Whether you are a seasoned crypto enthusiast or a newcomer to knowing about Bitcoin, Ethereum or any other crypto blockchain, token standards are the thing you need to grasp as the fundamentals. Token standards form the backbone of the blockchain world, governing the rules and functionalities of digital currencies and assets we encounter in the digital realm.
This article will discuss the fascinating world of token standards and their significance. You will know how they power the functionalities of cryptocurrencies and smart contracts.
What Are Token Standards?
Token standards are like the rulebook for digital currencies like Bitcoin and Ethereum. They set the guidelines and functions for how these cryptocurrencies work. They are part of a bigger set of rules for something called smart contracts. These smart contract standards make sure that things work smoothly on a blockchain.
Imagine smart contract standards as a set of rules and specifications. With these rules in place, anyone who knows how can create their own digital currency, like BRC-20 or ERC-20. For most blockchain projects, especially those using Ethereum, there are common token standards like ERC-20, ERC-721, ERC-777, and ERC-1155.
So, these standards are the building blocks that make digital currencies and smart contracts work the way they do on the blockchain.
How Do Token Standards Work?
You can think of token standards as the rules that smart contracts must follow to complete basic tasks on a blockchain. As a developer, they make it easy for you to create your cryptocurrency or token because they ensure a consistent set of rules and features. With these standards in place, you can create smart contracts for tokens that seamlessly work together, thanks to uniform functions, data types, and behaviors.
The process of setting token standards typically involves proposals from blockchain developers and the community. Ethereum, a leading platform for smart contracts, uses Ethereum Improvement Proposals (EIPs) to establish standards for its core protocol, APIs, and smart contracts running on the Ethereum Virtual Machine (EVM).
These proposals, known as Ethereum Requests for Comment (ERCs), serve as technical documents with guidelines for smart contract development, ensuring a well-defined framework for the Ethereum ecosystem.
Common Crypto Token Standard Examples
BRC-20 BRC-20 is an experimental token standard for Bitcoin, inspired by Ethereum's ERC-20. It enables the creation and transfer of fungible tokens via the Ordinals protocol. It gained popularity in early 2023, but still, BRC-20 tokens are in their experimental stage, so caution is advised.
In January 2023, Bitcoin's Ordinals protocol allowed for NFTs on the network. This prompted the development of BRC-20 token standards in March 2023 by an anonymous developer, enabling fungible tokens on Bitcoin. The first BRC-20 token, "ordi," was swiftly followed by others, including meme tokens. By May 2023, some BRC-20 tokens saw significant price increases and market caps, leading to higher Bitcoin transaction fees and network congestion.
ERC-20
ERC-20 refers to the Ethereum standard for fungible tokens, like security tokens, utility tokens, and stablecoins.
ERC-20 is:
Widely Used: It is the go-to standard for Ethereum tokens.
Must-Have Functions: There are six must-do functions, like defining the total supply, handling wallet balances, transferring ownership, and more.
Nice-To-Have Functions: You can also add extra features, such as the ticker symbol and token's name.
Custom Tokens: ERC-20 lets developers create unique fungible tokens. These tokens can have specific uses, like voting rights or staking. They are compatible with various cryptocurrency exchanges and wallets, making them super handy.
So, ERC-20 makes it easier for developers to create and manage tokens, and you will find lots of them in the crypto world. Some examples are UNI, SHIB, SAND, and MATIC.
ERC-721
ERC-721 is the Ethereum standard for non-fungible tokens (NFTs). It is not like regular tokens you can swap as they are unique and have distinct identities.
NFTs represent ownership of something special, like digital art, collectibles, in-game items, event tickets, or even virtual real estate. ERC-721 is more intricate than other token standards because it lets you create, own, and trade tokens with unique characteristics that can't be duplicated.
The fun fact is that ERC-721 was inspired by CryptoKitties, a cool blockchain game. It was also popularized by CryptoPunks. And, in 2021 into 2022, we saw a surge in NFT popularity with projects like Bored Ape Yacht Club, Pudgy Penguins, and Beeple's "Everyday: The First 5000 Days" digital artwork.
ERC-777
ERC-777 seeks to improve the ERC-20 standard and make the fungible process on Ethereum more efficient. Here is what ERC-777 does on the network in 2024:
'Hooks': ERC-777 introduces something cool called Hooks, which is efficient for smart contracts to send and receive tokens. This function combines sending tokens and notifying a contract into a single message.
Complex Interactions: This standard is all about making token trading more intricate. It allows for more complex interactions between the tokens and the network.
Rejecting Transactions: ERC-777 also adds a feature that declines transactions from blacklisted addresses.
Moreover, ERC-777 performs well with ERC-20. So, ERC-20 and ERC-777 tokens can work together seamlessly.
ERC-1155
ERC-1155 is like an upgraded version of previous standards. It takes the positive aspects from previous standards and creates tokens that are easy to use and don't cost a fortune in fees. It is simply a standard for contracts that handle different types of tokens.
Here are its exclusive parts:
Fungibility-Independent: ERC-1155 creates tokens that can be both fungible and non-fungible. They're flexible, so you can have different types of tokens.
Efficient Gas Usage: ERC-1155 is efficient when it comes to gas usage for transactions on the blockchain. It helps keep transaction costs low.
The Best Of Both Worlds: You can think of ERC-1155 as a mix of ERC-20 and ERC-721 but with some extra features. ERC-1155 was created by Enjin, an NFT expert after they saw the limitations of ERC-721 while sending multiple NFTs. With ERC-721, you had to do lots of separate transactions, and that drove up gas fees.
But with ERC-1155, you can bundle multiple assets into one smart contract. This makes things smoother, reduces network congestion, and keeps transaction costs in check.
Crypto Conclusion
With token standards like the experimental BRC-20 and the established ERC-20, we are witnessing the ever-evolving world of digital assets. BRC-20's emergence in the Bitcoin realm hints at exciting changes in the crypto industry and we expect more growth in this area.
