Token Standards Explained – A Guide for Newbies

Sometimes it feels like we've been talking about tokens since the dawn of time. Well, not literal time, but the dawn of cryptocurrency tokens, for sure. It's absolutely normal since everything in the blockchain ecosystem revolves around them.

Those crypto coins you have in your wallet right now? They're tokens.

Bitcoin? Of course, it's a token!

The play-to-earn crypto games you're dying to try? They use tokens as entry fees and also offer them as crypto rewards.

Those NFTs you're considering buying? Well, they are tokens also, the non-fungible kind (more on that later).

You can't say crypto without thinking about them, and there are multiple token types on the market. That's why today we're going to explore the different types of token standards that exist, as well as smart contract standards.

What is a token standard?

To understand token standards, we should first explain the concept of smart contract standards. They are the rules a smart contract must comply with to function as it should on a blockchain network. These specifications, which can include name registries, library-package formats, and token standards, are at the application level. These standards enable smart contracts to perform basic functions.

As long as they have this set of smart contract standards and some very clear parameters, anybody can be able to create an ERC token, for example.

Token standards are a subset of any smart contract standard. They serve as a roadmap for developing, issuing, and deploying new tokens on the underlying blockchains that enable smart contracts. Without this set of compliance rules, a smart contract would not be operational.

Ethereum is the platform of choice for blockchain smart contracts, and the most popular token standards are ERC-20, ERC-721, ERC-777, and ERC-1155.

Fungible tokens

Fungible tokens are the most fundamental type of tokens, a class of identical, interchangeable tokens that can be exchanged as they are equivalent to one another. Imagine two Bitcoins being equal in every way, just like two US dollars are. Most tokens built on blockchain protocols are fungible, but there is another type as well that is a bit more complicated.

Non-fungible tokens

NFTs are a different token type representing a whole other class of digital assets. Non-fungible tokens refer to non-interchangeable units of data stored on a blockchain that can be traded or sold. NFTs can be associated with digital files such as photos, audio, videos, or a combination of these.

Even though you might own two tokens created by the same artist and from the same collection, they will never have the same value, nor will they be alike. Each NFT has a digital signature, making them unique.

Our dedicated article explains the subject in depth if you're interested in knowing more about NFTs.

Ethereum Request for Comment (ERC Tokens)

As you've guessed, ERC tokens are the Ethereum token standards for cryptocurrencies that work on the Ethereum network or other compatible networks.

The Ethereum Request for Comment (ERC) is a collection of technical publications that provides instructions for creating smart contracts. They simplify communication between apps and smart contracts by defining a distinct set of functionalities for each type of token.

Anyone can make an ERC token. However, it necessitates completing an Ethereum Improvement Proposal (EIP), a document that outlines the features and procedures that are suggested for the Ethereum blockchain network.

When a developer submits a proposal for ERC token standards, Ethereum's core developers will review and evaluate it. The proposal will be approved, finalized, and implemented if the Ethereum community views it as a significant improvement to the blockchain ecosystem. The initial document becomes an ERC standard once this procedure is finished, allowing other developers to utilize it to make their own tokens.

There are many ERC standards right now, so we won't be able to cover all of them. But we are going to show you some of the most common ERC token standards:

ERC-20 Token Standard

The ERC-20 token standard is the blueprint for creating fungible tokens on the Ethereum blockchain. ERC-20 tokens are most frequently created by organizations and blockchain technology businesses, similar to other virtual assets. They enable the entity to alter the token's functionality, adding features like voting rights and incentive systems.

Although ERC-20 is considered a versatile token standard, each ERC-20 token has a standardized core functionality. In other words, any ERC-20-compliant tokens can communicate with one another and with other compatible services like MyEtherWallet and MetaMask.

An ERC-20 contract serves as the foundation for several cryptocurrencies, including stablecoins, security tokens, and utility tokens. These days, ChainLink (LINK), Dai (DAI), and Basic Attention Token (BAT) are three of the most well-liked ERC-20 tokens.

ERC-721 Token Standard

The next token standard is ERC-721 which is a non-fungible token standard. Non-fungible tokens are a specific kind of cryptographic token that cannot be exchanged for one another according to their technical specifications. Of course, you can transfer tokens from one wallet to another, sell them or trade them, but when you receive tokens in exchange for the ones you're trading, they will not have the same value.

