ERC-3525 Countdown: What is SFT? What is it used for?

Author: Solv Research Group

On September 3, 2022, the final public comment period (last call) for the semi-fungible token standard ERC-3525 ended, which means that ERC-3525 will be officially approved in a few weeks and become an industry standard. It is expected to be the first token standard passed after the Ethereum upgrade merge.

Tokens are one of the hot topics in blockchain innovation. Currently, there are dozens of token standards named ERC, and new standards are continuously emerging. What makes ERC-3525 special?

Unlike most newly emerged specialized "small standards," ERC-3525 is a universal "large standard." This new token standard was proposed and designed by the Solv Protocol team, supported by several core Ethereum developers, and took 20 months from inception to finalization, with repeated improvements and multiple drafts, making it a rare example of "slow work yielding fine products" in the speed-driven blockchain industry.

ERC-3525 defines a new asset class—semi-fungible tokens (SFT), thus placing it on the same level as ERC-20 and ERC-721. Previously, ERC-20 opened the fungible token (FT) market in 2016, and the current FT asset scale has reached hundreds of billions of dollars. ERC-721 opened the non-fungible token (NFT) market in 2018, and the current NFT asset scale has reached tens of billions of dollars. Can ERC-3525 open a new market? What is the outlook for this market?

To answer this question, one must understand what semi-fungible tokens (SFT) are, and to understand what SFT is, one must first know what FT and NFT are.

What is SFT?—Starting from FT and NFT

Fungible tokens are referred to as "fungible token" in English, abbreviated as FT. The English word fungible means "interchangeable." As the name suggests, the characteristic of FT is that any two units of the token are completely identical and can be exchanged for one another, making it "fungible" overall. FT directly corresponds to value units in the real world, such as currency, common stocks, and points, and can be easily understood because they can be added or subtracted.

As early as 2015, when Ethereum was just launched, Vitalik Buterin proposed the idea of implementing FT through smart contracts, and Fabian Vogelsteller proposed the ERC-20 standard in November 2015. After 2016, ERC-20 became the most widely used and recognized digital token standard, opening up a massive industry worth hundreds of billions of dollars.

Non-fungible tokens are referred to as "non-fungible token" in English, abbreviated as NFT, and they are the antonym of FT in every aspect. In FT, any two units of the token are completely identical and interchangeable, while each NFT is unique, one-of-a-kind, irreplaceable, and cannot participate in calculations. FT represents abstract quantity units, while NFT represents specific digital items, such as virtual artworks, domain names, music, game equipment, etc. To express their uniqueness, each NFT has its own unique ID (determined by the contract creation address and serial number) and metadata.

The main standard for NFTs is ERC-721, proposed in January 2018 by William Entriken and two others. The first three years of NFTs can be described as a silent supporting role. It wasn't until 2021, with the explosion of crypto art, that the NFT industry suddenly surged. In the first five months of 2022, the new asset scale of NFTs reached 36 billion dollars. Today, NFTs are considered one of the most important infrastructures for Web3 and the metaverse.

So what is SFT?

SFT is a semi-fungible token, a new type of token, and the third type of universal digital asset alongside FT and NFT. As the name "semi" suggests, it is between FT and NFT, capable of being split and calculated while also having uniqueness.

As mentioned earlier, FT is suitable for expressing abstract quantities, and NFT is suitable for expressing specific, one-of-a-kind items. So what does SFT express?

What new assets will SFT bring to Web3?

In fact, SFT is suitable for expressing digital items that have inherent quantity characteristics and sometimes require merging or splitting operations. Typical examples include financial notes, advanced financial contracts, land, and all standardized goods with inherent quantities. For example, two bonds with identical conditions and a face value of 500 yuan each are equivalent to one bond with the same conditions and a face value of 1000 yuan.

Another example is two virtual lands that can be merged into one under certain conditions. In the physical economy, two solar panels of the same model with an effective area of 20 square meters each can be considered as one 40 square meter solar panel for management and accounting purposes. Similarly, two cars of the same model can be aggregated by tonnage into the same batch. Such items are prevalent in Web3, DeFi, and the physical economy, especially in management, statistics, and financialization scenarios, making them abundant and of significant scale. These items are best expressed using SFT.

ERC-3525 is specifically designed to express SFT, combining the advantages of both FT and NFT. It has rich information carrying and visualization capabilities like NFT, while also possessing quantity characteristics like FT, allowing for flexible splitting, merging, and mathematical calculations. Based on ERC-3525, developers can easily support the aforementioned application scenarios, making it not only the infrastructure for Web3 and the metaverse but also an important bridge connecting blockchain with the physical economy, with seemingly limitless application potential. In the long run, SFT is bound to develop into a massive industry worth trillions of dollars.

