Understanding the Different Token Standards in Web3

Chao

November 5, 2024

Token standards are foundational to the Web3 ecosystem. They set guidelines that ensure tokens can be used and transferred seamlessly across decentralized applications (dApps) and platforms. In the decentralized world of Web3, tokens can represent anything from digital currency to unique assets like art. Token standards make these tokens compatible, secure, and functional across various blockchain networks. By adhering to standardized structures, developers can create tokens that work consistently within wallets, exchanges, and smart contracts, enhancing both the security and usability of digital assets.

This blog aims to demystify the most prominent Web3 token standards, explaining their unique functions, use cases, and impact on the blockchain ecosystem. To fully utilize Web3, it is essential to comprehend these standards, regardless of whether you are exploring fungible tokens for digital currency or non-fungible tokens (NFTs) for collectibles.

What are Token Standards?

Token standards are predefined sets of rules and technical guidelines that dictate how tokens should operate within a blockchain ecosystem. By adhering to these guidelines, developers ensure that tokens are consistent, compatible with different applications, and interoperable. Token standards facilitate seamless interaction between various platforms, including wallets, exchanges, and dApps, to manage, transfer, and use tokens across the ecosystem.

The Role of Token Standards in Web3

Token standards are essential to Web3 because they serve as the foundation for the effective interaction between decentralized apps, wallets, and smart contracts. These standards improve security and user experience by making it easier to integrate tokens into different platforms. Through interoperability, token standards facilitate the transfer of tokens between users and applications, hence facilitating a decentralized economy in which rights, rewards, and assets can be allocated seamlessly.

Types of Blockchain Token Standards

As a leader in the Web3 space, the Ethereum blockchain has created a number of widely used token standards, such as:

ERC-20: A fungible token standard with interchangeable and identical units.
ERC-721: A standard for non-fungible tokens (NFTs), where each token is unique and cannot be interchanged one-to-one with another.
ERC-1155: A multi-token standard that facilitates the efficient transfer of different token types within a single contract by supporting both fungible and non-fungible tokens.

Other blockchains, like Binance Smart Chain (BSC) and Solana, have introduced their own token standards, further expanding the capabilities of Web3 ecosystems and enabling compatibility within and across different chains.

ERC-20: The Fungible Token Standard

The ERC-20 standard is foundational to the Ethereum blockchain and represents the first widely adopted token standard for creating fungible tokens. Similar to traditional currency, fungible tokens are interchangeable units with identical values and characteristics. ERC-20 tokens function uniformly across Ethereum-based wallets, exchanges, and dApps because they adhere to a standard protocol. This standard is crucial to building the DeFi ecosystem by allowing seamless integration of tokens into various decentralized applications.

Key Features and Functions

ERC-20 tokens operate on specific functions defined in the ERC-20 standard, which ensure compatibility and ease of use. Key functions include:

Transfer: Allows users to send tokens from one address to another.
Approve: Grants permission to another address to transfer a specified number of tokens from the owner’s balance.
TransferFrom: Uses the allowance established by the approve function to facilitate transfers on behalf of the token holder.
TotalSupply: Provides the total amount of tokens in circulation.
BalanceOf: Shows the token balance in an Ethereum wallet.

These features improve the usage of ERC-20 tokens by establishing a cohesive environment for transactions, security, and utility across multiple platforms.

Use Cases of ERC-20 Tokens

ERC-20 tokens have become integral to the blockchain ecosystem, powering a diverse range of applications:

Cryptocurrencies: Many decentralized digital currencies are built as ERC-20 tokens, benefiting from Ethereum’s security and interoperability.
Stablecoins: USDC and DAI are examples of tokens based on fiat currency that employ the ERC-20 standard to ensure safe, reliable transactions in DeFi.
Utility Tokens: Several dApps use ERC-20 tokens to grant access to specific features, such as governance rights or exclusive platform functionalities.

ERC-20 has helped drive the adoption of blockchain technology by enabling a wide variety of fungible tokens, especially in DeFi, where users may trustably engage and transact with a range of tokens.

ERC-721: The Non-Fungible Token Standard

ERC-721 is the Ethereum standard specifically designed for non-fungible tokens (NFTs), introduced to represent unique, indivisible assets on the blockchain. Unlike fungible tokens (where each token is identical and interchangeable, as with ERC-20), ERC-721 tokens are unique and distinguishable from one another. Each ERC-721 token has individual attributes, such as metadata, which makes it one-of-a-kind and suitable for applications requiring distinct digital representations.

Distinct Features of ERC-721

Token Uniqueness: Each ERC-721 token has a unique token ID, ensuring no two tokens are alike. This uniqueness is essential for assets that must be tracked individually, such as digital art, collectibles, or other digital representations.
Metadata: ERC-721 tokens include metadata that can store additional information about the asset, such as artwork details, creator info, or specific item characteristics. This metadata enriches the token’s value and gives it a unique identity on the blockchain.
Ownership Tracking: ERC-721 has built-in features to track and confirm ownership, allowing users to prove possession and safely transfer ownership. This feature supports transparency and authenticity, which are essential for high-value or collectible assets.

