1. Why token standards are essential for cryptocurrency
2. The ERC-20 token standard
3. How do NFTs come into it?
4. What other types of token standards are out there?
A globally connected world is only possible with the adoption of shared standards. This can mean how we measure and weigh things, assign financial value, or the best practices across industry, commerce, and technology. The blockchain ecosystem is no different. It needs standards to scale and thrive. The founders of Ethereum understood this, making token standards a fundamental part of their blockchain. But what are token standards?
As civilisations developed worldwide, each came up with its own standards for measuring things. Time is a good example. Despite being so fundamental to our lives, there is no one standard for measuring it.
The first calendars can be traced to Bronze age times based on the passage of the Sun and the Moon, but varying interpretations followed. Mayan, Julian, Hebrew, Buddhist, Gregorian, the list is endless. Though there is now broader agreement on standards for measuring time, there still isn’t a universal system. The same applies to weights and measures.
The Imperial system used in Great Britain was formalised in 1824 and exported across its empire, including America, where it is still widely used today, from the NFL to describing how much a person weighs.
But at the same time, France, its great European rival, had come up with a different measuring standard, based on the ‘metre’. The British snubbed an invitation to participate in developing that system, so the Imperial and Metric systems fought a battle for dominance, which today still forces painful conversions.
You could fill an encyclopedia, let alone this blog piece, with more examples of competing standards creating friction and making the world less scalable. That point wasn’t lost on Ethereum’s founders, whose ambition was to develop a scalable and friction-free world of digital applications (dApps) using an architecture that included a set of common standards for exchanging value - token standards.
Ethereum provides a computational engine for any idea that can be reduced to mathematics, leaving developers free to be imaginative in building dApps. Ethereum doesn’t enforce rules on those that use it, like Google’s Playstore or Apple’s App Store, and includes its currency, Ether, used as a medium of exchange within a dApp and a way to pay for renting its computing power.
That computation is facilitated by Smart Contracts, agreements defined in a bespoke language called Solidity. Ethereum’s brain, known as the EVM - Ethereum Virtual Machine - executes Smart Contracts, with the latest state recorded in its blockchain.
For those developers to have the freedom to build value into their ideas, Ethereum allows them to create their own tokens, rather than insisting that ETH, its native token, is used.
The flexible use of tokens was a masterstroke because it allowed dApps the freedom to build their mini-economies with unique tokens for exchanging and creating value.
But even better, Ethereum enables dApps to seamlessly integrate - an idea called composability - because those tokens adhere to a common set of standards.
Ethereum provides a token standards list described in ERC format and a number. ERC stands for Ethereum Request for Comment and refers to a technical document that blockchain developers can reference when writing Smart Contracts and building dApps.
The most common Ethereum token standard is ERC-20. This set of guidelines allows developers to build applications with their own unique token, which is interoperable with other products and services.
The ERC-20 standard specifically relates to fungible tokens within Ethereum. Fungibility is one of those words that you rarely encounter in general conversation but is used a lot within crypto. It describes something that is mutually interchangeable, like money. One €10 note is fungible for any other €10 note.
So ERC-20 tokens that follow the documented standard are interchangeable. Devised by Fabian Vogelsteller in November 2015, they provide an API for tokens within Smart Contracts providing the following standard functions:
Though the ERC-20 standard might seem a bit abstract, its importance should become a little clearer when you think about the sort of things they enable. They drove the explosion of ICOs, DEFI and are pivotal in Play-to-Earn games providing:
As powerful as the ERC-20 standard, there was room for improvement addressed in an additional fungible token standard, ERC-777. The ERC-777 standard makes it more efficient for Smart Contracts to send and receive tokens through Hooks.
Hooks combine what were two messages - sending tokens and notifying a contract - into one, adding the ability to reject transactions. ERC-777 also addressed confusion around the use of Decimals.
Another flaw in the ERC-20 standard was the ease of mistakenly sending tokens to a contract address rather than a wallet address. That problem was highlighted by a Reddit user and addressed with the ERC-223 standard, which enables transactions to contracts and wallets that perform the same function.
The other most common Ethereum token standard provides the opposite utility to a fungible token. It creates a form of value that isn’t interchangeable but is unique, a Non-Fungible Token aka an NFT.