In addition, ERC-3525 has powerful scalability, allowing for the addition of many magical features. For example, the proposers of ERC-3525, the Solv Protocol official team, have expanded a very useful capability based on ERC-3525, enabling SFT to accommodate an unlimited number of other digital assets of various types. These digital assets can be FT, NFT, or other SFTs. This technical extension also allows for the dynamic transfer of assets into and out of SFT, making SFT a flexible dynamic container that can express various advanced digital assets, financial tools, and contracts in Web3, with enormous application potential.

It is evident that ERC-3525 represents a universally existing digital asset SFT, while also possessing strong scalability, leaving ample room for various innovations.

Application Ideas for ERC-3525

How can ERC-3525 be applied in Web3? Here are several ideas:

First, use ERC-3525 to construct various advanced digital financial assets, such as certificates of deposit, bills of exchange, bonds, options, futures, swap contracts, insurance contracts, fund shares, asset-backed securities (ABS), etc. On one hand, ERC-3525 SFT can be freely split, merged, and calculated, with flexibility comparable to ERC-20 fungible tokens. On the other hand, advanced financial assets have complex condition combinations that require strong expressive capabilities. ERC-3525 significantly enhances metadata and visualization capabilities based on ERC-721, allowing for the expression of richer, more structured information, with information transparency and penetration that traditional technologies cannot match.

For example, if ERC-3525 is used to express fund share assets, users can easily gain insight into the current asset composition and status of the fund, eliminating the common information opacity and asymmetry found in traditional finance.

Second, develop advanced virtual items and equipment in Web3 or the metaverse based on ERC-3525. For instance, if virtual land is represented by NFT, it becomes difficult to handle land merging and splitting operations, while using SFT makes it effortless. Additionally, for upgradable and mergeable game equipment, the computability and combinability of SFT can greatly simplify development difficulty and enhance the liquidity of virtual goods transactions. Furthermore, creating membership cards, gift vouchers, and lottery tickets based on ERC-3525 can enable many unprecedented functions, enriching the user experience of Web3 applications.

Third, implement real-world asset on-chain based on ERC-3525. ERC-3525 SFT can carry and lock legally binding contract texts generated in the real world (usually represented as PDF documents) and achieve real-time monitoring of related asset statuses through programming with oracle services. Therefore, after coordinating with relevant institutions and government departments, ERC-3525 can become a powerful tool for putting real-world assets on-chain.

For example, land can be expressed as ERC-3525 SFT, and solar panels can also be expressed as ERC-3525 SFT, both of which can be expressed in area units and managed on the blockchain. This allows for free combination, splitting, and transfer, and after connecting to management systems, the actual status can be quickly queried, providing advantages in both supply chain collaboration and financialization that traditional technologies cannot match.

Fourth, treat the extended ERC-3525 SFT as a transferable, splittable digital asset wallet. If the dynamic container feature extended by Solv Protocol is used, ERC-3525 SFT can accommodate multiple types and unlimited quantities of digital assets, such as packaging 2 bitcoins, 10 ethers, 2 BAYC NFTs, and another SFT into one ERC-3525 SFT, functioning like a wallet. However, this SFT can be transferred and even split, making it far more flexible than a wallet.

Finally, the most general use is to treat ERC-3525 SFT as a visualized, tokenized smart contract. Since ERC-3525 SFT can embed one or a group of smart contracts with its own execution logic and triggering conditions, while also having the ability to receive and send tokens, it can be fully regarded as a transferable, splittable, and visualized advanced smart contract. Theoretically, all functions that smart contracts can achieve can be implemented using ERC-3525, and with greater flexibility. As smart contracts are the core technology of blockchain, ERC-3525 has also become one of the most universal technologies that can reflect the characteristics and advantages of blockchain.

For example, a supply chain tracking and management collaborative platform can be developed using SFT to represent a batch of goods, allowing for the splitting of SFT during distribution. Additionally, SFT can be used to create trade contracts, lease contracts, or mortgage contracts, leveraging the precise, strict, automatic execution, and real-time efficiency of smart contracts to significantly improve the efficiency of contract formulation and execution, laying a solid foundation for introducing supply chain finance.

It can be said that the soon-to-be-passed ERC-3525 is one of the most advanced, universal, and multifunctional digital asset and digital item token standards available today. But is its usage cost and threshold also high?

Surprisingly, the average gas consumption level of ERC-3525 is comparable to that of ERC-721, and in some commonly used functions, it is even significantly lower than the widely adopted ERC-721 standard implementation, which is the result of careful design and long-term optimization. Moreover, to lower the usage threshold, ERC-3525 is designed to be compatible with ERC-721, so almost all wallets, DeFi protocols, NFT tools, and markets currently on the market can directly support ERC-3525 without modification.

In addition, the reference implementation of ERC-3525 is completely open-source and available for everyone, and there are already successful cases. Solv Protocol has developed the largest bond issuance and trading market in the industry based on ERC-3525, and FujiDAO is developing an options market based on ERC-3525, with its technological advancement already validated.

We believe that ERC-3525 will become one of the leading token standards in blockchain, exploring new spaces for Web3, digital finance, and blockchain applications in the physical economy, opening up a massive market worth trillions of dollars.