Use Cases of ERC-721 Tokens

ERC-721 tokens have revolutionized the production, exchange, and ownership of digital assets, creating new uses in a number of industries:

Digital Art: Artists tokenize their creations using NFTs based on ERC-721, giving collectors verifiable ownership. Platforms like OpenSea and Foundation have popularized digital art NFTs, allowing artists to retain royalties and ensure authenticity.
Collectibles: Rare digital memorabilia and in-game items are examples of blockchain-based collectibles that are powered by ERC-721 tokens. Users can purchase, sell, and exchange one-of-a-kind objects as digital assets on collectible platforms like NBA Top Shot and CryptoKitties.
Real-World Asset Tokenization: In addition to the digital space, ERC-721 is being explored for tokenizing real-world assets such as property and luxury goods. By tokenizing physical assets as NFTs, blockchain can facilitate easier transfers, provide transparent ownership records, and reduce fraud.

ERC-1155: Multi-Token Standard

ERC-1155 is an advanced Ethereum token standard that enables developers to create both fungible and non-fungible tokens within a single smart contract. In contrast to ERC-20 and ERC-721, this multi-token standard allows for the use of fungible, non-fungible, and even semi-fungible tokens in a single, effective contract. With ERC-1155, a contract can manage a wide range of tokens, simplifying asset creation and management for projects that require various token types.

Advantages of ERC-1155

Compared to previous token standards, ERC-1155 has the following advantages:

Efficiency in Batch Transfers: Unlike ERC-20 or ERC-721, which handle tokens individually, ERC-1155 supports batch transfers, allowing users to send multiple tokens of different types in a single transaction. This batch processing significantly reduces transaction costs (gas fees) and saves time, making it more efficient for applications with high transaction volumes.
Decreased Gas Fees: ERC-1155 optimizes gas usage by combining transactions and storing multiple token types in a single contract, providing an affordable option for applications that need numerous tokens.
Flexibility for Various Token Types: ERC-1155 offers unmatched versatility by managing both fungible (identical) and non-fungible (unique) tokens within a single framework. This feature is particularly helpful in ecosystems where tokens with different properties coexist, like gaming or digital collectibles.

Use Cases of ERC-1155 Tokens

ERC-1155’s versatility has made it particularly popular in the gaming sector and other industries that rely on a mix of asset types:

Gaming: ERC-1155 is widely used in gaming environments where in-game assets vary in nature. For example, a game may use fungible tokens as in-game currency, allowing users to trade or accumulate coins while also featuring unique, non-fungible items, like special weapons or rare characters, as NFTs. Both asset types can coexist under a single contract with ERC-1155, improving cost-effectiveness and performance.
Digital Art and Collectibles: ERC-1155 is used in some projects to create art collections with different editions, where some digital items are unique and others are fungible. This structure allows artists and creators to offer diverse collections while managing them efficiently within a single contract.
DeFi and Mixed-Asset Platforms: ERC-1155’s ability to combine different token types is also useful in DeFi platforms that require both utility tokens and rare assets within the same ecosystem. This streamlines asset management and improves user experience.

Other Emerging Ethereum Standards

1. ERC-777

ERC-777 enhances the functionality of ERC-20 by introducing advanced features such as operator roles and flexible token transfers. It offers a more efficient method of managing token activities and enhances user experience. Users can choose trusted operators for particular tasks, such as fund transfers or automatic payments, by using the operator role, which enables other parties to carry out transactions on behalf of the token holder. Additionally, ERC-777 tokens are backward compatible with ERC-20, meaning they can be integrated seamlessly with existing dApps while offering improved control and efficiency for advanced use cases.

2. ERC-1400 (Security Tokens)

ERC-1400 is designed specifically for compliant security tokens, catering to regulated assets and bridging the gap between traditional finance and Web3. It includes capabilities for regulatory reporting, investor control, and restricted transfers based on legal requirements. With in-built compliance checks that prevent illegal transfers, ERC-1400 enables the management of assets such as tokenized stocks, bonds, or other regulated financial instruments. ERC-1400 offers a safe and transparent framework for the Ethereum tokenized securities market by supporting investor protection and regulatory compliance.

3. ERC-4626 (Yield-Bearing Tokens)

ERC-4626 is tailored for the DeFi sector, allowing tokens to represent yield-bearing positions, such as in lending protocols or staking mechanisms. It standardizes the design of vaults, enabling users to deposit assets in return for tokens that appreciate in value as they earn yield. By streamlining DeFi platform integrations, this standard facilitates the management and optimization of yield-bearing assets. ERC-4626’s design also improves transparency for users, who can view their yields clearly and interact with different DeFi protocols using a unified approach.