You would have to be living off-grid not to have heard mention of NFTs. NFTs function as receipts of ownership for things like artwork or a plot of land in both digital and physical formats. Two separate ERC standards describe NFTs: ERC-721 and ERC-1155.
Because NFTs follow a standard, they give anyone with an Ethereum supported wallet the opportunity to tokenise and exchange almost any unique item of value. The focus to date has been on digital art, which encapsulates the crypto culture, Cryptopunks or Bored Apes, but NFTs are powering all kinds of other applications:
Though ERC-20 and 721 are by far the most commonly used Ethereum token standards, several others play an essential role in scaling Ethereum’s use cases.
ERC-1155 is a multi-token standard that enables a Smart Contract to support fungible, non-fungible and specific configurations of both token types. It also improves token transfer through batching, allowing transfers, approvals, and balance queries to be applied in batches rather than individually.
Ethereum token standards have improved and evolved to match new use cases. For example, ERC-1400 provides a library of standards allowing tokens to function as securities.
Most people would understand the term security in reference to a stock or share in a company. ERC-1400 creates a standard way to tokenise securities and use them with Ethereum applications. It covers issuance and redemption and manages their ownership and transfer restrictions.
Though securities are fungible because each confers the same right to the holder, they can have non-fungible characteristics in terms of specific criteria that might apply. ERC-141O allows for a Partially Fungible Token standard where meta-data describes how different subsets of a token balance should behave, including transfer restrictions, specific rights, or obligations.
The creator of the ERC-20 token, Fabian Vogelsteller, moved his focus onto the thorny issue of how to tokenise identity on Ethereum, creating ERC-725.
ERC-725 allows users to control their identity rather than relying on a centralised service to hold and verify it. It is a crucial element of Web3.0; the next iteration of web experience where users can control their identity, rather than centralised services monetising it.
Though Ethereum established the concept of a Turin Complete computational blockchain, it wasn’t long before other chains emerged, often looking to emulate, and improve on, its use of Smart Contracts while applying token standards that are very similar.
The Tezos blockchain offers Smart Contract functionality but is designed to provide a more scalable infrastructure than Ethereum. Users can vote on proposals described in a TZIP format - Tezos Improvement Proposal.
TZIP-7 introduced the equivalent of the ERC-20 token standard, described as FA1.2. It allows Smart Contracts to create and transfer fungible assets on the Tezos Blockchain.
FA2.0 provides hybrid support of fungible and non-fungible tokens on Tezos, making it comparable to ERC-1155. It supports batching and the use of meta-data.
NEO is often considered the Chinese version of Ethereum, and just like Ethereum supports Smart Contracts and token standards. Where Ethereum has EIPs (Ethereum Improvement Proposals) NEO has NEPs (NEO Enhancement Proposal).
NEP 5 set out the token standards for general Smart Contract interaction, following very closely to ERC-20, defining Supply, Symbol, Transfer and Balance; NEP 5 was improved in NEP-17.
NEO also supports NFTs through the NEP 11 standard. NEP 11 allows for non-fungible tokens definitions such as Name, Owner, Asset Type, and customisable token attributes that are particularly relevant within art collections and gaming.
The EOS blockchain was launched in 2018 with the grand ambition of becoming the most scalable Turing Complete blockchain, aiming to process millions of transactions per second. Like Ethereum, it has its own Smart Contract logic, unique consensus mechanism, and a comparable approach to token standards.
EOS, the native currency, is managed in a system contract - the eosio.token contract. It is comparable to the ERC-20 standard, though multiple tokens can be managed from this single contract - creating, issuing, transferring and adjusting the supply of EOS tokens.
EOS has a specific standard for handling non-fungible tokens, dGoods, developed through Mythical Games, part of the wider EOS ecosystem.
dGoods are comparable to ERC-1155 given they provide a hybrid standard for both fungible and non-fungible items, including:
Ethereum provided a standard format for the exchange of unique items of value - tokens -
giving a new generation of creative entrepreneurs the freedom to invent entirely new digital economies free of the friction in the analogue world.
There is no concern about Imperial vs Metric or driving on the left-hand side or the right. Standards make life simpler, and because Ethereum was essentially creating a new world, its founders got to develop their own set. Though rival blockchains have emerged, all retain the concept of token standards introduced by Ethereum, showing their fundamental importance to the growth of blockchain-based economies.
Next step: What are the risks of DEFI?Go to next step