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An Introduction to Token Standards

June 30, 2023 - 8 min read

Token standards are guidelines that make it easier for smart contracts to communicate with one another and allow programmers to design custom cryptocurrency tokens on a certain blockchain system.

Virtually anything can be represented by a token, from the attributes of a video game character to actual assets like stock in a company or an ounce of gold. Hence, a single standard must be used to govern this diversity of possibilities. Token standards aim to ensure that every token unit within a blockchain network is identical in type to all other tokens in that network that follow the same standard. 

However, it’s crucial to remember that all tokens are not created equal and that there might be differences in the characteristics and function, even within the same standard, since tokens can have different total supplies, decimal values, or functionalities depending on their intended usage.

Tokens can be used for a number of purposes, including facilitating transactions, verifying ownership, getting access to services and products, etc. While widely accepted token standards, such as the ERC-20 standard (for Ethereum-based tokens), may assist in promoting interoperability across various token-based projects, crypto tokens alone may not always foster consistency and compatibility between many token-based projects. 

For example, employing a widely-accepted standard like ERC-20 can make it simpler for exchanges to integrate the new token into their platforms if a new project wishes to develop a token that can be traded on several decentralized exchanges. In addition, cross-chain bridges have aided in fostering interoperability across token-based projects and token standards. 

The production and administration of tokens on blockchain networks are governed by numerous evolving standards. For example, ERC-20, ERC-721, and ERC-1155 are three of the most well-known token standards on the Ethereum blockchain.

Token creators can ensure their tokens work with different wallets and exchanges under the same standards by using token standards.

Classification of Tokens

On blockchain networks, tokens can be divided into two categories: fungible tokens and non-fungible tokens.

Fungible Tokens

A type of digital asset classified as a fungible token has the same value as other fungible tokens of the same type. Fungible tokens are frequently employed as a form of payment or to symbolize a single unit of value within a certain ecosystem since they can be substituted for one another and have the same value. A fungible token like ether (ETH) on Ethereum is the ideal example. 

A fungible token is technically formed as a smart contract on a blockchain platform corresponding to a particular standard. A specific amount of new fungible tokens are produced and added to the supply each time one is created. Each token has a unique identification that sets it apart from other tokens on the network; however, the unique identifier of each token has no bearing on its value or usefulness. In traditional financial markets, they can be used to represent assets like stocks, bonds, and commodities.

Non-fungible Tokens

A non-fungible token (NFT) is a digital asset representing a unique and non-interchangeable unit. Unlike fungible tokens, each NFT is unique and cannot be traded for another NFT at a 1:1 ratio. In the blockchain network, NFTs can be exchanged between users like any other digital asset.

The potential of non-fungible tokens is demonstrated by the fact that various items, including real estate, the arts, and antiques, can be tokenized. For example, the Bored Ape Yacht Club is a well-known collection of NFTs that includes 10,000 digital images of apes, each with distinctive characteristics, such as clothing and expressions. NFTs comply with certain standards, such as the Ethereum blockchain’s ERC-721 standard, and are highly suited for specific applications where authenticity and ownership are essential due to their uniqueness and non-interchangeability.

Importance of Token Standards

Let’s use the case of ERC-20 tokens on the Ethereum network to show the significance of token standards. Developers can design interoperable tokens that are compatible with any application that accepts ERC-20 tokens by adhering to the ERC-20 standard. The ERC-20 standard has led to the creation of hundreds of tokens on the Ethereum blockchain, including well-known tokens like Tether (USDT) and Binance Coin (BNB). 

Many use cases, including social media, gaming, and decentralized finance (DeFi) apps, have been made possible by these coins. Without the standard, creating and managing tokens on the Ethereum blockchain would be far more difficult, which would limit their applicability and uptake. 

For the growth and adoption of cryptocurrencies and blockchain technology, token standards are essential for the reasons listed below:

  • Interoperability: Tokens can interact and operate effectively with other tokens and decentralized applications due to shared token standards. Interoperability within and across ecosystems is essential for trading and utilizing tokens.
  • Security: Token standards offer a structure for developing and operating crypto tokens, and they’re intended to encourage best practices and provide a fundamental level of security. They do not, however, guarantee that the tokens are 100% secure and unhackable. It’s critical for token issuers and users to take extra security precautions like putting in place robust access limits, adopting secure essential management procedures, and routinely keeping an eye out for unusual behavior to protect their tokens.
  • Liquidity: Token standards make trading tokens on cryptocurrency exchanges simpler. It promotes the token market by improving liquidity and making it easier for users to buy and sell tokens.

Additionally, token standards promote innovation by providing developers with a platform to test out cutting-edge token use cases and applications. For example, Ethereum permits developers to create their own tokens rather than requiring them to utilize ETH, its native token, in order to offer them the freedom to add value to their ideas.

Ethereum, one of the most well-known blockchains at present, uses a variety of token standards to operate in its system. Ethereum has made it possible to launch many token-based blockchain ventures and utility tokens.

In ERC-20, ERC stands for Ethereum Request For Comments; the number 20 is a unique identifier that distinguishes the standard from others. When this standard was first introduced in 2015, only programmers used it actively; in 2017, the whole community completely adopted it. 

