Token standards are the rules and protocols by which a cryptocurrency operates. You can compare token standards to road rules which ensure that cars safely maneuver through a city without crashing into anybody. These standards are necessary in order for cryptocurrencies to remain interoperable and work with dApps.
You already know about at least one token standard if you have used Ethereum: ERC-20. This standard ensures that a wallet can host numerous Ethereum-based tokens without forcing you to create a unique wallet for each token. Token standards also help developers take a global and compatible approach to developing projects.
Today’s article walks you through the fascinating world of token standards and how they make complicated blockchain technology less complicated. I will primarily discuss popular Ethereum token standards, but will also include common token standards on other blockchains as well.
What Are Token Standards?
Token standards represent a set of rules by which a token operates. In the context of decentralized technologies, standardization makes it possible for a cryptocurrency to be created, managed, and stored on a blockchain-based wallet. Token standards dictate what data a token stores, its behavior, the actions it is capable of, and how investors can interact with the token.
Token standards are only possible on blockchain networks with smart contract functionality. This is because smart contracts create the foundation for a token to execute certain functions. Some of these functions are part of the token’s smart contracts, such as its issuance, destruction, deployment, transfer, and so on.
Standardization makes sense because the blockchain industry needs a global interface that is replicable, and can be built upon, by everyone. If you’re a Honda driver you wouldn’t want to sit into a Toyota only to realize that the interface is completely different – barring you from driving the car. The same ethos is prevalent in crypto as well.
Let’s say you launch a brand new ERC-20 token on Ethereum. By using the same token standard as Ethereum, Uniswap, Tether, and so on, you ensure that your token is compatible with all Ethereum exchanges and wallets that exist. And you didn’t have to do anything apart from following the ERC-20 recipe.
Why Use Token Standards?
Token standards are mainly important for enabling interoperability within the crypto space. As such, cryptocurrencies can work on that standard and interact with other platforms and programs. Moreover, any new token issued on that standard will be able to work with existing dApps.
Let’s say you’re a Solana investor. All you need to interact with the Raydium DEX or Magic Eden NFT marketplace is an SPL token. SPL represents the main token standard on Solana. It doesn’t matter whether you have SOL, BONK, or RAY – all three are tradeable on Solana-based dApps.
So token standards make it possible for tokens from the same standard to be interchangeable. But what else can they do?
Token standards make smart contracts more efficient. A smart contract doesn’t need any additional data apart from what it already knows about an existing token standard. It can then monitor the blockchain for such tokens and perform actions.
For example, developers can write smart contracts for on-chain order books. These smart contracts will monitor the order book for orders set by investors. If there are any matching orders, the smart contract will execute them. And the developer doesn’t need to create any new operational logic for interchanging two tokens on an order book, the functions are already present within the token standard.
Last but not least, there is composability. Composability means that blockchain developers can reuse existing features, data, or standards, to create new cryptocurrencies. A project developer doesn’t need to build his cryptocurrency from scratch. He can simply follow the basic guidelines imposed by the ERC-20 token standard.
List of Popular Ethereum Token Standards
Ethereum has the most diverse set of token standards in all of crypto. I have previously mentioned ERC-20 as the most popular standard of them all, but you might have also heard about these token standards:
The ERC acronym stands for Ethereum Request for Comment. You can view ERC as a list of guidelines for developing specific types of smart contracts. Each smart contract does something different. For example, ERC-20 holds fungible tokens like ETH, USDT, and AAVE, while ERC-721 holds non-fungible tokens.
ERC defines the types of functions that a token can have. Anyone can create a new type of ERC standard, however, it has to be accepted by the community and proposed through an Ethereum Improvement Proposal (EIP).
Let’s go through some of these token standards so that you gain a better understanding of how they work.
Like I said earlier, ERC-20 is a token standard for creating, operating, and distributing fungible tokens on Ethereum. Fungibility is an aspect that determines whether something is interchangeable. Money is interchangeable, and therefore fungible. The same can be said for cryptocurrencies.
Something that isn’t fungible also isn’t interchangeable. You can’t swap a home for another home because they’re not the same homes. One may have a swimming pool and seven rooms, while the other has a garage and 5 rooms. Their values aren’t the same.
ERC-20 is Etheruem’s most versatile token standard. It is compatible with all Ethereum dApps and platforms. You can store such tokens on wallets like MetaMask.
ERC-20 tokens have a total of six primary functions. The list goes as follows:
- TotalSupply – Derives the total token supply of a specific token.
- BalanceOf – Derives the token balance in a wallet
- Transfer – Allows users to transfer tokens from one wallet to another.
- TransferFrom – Grants smart contracts the privilege to transfer tokens on the user’s behalf.
- Approve – Sets a limit on the number of tokens a smart contract can withdraw.
