The Ultimate Guide to Cryptocurrency Token Standards
New technologies become successful when it finds a perfect balance between traditional systems’ values and advantages of new technology. Blockchain has mastered this art, and people are gradually accepting the changes brought about by this developing technology.
One of the changes is accountability in the financial system, which contributed to the creation of tokens. Tokens are digital assets, also known as value contracts. A token standard is stored in a smart contract to help manage balances in the wallet. Today, we will look at the most common token standards.
Token vs. Coin
This is an often confusing topic, especially for newbies in crypto trading. The two are different; thus, it is crucial to know what they mean. The main difference is in their application. Tokens are primarily used with dApps on existing blockchains, while coins are used similar to real-life money.
Tokens are created via smart contracts. Tokens include Waves, NEO, Stratis, and Lisk, while coins include Ethereum, Cardano, Stellar, Ripple, Litecoin, etc. Token standards enable wallets to recognize and interact with tokens. New standards are continually established and are mainly prevalent on Ethereum. Here are some of the accepted token standards:
Why Do We Have Token Standards?
Tokens are essentially value counters stored in a contract. In the mainstream, websites and apps communicate with each other via an API layer. However, in such a system, the API facilitating communications between two or two websites is completely custom and cannot be reused. If the app or website wanted to communicate to a third party, another API layer would have to be created. A standard would eliminate the need to develop different APIs for integrating websites and apps.
Given that the crypto space is full of tokens (in their thousands), token standards come in handy to enable platforms such as wallets and exchanges to support multiple tokens. Without token standards, each token would have its own wallet and exchange, amounting to numerous challenges, including unscalability. By implementing a single token standard, crypto wallets and exchanges can interact with thousands of tokens developed using that particular standard. Besides, tokens of a particular standard can seamlessly be exchanged, facilitating blockchain interoperability.
Common Token Standards
Let’s have a look at the most common token standards.
ERC-20 (Ethereum Request for Comments) is the most common token standard proposed by Fabian Vogelsteller in November 2015. It is used to provide basic functionality such as transferring tokens and allowing tokens to be approved to be used in another on-chain third party. Therefore, it can create fungible( exchangeable) tokens such as voting tokens, virtual currencies, or staking tokens. Besides, it enables Ethereum developers to create token applications that are interoperable(compatible) with other products and services.
ERC-20 features six compulsory and three optional tasks and two events to implement a compatible API within Smart Contracts. Some of the functionalities offered by the ERC-20 token include: facilitating the transfer of tokens from one account to another, establishing an account’s token balance, finding the token available on the network, and finding the total amount of token from an account that a third party account can spend.
ERC-20 is a blockchain-based token asset that functions like Bitcoin, Ether, or Bitcoin Cash: to hold value and be sent or received. These tokens are stored and sent through Ethereum addresses and transactions. ERC-20 tokens transaction fees are covered by gas, and they are created and hosted in the Ethereum blockchain.
ERC-721 (Ethereum Request for Comments 721) is an open standard used to create Non-Fungible Unique Tokens (NFT) on an Ethereum blockchain where each token is distinct. Non-Fungible means non-replaceable or non-interchangeable. ERC-721 was proposed by Dieter Shirley, William Entriken, Jacob Evans, and Nastassia Sachs in January 2018.
ERC-721 is an NFT standard that leverages an API for tokens within Smart Contracts. It’s therefore majorly used on NFT platforms that support bing and selling of different nonfungible items, including collectible items, lottery tickets, access keys, arts, sports memories, etc.
ERC-721 is a cousin to ERC-20, but it is equally as important. It provides functionalities such as the transfer of tokens from different accounts, token balance queries, establishing the total supply of the token available on the network, and determining a specific NFT token owner. Like ERC-20, it’s also used to verify that a particular amount of token has been moved to a third-party account. Each asset usually has its own individual. This token standard needs the complaint tokens to implement ten critical functions and three events. After ERC-20, it is the most prevalent token standard in the market.
ERC-777, like ERC-20, is for fungible tokens. It focuses primarily on allowing more complex interactions while trading tokens. This token standard defines the advanced features to work together with tokens, whereas it remains backward compatible with ERC-20.
It defines hooks that send and receive to allow token holders to exercise more control over their tokens and instruct operators to send tokens to another address. ERC-777 are essentially smart contracts that require compliance to implement five events and 13 critical functions.
The ERC-1155 is a digital multi-token standard that allows for the administration of any blend of non-fungible and fungible tokens in the same smart contract. This token standard aims to get the best features from previous standards to enhance gas efficiency and a fungibility-agnostic token contract.
Therefore, the central concept behind this standard is one smart contract instantiating an indefinite number of tokens. Imagine having the ability to rewind or fast-forward through time to analyze life cycles and patterns of different ERC-1155 tokens regardless of the type of smart contract.
This standard is the finale of a year-round of dynamic action by the blockchain community. If you are thinking of using the ERC-1155, you can read all about it here. It leads to a significant advantage in efficiency and allows for a standardized record of all token burn, mint, and transfers.
The ERC223 is another token standard on the Ethereum Blockchain that functions specifically to create receipts. When implemented on the Ethereum Blockchain, the token specifically provides information about a particular transaction, including the sender and the particular block in which it was received. It essentially ERC223 allows Ethereum users to send their tokens to either wallet or exchange, implementing the same standard, thus eliminating the potential for confusion and lost tokens.
The ERC223 token standard prevents a token from being sent to a contract that doesn’t implement its receiving hook. Apart from its creating receipts, the rest of ERC223 functionality is backward compatible with ERC20. This means that you can use the ERC20 interface to interact with an ERC223 token.