It outlines the guidelines by which tokens built using it will operate. It offered universal programming guidelines and addressed the key issue that new token makers had. The Solidity programming language is used to create all token contracts on the Ethereum platform.

Prior to the adoption of this standard, each token was entirely unique, which made it incredibly challenging for exchanges, wallets, and other applications to connect with new tokens. These coins are widely used in initial coin offerings (ICOs), in which companies raise money by selling investors their own ERC-20 tokens. The functionality of an ERC-20 token is very similar to that of cryptocurrencies with which you may already be familiar.

The ERC-20 standard essentially defines the most basic token functionality, such as the total quantity, current wallet balance, transfer function, source address for transfers, approval for withdrawals, checking account balance, token name, symbol, and numbers.

The ERC-20 tokens have some disadvantages, such as low throughput and slow transactions due to network congestion and high demand. Moreover, the Ethereum blockchain requires ETH for transaction fees which can be more time-consuming and expensive. Also, it is simple to mistake the smart contract address for the wallet address due to design flaws. Users have accidentally sent tokens to smart contracts in the past while intending to send them to cryptocurrency wallets, leading to their funds being unrecoverable.

EIPs And Other Ethereum Token Standards

Developers and community members can propose changes or enhancements to the Ethereum network through Ethereum Improvement Proposals (EIPs). EIPs are a crucial component of the Ethereum ecosystem because they enable the network to keep growing and evolving in response to shifting demands and difficulties. EIPs can propose modifications to the smart contract specifications, Ethereum protocol, and other facets of the network.

Each EIP is evaluated by the Ethereum community and developers, and if approved, it could be included in the next releases of Ethereum. Each EIP is given a special number and is grouped according to its kind, such as standards, interface upgrades, or informational EIPs. For example, EIP-721 proposed the standard for NFTs.

For a variety of uses, many Ethereum standards were developed, including:

ERC-223: Unlike ERC-20, which requires payment of transaction fees in ether, ERC-223 permits payment in the tokens involved. The AmigoCoin project is one example that follows the ERC-223 token standard.

ERC-721: ERC-721 is useful to the market of collectibles like digital art and tradable cards, expanding the use of NFTs, which are distinct and have separate codes. The primary difference between ERC-721 and its predecessors is that ERC-721 generates heterogeneous tokens as contrasted to ERC-20 and ERC-223’s homogeneous tokens. Axie Infinity (AXS), a game that combines trading and battle on the blockchain as an example of a token  that uses ERC-721 token standard. 

ERC-1400: A standard for security tokens that are more tightly controlled in terms of access and customer identity and are marketed as securities. The Ploymesh (POLYX) token, which is a blockchain designed exclusively for security tokens, is an example of a token using ERC-1400 token standard. 

ERC-777: An upgrade to ERC-20 that keeps backward compatibility while introducing new functionality and lowering overhead. OpenZeppelin uses ERC-777 standard to create, automate, and run decentralized apps.

ERC-4626: A token standard that divides vaults into transferable and non-transferable tokens according to how well they reflect assets that generate income. ERC-4626 is the standard used by Yearn Finance, a yield aggregator, for their vaults in Yearn V3.

Crypto Token Standards For Other Blockchains

Solana Token Standards

SPL Token: SPL tokens are fungible, much like the ERC-20 token standard used on Ethereum.

SPL Token Metadata: This standard specifies a format for SPL token metadata that can be used to provide further details about SPL tokens, such as the token’s name, symbol, and decimal places.

SPL Non-Fungible Token: This standard outlines how non-fungible tokens (NFTs) should be created and managed on the Solana network.

SPL Vault: This standard outlines how to build a safe vault for keeping tokens.

Tezos Token Standards

FA1.2: It’s similar to the ERC-20 token standard. It is used for a variety of purposes, including payments, trading, and fundraising.

FA2: It permits both fungible and non-fungible token production. When compared to FA1.2 tokens, FA2 tokens are intended to be more adaptable, enabling more complicated tokenization scenarios.

Final Thoughts

The development, distribution, and management of tokens on a blockchain have become simpler due to token standards, opening up new and imaginative use cases for digital assets. We might come across some fantastic utility tokens soon.

As new token standards will rise, it has the potential to revolutionize the creation and use of digital assets on the blockchain. As diverse use cases and applications for digital assets continue to flourish, more specialized token standards will appear. These standards must satisfy the specific requirements of these use cases. For example, new token standards may be created to provide enhanced privacy and security features for digital assets.

What does this mean for advancing blockchain technology and the token economy? Only time will tell as the blockchain ecosystem matures and expands. Token standards offer a fascinating method for creating, managing, and exchanging value on the blockchain when we look to the future.

To level up and gain a deeper knowledge of all things related to the future of the cryptocurrency industry, check out the latest content in the Supra Academy section.

References

  1. Chamria, R. (2022, 28 Oct.). Introduction to token standards: ERC-20, ERC-721, ERC-777, AND ERC-1155. Zeeve.
  2. Chen, R. (2022, 24 Aug.). Token standards 101: Your guide to ERC tokens. Kaleido.
  3. Di Angelo, M., & Salzer, G. (2021). Identification of token contracts on Ethereum: Standard compliance and beyond. International Journal of Data Science and Analytics.
  4. Johnny. (2021. 14 May). The beginner’s guide to SPL tokens on Solana. Frontier Protocols.

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