ERC-721-721 token standard is used to represent digital collectibles, game objects, digital artwork, event tickets, domain names, and ownership records for real assets. In other words, we're talking about NFTs.

ERC-777 Token Standard

ERC-777 was created to address and fix some of the limitations that the ERC-20 token standard has. This improved token standard is more efficient since it makes smart contracts send and receive tokens through a mechanism known as 'Hooks'.

Another essential function that ERC-777 introduces is the ability to reject transactions from blacklisted wallet addresses. ERC-777 remains compatible with ERC-2o. Since both standards employ the same underlying blockchain functionality, tokens produced on ERC-20 and ERC-777 can easily interact with one another.

ERC-1155 Token Standard

ERC-1155's primary focus is to develop fungibility-independent and gas-efficient token contracts by combining the best features of its predecessors. Simply put, it is a token standard for contracts that can manage multiple token types.

The developers from Enjin that created it describe it as "a single smart contract that can govern an infinite number of tokens."

The Enjin team worked on ERC-1155 to solve some of the problems ERC-721 poses, like the lack of flexibility in batch transfers.

For example, to send multiple NFTs on ERC-721, a user would need to perform multiple transactions. As a result, a high number of transactions would flood the network and incur a high transaction cost.

ERC-1155 eliminates the issue by supporting batch transfers, allowing multiple assets to be bundled in one smart contract. Hence, it dramatically reduces the potential for a transfer to cause network congestion while lowering the transaction costs.

Token Standards for EOS

Of course, Ethereum is not the only blockchain network that uses different smart contracts, token standards, and smart contract standard.

The EOSIO blockchain platform has all the key functionalities, such as consensus, fee schedules, account creation and update, token transfer operations, block producer registration, voting, and multi-signature.

EOSIO is an open-source platform, including the smart contracts needed for an EOSIO-based blockchain. These include eosio.bios, eosio.system, eosio.msig, eosio.token, and eosio.wrap.

EOS makes use of the eosio.token smart contract. This contract outlines the framework and procedures for creating, issuing, and managing tokens on the EOSIO underlying blockchain.

Token Standards for NEO

Another project that focuses on creating the foundation for smart contracts is NEO. It uses the NEP ( NEO Enhancement Proposals) smart contract standard that defines the basic protocol specifications, client APIs, and contract requirements for the NEO platform.

NEO token standard types:

There are three token standards you should know about. NEP-5 gives systems a generalized means of interacting with tokenized smart contracts. NEP-11 is the benchmark for drafting NFT contracts. NEP-17 is a token standard that defines a universal interaction mechanism for tokenizing smart contracts.

Token Standards for Tezos

Tezos Interoperability Proposal (TZIP) are technical documents that contain the specifications of any update, interoperability standards, and features of the Tezos blockchain. They also mention how the updated features can be implemented and how they improve the overall network.

FA1.2 (Financial Application 1.2)

This is the fungible token standard for Tezos, described in the TZIP-7 document. It implements a ledger that maps identities to balances.

The ledger is used for token transfer operations and approvals for spending tokens from other accounts.

FA2 (Financial Application 2)

It is the unified token standard on Tezos. It supports many token types like fungible, non-fungible, non-transferable, and multi-asset contracts.

It allows contract developers to create new types of tokens while maintaining a common standard interface for wallet integrators and external developers.

Security tokens versus Utility tokens

You've probably heard about utility and security tokens. We'll explore them a bit, so you know the difference between a security token and a utility token.

Security token

Access to a restricted electronic resource is granted using a security token. It has many characteristics found in both a fungible and non-fungible token. Security tokens are used to represent partial or complete ownership interests in assets. ERC-20 and ERC-721 are both security token standards.

Utility Token

Utility tokens provide access to a network, while token purchases reflect the ability to purchase commodities or services from that network.

Final thoughts

We're at the end of our token standards guide. Our mission is complete if you now understand what a security token and a smart contract standard are. You can identify the most popular ERC standards and know how they work on the Ethereum blockchain.

These are fundamental concepts that any Ethereum community member should be able to identify when looking at a new cryptocurrency project or when reading a whitepaper.

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