Rolf, one of the co-founders mentioned during an interview that semi-fungible tokens have provided a new level of flexibility to the platform, especially in the trading section of the platform, where traders are able to exchange and trade out tickets and coupons that are non-fungible and then shift to become semi-fungible.
Furthermore, another example is the Solv Protocol, that introduced a special feature by the term ‘Initial Voucher Offering’ (IVO). This is a type of functionality that gives users a chance to gain a seat of the initial investors towards a certain a project by utilizing semi-fungible tokens.
With the introduction of the Initial Voucher Offering, it made the Solv Protocol, the first ever to introduce semi-fungible tokens into Decentralized Finance (DeFi).
Semi-fungible tokens have also made their way into the gaming industry. Many video games of today have certain in-game items either featured or cosmetic to be traded among players.
Taking standard NFTs into consideration, those in-game items can be minted into NFTs, however the process minting every single item in the game is quite tedious, time consuming and costly.
This is where the concept of semi-fungible tokens come into play. Because semi-fungible tokens can be processed in batches, it allows for multiple in-game items to be minted in a single instance, making the entire process not only much more efficient, but also makes it cost effective for the game company.
In terms of trading platforms, Magic Eden is considered to the platform that initiated the trade of semi-fungible tokens very recently in July of 2022.
The trading platform powered by the Solana blockchain was introduced in partnership with the blockchain gaming company known as Genopets. Despite blockchain gaming still being in its early stages, the concept has started to grow on a rapid pace and with the features and advantages that semi-fungible tokens bring, it is likely to swell further.
As expected, it will take quite some time before semi-fungible tokens will reach their full potential and there is no question that they will bring more new and fresh use cases in the coming time. It is very likely that something major will show up with the likes of semi-fungible tokens.
Storing Semi-Fungible tokens and Non-Fungible tokens
Keeping SFTs and NFTs secure is a vital part of a trader’s success, thus making it quite an important factor to consider taking a look at. As of now, there are tons of wallet services available on the internet that allow the storing of digital assets like cryptocurrencies and NFTs.
And with the rise in popularity of SFTs, these wallets have started to show immense support for them. However, it must be taken care that the wallet is custodial or non-custodial depending upon your preference over asset control.
Likewise, same goes for trading platforms. A safe and reliable trading platform is required to make successful trades, so as the growth of NFTs and SFTs continue, more and more platforms have started their work to integrate both SFT and NFT trading, so that users have flexible options to choose from.
Whether the users wish to seek SFTs or NFTs mainly depends on their personal preference. If they wish to face the issues of NFTs, they can do so, if they want a more secure and efficient way then they can use SFTs.
Wrapping things up, while the usage of fungible and non-fungible tokens massively outweighs the level of semi-fungible, it is expected that semi-fungible tokens will likely steal the show in the coming future.
Looking at the benefits and characteristics surrounding semi-fungible tokens, it is safe to assume that SFTs are an evolutionary step towards making the token trading space a much safer and more efficient choice for traders around the world seeking the trade of tokens and cryptocurrencies.
The ability to process multiple items at a time, whilst having compatibility and support for different tokens and its efforts to minimize the risks associated with NFTs, semi-fungible tokens will mostly likely become an attractive choice for the majority of traders globally, as more and more solutions, platforms and use-cases start to involve them.
The future of token trading still has a lot of potential coming ahead, so for this looking to get into token trading, now is a good time to learn how to do it.
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