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Token Standards

| June 25, 2024

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Key Takeaways

  • Token standards like ERC-20 and ERC-721 define the regulations and functionalities for creating, issuing, and deploying cryptocurrency tokens on blockchain platforms, ensuring consistency and interoperability.

What are Token Standards?

Token standards encompass the regulations, prerequisites, and functionalities governing the operations of a cryptocurrency token. Before exploring token standards, it’s beneficial to grasp the structure of a smart contract standard. Essentially, smart contract standards set the regulations that a smart contract must adhere to. It is essential for proper functioning within the underlying blockchain network.

These standards comprise specifications at the application level, such as token standards, name registries, and library-package formats. Armed with this array of smart contract standards and well-defined criteria, individuals possessing adequate expertise can craft their own ERC token. In essence, these standards empower smart contracts to execute their fundamental operations.

Token standards constitute a subset of smart contract standards. Token standards serve as guidelines for creating, issuing, and deploying new tokens on these platforms.

Currently, Ethereum is the prevalent choice for most blockchain smart contracts. ERC-20, ERC-721, ERC-777, and ERC-1155 are emerging as the most prevalent token standards.

The ERC-20 token standard serves as a framework for generating interchangeable tokens within the Ethereum network. ERC-20 primarily deals with fungible tokens. In contrast to ERC-20, ERC-721 defines standards for non-fungible tokens (NFTs).

ERC-777 aims to overcome ERC-20’s limitations. It introduces a more efficient mechanism, ‘Hooks,’ which facilitates the transfer of tokens within smart contracts.

The ERC-1155 token standard endeavors to integrate the strengths of its predecessors. It enables the creation of token contracts that are independent of fungibility and efficient in gas usage.

How Token Standards Function?

Token standards establish the guidelines under which smart contracts operate to execute fundamental functions within a blockchain protocol.

These standards enable any developer to create their own cryptocurrency token with standardized interfaces and features. Through this standardization, developers can create smart contracts for tokens that seamlessly interact with each other. Thus ensuring consistency in data types, functions, and behaviors.

The establishment of token standards typically occurs through proposals submitted by blockchain developers and the community. Today, Ethereum leads in the smart contracts space and remains a leading platform for numerous applications. That is why Ethereum Improvement Proposals (EIPs) are used to define standards for the core protocol. They are also used to standardize application programming interfaces (APIs) for nodes and client software. EIPs also set rules for smart contracts executed on the Ethereum Virtual Machine (EVM).

Within the Ethereum ecosystem, Ethereum Requests for Comment (ERC) serve as proposals outlining standards for Ethereum-based applications. It also covers other smart contracts and tokens. These ERCs act as technical documents containing guidelines for smart contract development.

What are the advantages of Token Standards?

● Interoperability

Token standards ensure seamless interaction among products developed using the same standard. When a project issues a token adhering to a token standard, the new token remains compatible with existing platforms and applications, such as wallets. For example, assets based on the ERC-20 standard are interoperable with other products and services also built upon this standard.

This interoperability facilitates trading ERC-20 tokens for others. Without token standards, trading multiple cryptocurrencies would be significantly more complex, requiring specific wallets for each token instead of using a single wallet capable of holding various cryptocurrencies.

● Composability

In programming, composability allows developers to reuse existing components to create new products. This principle applies to token creation as well. By adhering to token standards, developers spend less time on basic functionalities. Thus enabling them to allocate more time to experimentation and innovation.

● Efficiency

Token standards also streamline interaction between smart contracts. When smart contracts adhere to token standards and deploy tokens, they can efficiently monitor the created tokens.

Standards such as ERC-20 and BEP-20 provide essential functions like address retrieval and token balance. Thus allowing smart contracts to monitor tokens more effectively. For instance, developers can use the Contract Application Binary Interface (ABI) interface to track token transfers and other data associated with an ERC-20 token.