- Allowance – Gives external addresses the possibility to spend and access a user’s wallet and its balance.
ERC-721 is Ethereum’s token standard for non-fungible tokens (NFTs). NFTs represent a special type of blockchain-based token that is not interchangeable with another token of its kind. This is because each token is unique and has specific characteristics. Although 1 BTC = 1 BTC, the same cannot be said for the NFTs inside the same collection.
Developers use non-fungible tokens to tokenize certain material or immaterial items. Some popular examples include in-game items, digital art, concert tickets, internet domain names, digital art collectibles, and so on.
A popular example of a token collection utilizing the ERC-721 token standard includes the Bored Apes Yacht Club. If you check out the collection’s OpenSea listings, you’ll notice that each BAYC NFT has its own unique aspects.
ERC-777 is an expanded version of the basic ERC-20 token standard. The upgraded token standard makes it possible for smart contracts to send and receive tokens through a new mechanism called hooks. Hooks combine two types of messages – one for sending tokens, the other for notifying a contract – and turn them into one function.
What’s also worth noting is that ERC-777 tokens have a feature allowing them to reject transactions from blacklisted addresses. These addresses might include those from hackers who exploited smart contracts, or criminal individuals using blockchain technology to launder money.
The most important thing you need to know about ERC-777 is that it is completely backwards compatible with ERC-20. The two types of tokens can interact with each other without any limitations. This means that the new ERC-777 standard does not render ERC-20 obsolete.
ERC-1155 is the most improved token standard on Ethereum as of yet. It takes all the best parts of its predecessors in order to create a fungibility-independent token standard. ERC-1155 is also more gas-efficient compared to its predecessors.
So what’s special about ERC-1155? It can basically hold, operate, and distribute an infinite number of tokens. The standard primarily tackles the limitations of ERC-721. To be more specific, it targets the impossibility of ERC-721 to conduct batch transfers. This means that you have to spam the network with transactions when transferring a bunch of NFTs.
ERC-1155 solves the problem by supporting batch transfers and allowing you to bundle multiple types of assets into one transaction. You can transfer NFTs from different collections and even transfer fungible crypto tokens – all in one transaction.
Common Token Standards On Other Blockchains
Ethereum isn’t the only blockchain network worth talking about. Other blockchains use their own token standards for operating and hosting tokens. The most popular examples include Solana, Binance Smart Chain, and Tezos.
Solana Token Standards
Solana is a blockchain network popular for its fast transaction throughput and cheap fees. Solana has its own standardization process for its ecosystem. Developers call Solana’s token standard SPL (Solana Program Library).
SPL represents a library of on-chain programs that run on the Solana blockchain. The library allows SPL-based cryptocurrency tokens to interact with the Solana blockchain, its wallets, and dApps. Certain tokens go under the Solana Token Program, which is a subsection of SPL.
SPL is comparable to Ethereum’s ERC-20 and ERC-721 token standards. Tokens native to Solana can be either fungible tokens or non-fungible tokens. Some can even combine functionalities from multiple token types.
Binance Smart Chain (BSC) Standards
The Binance Smart Chain, one of crypto’s most popular DeFi ecosystems, has its own standardization process. BSC utilizes the BEP-20 token standard to distribute, operate, and host fungible tokens. BEP-20 allows developers to create utility tokens, Peggy coins, stablecoins, etc.
BEP-20 utilizes the same six primary token functions as mentioned in ERC-20. The main difference is that BEP-20 also supports features such as minting, pausing token burns, and blacklisting.
Tezos Token Standards
Tezos is another popular blockchain for fungible tokens and NFTs. The blockchain utilizes the Tezos Interoperability Proposal (TZIP) to define interoperability standards, features, and token standards. TZIP is part of the blockchain’s on-chain governance process.
The two most primary token standards on Tezos are TZIP-7 and TZIP-12. TZIP-7 is basically the same token standard as ERC-20. On the other hand, TZIP-12 is a multi-asset interface that allows developers to be independent of following standards specific to token types. It is the equivalent of Ethereum’s ERC-1155 standard.
Crypto token standards are necessary for operating, distributing, and hosting tokens on a blockchain-based decentralized ledger. Token standards define what functions a token has, how it can work with a dApp, and in which ways a holder can interact with the token.
Token standards are the basic premise to interoperability on blockchain networks. Developers and users alike need a global and unified approach to creating and using tokens. Standardizing such a process ensures that a token can work with existing blockchain infrastructure. Moreover, developers don't have to create tokens from scratch.
The most popular token standards include ERC-20, ERC 721, ERC-1155, SPL, and BEP-20. These token standards facilitate transactions operated by smart contracts on their respective ecosystems. Most token standards are based on Ethereum’s ERC-20 token standard.
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