ERC 165 is not a token standard but a supporting pillar of ERC 721. It is the support base for ERC 721, which cannot work without it. A smart contract needs to interrelate with crypto tokens. Smart contracts usually have specific interfaces that enable interactions with other token standards. There is no standard method to identify interfaces applied by smart contracts. ERC 165 regulates a technique for this, rather than systematizing the identification interfaces.
ERC 621 is an extension to ERC 20. It is used to increase or decrease the total token supply via two functions: ‘DeacreaseSupply’ and ‘IncreaseSupply.’ Only contract owners or trusted users can use them according to its proposal.
Cryptos are different from fiat currencies because fiat currencies can be increased or decreased in supply by the central bank. Cryptocurrencies are considered mathematical money. One of the aspects that govern token appreciation and affect a token’s economics is total token supply.
Some recent laws in the US State of Delaware currently permit firms to use blockchain to preserve share registries. ERC 884 is among the ERC standards that plan to gain from this law. It plans to label each token standard as a share of a specific company registered in the Delaware State.
To conform to all the regulations, this token standard also includes:
- Recording of data controllers mandate
- Identify verification
- Compulsory whitelisting of token holders
- Record of shares transfer
To implement ERC 884, there is a need for an off-chain database for different Know Your Customer necessities. However, this is still a drafted proposal in its initial stages.
As a novice in the cryptocurrency world, you will find that you need to pay some costs while transferring some Ether-based tokens. However, this surges friction for you. Fortunately, ERC 865 is designed to make things easier for beginners in cryptocurrencies. The token can also be used to pay the minor fees in the transfer of tokens as well.
Tron (TRX) moved out of Ethereum into its main net blockchain. It is a platform for decentralized applications. It allows its operators to issue or create token standards on its blockchain, which may be used as Dapp’s currency.
TRC 10 and TRC 20
TRC 10 tokens feature a straightforward token creation, while TRC 20 has a built-in smart contract functionality. It is accessible through Application Programming Interface and also features much lower transaction fees than other token standards.
TRC 10 has bandwidth costs for deposits and API deposits and transfers. This standard relocates and credits into smart contracts the cost of energy and bandwidth. TRC 20 is generally more expensive than TRC 10 in terms of transaction fees.
Tron enables users to process smart contracts, while bandwidth enables users to perform transactions. Users can freeze their TRC tokens in wallets to generate energy and bandwidth.
Waves is a token standard designed for developing enterprise-grade applications and enables access to the Ethereum network. Waves offer interoperability among different protocols. The token holders can also access various crypto exchanges, decentralized finance protocols, and decentralized apps. Waves confirm waves to USDN (an algorithmic stablecoin attached to the US dollar) pool on Uniswap, the main non-custodial Eth token exchange.
Users also choose to transfer waves tokens from one independent blockchain to another via access initialized in waves. Waves developers recognize that Eth has the biggest ecosystem in terms of active users and the total number of dApps. There is a minimum of two waves of withdrawal fees and no deposit fees for users.
Binance Smart Chain
BEP 2 is a token standard for the distribution and application of tokens on a Binance Chain. This standard provides a set of rules to be followed by tokens that function on the Binance Chain. It can be compared to ERC-20. However, BEP-2 is not software but a group of technical specifications.
BEP-2 token standard also describes some rudimentary and other crucial features of tokens distributed on the Binance Chain. These tokens can be traded via decentralized exchange or Binance DEX. BEP-2 tokens can also be stored in various wallets, including software wallets like trust wallets or hardware wallets like Ledger Nano S, Coolwallet S, Ledger Nano X, etc.
This is a token standard on the Binance smart chain. It extends from ERC 20, which is the most popular Ethereum token standard. One can think of it as a plan for tokens that delineates how they can be used, by who, and the guidelines for their usage. It is compatible with both ERC 20 and BEP-2.
BEP-20 was designed as a technical design for the Binance Smart Chain to avail a flexible set-up for developers where they can inaugurate a variety of tokens. Token transfers are operated via BNB, which delivers a motivation for validators. Binance Smart Chain was intended to be somewhat of an extension to Binance Chain. Like Binance chain, it has dual chain architecture to cater to DApps.
NEP-5 is a NEO standard token protocol that runs the essential functions on the NEO blockchain. If you feel lost, NEP-5 tokens are to NEO while ERC-20 are to Ethereum: Tokens built on their respective networks to fit in their specific standards. Any token in the NEO blockchain needs to conform to the NEP-5 standard.
NEP is the acronym for NEO Enhancement Protocol, and number 5 represents the revision that everyone has agreed upon. There are many NEP-5 tokens like DBC, ONT, and NEX. NEP-5 tokens are considered unique because they contribute to the NEO system. The more NEP-5 tokens running on a platform, the sturdier the NEO ecosystem becomes.
NEP-5 tokens also make the general NEO token exchange more straightforward and faster. The NEO blockchain allows the creation of smart contracts, but deployment or accessibility of these contracts carries a high cost. GAS, a native token of NEO blockchain, is used to cover this cost. While still facing gradual changes, they are very efficient.
While still new in the market, token standards could turn out to be helpful in the accomplishment of ambitions in security and non-fungible tokens. In this guide, we have analyzed the various token types and standards in the market. ERC-20 is the most common standard, while the non-fungible ERC-721 is the second most prevalent one.
All the tokens described above serve unique purposes, but some of the uses may overlap. Knowing how to differentiate one type from the other is essential for gaining an in-depth understanding of how both individuals and businesses use blockchain technology to achieve the advantages of digital currencies.