Ethereum Tokens & Token Standards – Explained

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Tokens

Blockchain development transformed the way businesses operate. While cryptocurrency coins play an integral role as an investment asset, equally important and useful are the tokens.

This article delves into what are tokens, what is tokenization, what is ERC for Ethereum, the ERC token standards, and more.

Let’s get started!

What are tokens?

Tokens also referred to as crypto tokens, are essentially units of value that blockchain projects build on top of the existing blockchain network. Tokens are a completely different class of digital assets, they don’t have a native blockchain.

Cryptocurrencies are native to the particular blockchain while tokens are developed by platforms that build on top of these blockchains. For example, Ether (ETH) is the native cryptocurrency of the Ethereum blockchain. While Ether belongs to the Ethereum platform, there are other blockchains that use Ethereum blockchain. 

LINK, COMP, and DAI are some examples of crypto tokens built with the Ethereum blockchain.

What is tokenization?

In simple language, tokenization refers to the process of changing an asset or its ownership into special units known as tokens. It is generally used for transforming the ownership and right of assets into a digital form. This process enables converting even physical, indivisible items into tokens.

For example, tokens are used with regard to ensuring data security of sensitive data that replace it with unique, non-confidential information. In this case, tokens don’t contain original data while they comprise similar characters. The users would need to access the tokens that are linked to originals stored elsewhere to restore them and view the actual information. Tokens are created using various techniques like cryptographic functions, randomly-generated numbers, and more. They are thus used to store sensitive personal and financial information.

What is ERC for Ethereum?

ERC expands to Ethereum Request for Comments. It’s similar to technical documents that outline research, innovations, and methods that are applicable to developers and users who wish to participate in technical discussions of improvements, fixing errors, defining standards, and more. Sometimes, they either keep or freeze the inclusive to end in an EIP.

Now, the question is who has the authority to edit or review these ERC documents? Well, anyone including Ethereum smart contract programmers who write these technical details, can review them periodically and add comments for further improvement.

What are ERC token standards?

ERC token standards refer to specifications of the interface that is proposed to support the smart contract that implements the token. These have been made to create wallets or systems that are agnostic to protocols. Initially, most of them were creating their own tokens and custom interfaces. Ethereum’s community reviews the rules and they are amended from time to time. The ERC token standards are inclusive of the same token and the ERC can vary with each one depending on characteristics and purpose. 

Before moving to ERC standards, let’s understand what smart contracts are capable of:

  • Smart contracts are created by programmers who follow the rules of the underpinning language like Solidity to tap the potential of the Ethereum network.
  • Smart contract standards include token standards, registry details, library names, and more.

ERC-20 Token Standard 

ERC-20 tokens were first developed in 2015, and in 2017, they were introduced into the Ethereum ecosystem. ERC-20 standards set the rules for the development of fungible tokens on the Ethereum blockchain. 

While ERC-20 tokens represent fungible items, in standard one ERC-20 simply saves the balance of tokens assigned in an account and exposes functions that allow to manipulation of the tokens.

Ethereum requires a strong standard to bring uniformity in the operations to support token development on the blockchain network. This is the role played by ERC-20 tokens.

Characteristics of ERC-20 tokens:

  • ERC-20 tokens are one of the popular interfaces for implementing fungible tokens.
  • Each ERC-20 token is equal to the same value regardless of its structure and features
  • Fungibility refers to the ability of the asset to be exchanged for assets of the same value
  • ERC-20 tokens’ most popular applications include stablecoins, governance tokens, and ICOs

ERC-721 standard

As a first step to understanding ERC-721, you must be aware of Non-fungible tokens – NFTs. Dieter Shirley, founder of CryptoKitties proposed the development of a new token type for supporting NFTs. The suggestion was finally approved in 2018. It is specialized in NFTs, meaning the rules encoded in ERC-721 can be used for representing any digital asset on the Ethereum blockchain. ERC-721 can represent the following:

  • A unique digital artwork
  • Social Media Posts
  • In-game collectibles
  • Gaming characters
  • Any animated character or other items

Characteristics of ERC-721 tokens:

  • They represent the non-fungible tokens, NFTs.
  • They cannot be exchanged for anything of the same value as they are one-of-a-kind
  • ERC-721 tokens are most popular with NFTs in digital art

ERC- 1155 – Multi-token standard

Combining the features of ERC-20 and ERC-721, an all-inclusive token standard was introduced for Ethereum smart contracts. It’s a standard interface that supports all forms of fungible, semi-fungible, and non-fungible tokens and other configurations under a common smart contract.

With ERC-1155, you can address all your token development needs and solve your problems in a single interface. The whole idea of developing ERC-1155 was to develop a robust smart contract that would manage different ERC tokens. In addition, ERC-1155 improves the overall functionality of previous ERC tokens, making Ethereum more efficient and scalable.

Characteristics of ERC-1155 tokens:

  • ERC-1155 is a smart contract interface that supports fungible, semi-fungible, and non-fungible tokens 
  • ERC-1155 can perform the tasks of ERC-20 and ERC-721, even both simultaneously
  • The token can be used for creating NFTs, redeemable shopping vouchers and ICOs, etc
  • Each token can represent a different value based on if it’s fungible, semi-fungible, or non-fungible

Final thoughts

Tokens play a significant role in the blockchain economy. The rationale behind Ethereum introducing the token standards is to tackle the various dynamic changes that keep taking place in the blockchain arena. Each of these standards serves a specific purpose and offers benefits to the users and developers. While ERC-20, ERC-721, and ERC-1155 Ethereum standards are at present, it is expected that more standards would emerge in the future to keep up with the growing business requirements.

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