Most crypto enthusiasts today have experienced confusion in navigating their way into the crypto space. First, coin or token? Which is which? What’s what? We hear Bitcoin, Litecoin, Altcoins, but we also hear Security Tokens, Utility Tokens, and Non-Fungible Tokens. All of these words look very confusing to you right now, especially if you’re a beginner in the space, but these concepts will become very simple once you know what role they play.
For this article, we will all learn the different token standards — ERC Tokens, what they do, how important they are in cryptocurrencies, and why there are different types that exist.
Coin or Token?
Which is the appropriate term to use? Coin or token? Well, coins existed first than tokens. It all started with Bitcoin — the first blockchain network. Bitcoin became the framework for other cryptocurrencies to exist like Litecoin (LTC) and Dogecoin (DOGE) that offer the same use cases as Bitcoin — to make global peer-to-peer payments using cryptography and eliminating intermediaries like banks.
These cryptocurrencies have their own blockchain network and are referred to as coins.
When Ethereum came, it introduced the concept of decentralized applications and protocols living in the blockchain. Developers of these projects are allowed to create in-app currencies that do not require a dedicated blockchain and are stored in the Ethereum blockchain instead. Ethereum also allows users to create other forms of standalone digital assets that can be immutably stored on the Ethereum itself. All these in-app currencies or digital assets created and stored on Ethereum are what we call tokens.
To make it simpler, crypto assets that have a dedicated blockchain are called a coin. Assets created on a third-party blockchain and without a dedicated blockchain are called tokens.
Now, let’s discuss the token standards in the Ethereum blockchain — ERC.
Defining ERC
Ethereum Request for Comment (ERC) is essentially a set of technical documents containing guidelines on developing a smart contract. They define a specific set of functions for each token type and facilitate the interaction between applications and smart contracts.
Anyone can create an ERC. However, it requires going through the process of an Ethereum Improvement Proposal (EIP), which is a document with the proposed features and processes for the Ethereum blockchain network.
Once a developer submits their proposal, it will be assessed and scrutinized by Ethereum’s core developers. If the community deems it an important addition to the blockchain ecosystem, the proposal will be accepted, finalized, and implemented.
As soon as this process is complete, the initial document becomes an ERC standard that other developers can use to create their own tokens.
There are different tokens created in the Ethereum blockchain for different use-cases. These are:
ERC-20 Tokens
As Ethereum’s popularity grew, and people started creating their own smart contracts, a problem arose: How do you get these different contracts to interact with each other? The answer was ERC-20. This is a standard, or set of rules that make it easier for contracts to interact.
The ERC-20 token standard allows developers to create their own tokens on the Ethereum network. It has provided an easier route for companies to develop blockchain products instead of building their own cryptocurrency. ERC-20 tokens are also called the fungible token standard as it is interchangeable with another token.
ERC-20 tokens are the most commonly used tokens on the Ethereum network. They are designed to be used for paying for functions and are known as utility tokens. They can also be used to pay for goods and services. These are:
- Fungible — The code of each individual token is the same as any other, though transaction histories can be used to identify and separate out the tokens involved.
- Transferable — They can be sent from one address to another.
- Fixed supply — A fixed number of tokens must be created so that developers cannot issue more tokens and raise the supply.
ERC-721 Tokens
As the use cases of blockchain expanded, there was a need to tokenize and represent unique data on the blockchain — and that was when the ERC-721 token standard was introduced. ERC-721 standard allows you to create non-fungible tokens, i.e. tokens that each possess a unique value and act as verifiably unique digital objects that cannot be interchanged with each other like ERC20 tokens. This characteristic is also the reason why it is called the non-fungible token standard.
So, suppose you want to represent a piece of digital art on the blockchain. You clearly cannot use an ERC-20 token to do that. Instead, you use an ERC-721 standard token to create an NFT art piece. This NFT of the digital art piece can easily prove the authenticity of the art work and its record of ownership.
As the record of ownership and the identity of the NFT is immutably stored on a blockchain, it also makes forging any artist’s original work nearly impossible.
ERC-1155 Tokens
The ERC-1155 token standard focuses on incorporating the best aspects of its predecessors for creating fungibility-independent and gas-efficient token contracts. In layman’s terms, it is a standard for contracts that can manage multiple token types. Or, as described by their developers, Enjin, “a single smart contract that can govern an infinite number of tokens”.
The team at Enjin developed this token standard to address the shortcomings associated with ERC-721, specifically the lack of flexibility for batch transfers. To illustrate, in order to send multiple NFTs on ERC-721, a user would be required to perform multiple transactions. As a result, the number of transactions would flood its network with transactions and potentially incur a high transaction cost.
ERC-1155 directly addresses this by supporting batch transfers, which allows the bundling of multiple assets in one smart contract. In doing so, it significantly reduces the potential for a transfer to cause network congestion, while lowering the transaction costs.
Other Token Standards
- ERC-777 — It aims to be an improvement on the ERC-20 standard by lowering overheads and adding new features. It is backwards-compatible, which means it might be more widely adopted.
- ERC-223 — When you make a transaction, fees are currently paid in Ether. This standard allows for the transaction fees to be paid using the tokens involved. This means a transfer of Augur would be paid in Augur tokens, with the ticker symbol REP.
- ERC-1400 — These are for security tokens so the tokens can be sold as securities. This requires more control over who can access the coins and introduces know-your-customer protocols.
The Future of ERC Tokens
Many crypto enthusiasts have been hyped for the coming of the next “Ethereum killer.” However, Ethereum is not showing any signs of slowing down as it sustains its №2 ranking just behind Bitcoin.
ERC-20 tokens are widely used in the Ethereum blockchain and will continue their traction given that Ethereum maintains its status. What most people consider as their biggest enemy is from within: another Ethereum standard emerges. Other token standards will cease to exist if they no longer serve the purpose why they are created in the first place.
The possibilities for Ethereum are endless. With this innovation, today, it is now possible for artists to create a unique token representing their art piece, the possibility of representing the scarcity of their creations and proper monetization their work, the possibility for game developers to impart real-world value to their gamers using in-game items, and it is possible to create an entirely new, user-governed economy on the internet… something that was never thought of or worked on before.
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