Token Standards on Other Blockchains

1. BEP-20 on Binance Smart Chain (BSC)

BEP-20 is the primary token standard on Binance Smart Chain, closely modeled after Ethereum’s ERC-20 standard. Designed for fungible tokens, BEP-20 enables users to create and manage tokens seamlessly within Binance’s ecosystem, supporting dApps, DeFi projects, and decentralized exchanges (DEXs) like PancakeSwap.

It provides developers with flexibility and interoperability with the Binance Chain, making it a popular choice for projects aiming to leverage Binance’s fast transaction speeds and low fees. BEP-20 has gained traction, particularly among developers and DeFi users searching for a less expensive alternative to Ethereum’s network.

2. SPL on Solana

SPL is Solana’s token standard. It facilitates the creation of fungible and non-fungible tokens with high-speed, low-cost transactions and is ideal for Web3 applications such as dApps, NFTs, and DeFi solutions.

The SPL standard supports Solana’s blockchain architecture, which achieves high transaction throughput and efficiency, making it a competitive platform for real-time applications, especially in the NFT space. It is used by well-known NFT marketplaces like Solanart and Magic Eden, which use Solana’s transaction efficiency to attract developers and users from all over the Web3 ecosystem.

3. TRC-20 and TRC-721 on TRON

The TRON ecosystem uses TRC-20 for fungible tokens and TRC-721 for non-fungible tokens (NFTs). TRC-20, like ERC-20, supports the creation of fungible tokens used across TRON-based dApps and DeFi applications, while TRC-721 facilitates distinct, indivisible assets for NFTs.

Known for quick transactions and low costs, TRON has emerged as a preferred platform for gaming and entertainment dApps, where smooth token exchanges and asset transfers are essential. Developers and users in the gaming and DeFi industries are drawn to TRON’s ecosystem because its token standards allow for the creation and exchange of a wide variety of assets across numerous decentralized applications.

How to Choose the Right Token Standard?

1. Purpose of the Token

The intended use of the token is the first factor to be taken into account while selecting a token standard. For example, standards like BEP-20 on the Binance Smart Chain or ERC-20 on Ethereum are ideally suited for fungible tokens, which are uniform and interchangeable. These are ideal for decentralized finance (DeFi) assets such as utility tokens, governance tokens, or stablecoins.

Conversely, non-fungible tokens (NFTs), which stand for unique assets, align with the ERC-721 or TRC-721 standards for tokenizing real-world assets, digital collectibles, and gaming items. ERC-1155 provides a flexible approach by permitting several token types in a single contract, which is ideal for projects that need both fungible and non-fungible capabilities within the same environment.

2. Blockchain Ecosystem Considerations

Selecting a blockchain ecosystem is crucial for fulfilling needs for scalability, transaction speed, and fees. Blockchains such as Solana, with its SPL standard, or TRON, with its TRC-20 and TRC-721, can provide cost-effective alternatives for companies that value low costs and high transaction speed, particularly for high-frequency dApps like gaming. If interoperability and extensive dApp support are priorities, Ethereum’s ecosystem may be preferable despite higher fees, as it offers well-established standards and cross-chain compatibility options.

3. Community and Developer Support

Established token standards with robust community and developer support often benefit from better security, compatibility, and integration with popular wallets and exchanges. The widespread recognition and support of standards like BEP-20, ERC-20, and ERC-721 facilitates their adoption and broadens their market reach. For long-term stability and interoperability, choosing a standard with a large, active community gives access to shared resources, updates, and troubleshooting.

Future of Token Standards in Web3

1. Growing Demand for Specialized Standards

As Web3 continues to expand, the need for token standards tailored to specific industries, like DeFi, gaming, and supply chain management, is on the rise. For instance, gaming applications benefit from multi-token standards like ERC-1155, which permit a combination of fungible and non-fungible objects within a single contract. On the other hand, DeFi protocols require yield-bearing token standards (like ERC-4626) that represent staking or lending positions.

2. Interoperability and Cross-Chain Standards

The Web3 ecosystem is moving towards cross-chain compatibility to address the fragmentation across blockchain networks. This trend has spurred the development of interoperability-focused standards that facilitate smooth token transfers between various blockchains. Standards that support interoperability allow tokens to bridge ecosystems, enabling cross-chain dApps, enhanced liquidity, and broader use cases.

3. Increased Security and Compliance Requirements

As regulations around digital assets intensify, future token standards are likely to include features that prioritize security and compliance. Standards like ERC-1400 for security tokens are an early example, designed to meet regulatory requirements through added controls. Newer standards might include improved authentication, anti-fraud measures, and reporting capabilities to meet the increasing need for safe and legal digital assets in Web3.

Conclusion

The decentralized ecosystem relies heavily on Web3 token standards, such as ERC-20 for fungible tokens, ERC-721 for NFTs, and ERC-1155 for multi-token use cases. Each standard serves a specific purpose. ERC-721 powers digital art and collectibles, ERC-1155 simplifies gaming assets by supporting both fungible and non-fungible tokens in a single contract, and ERC-20 supports DeFi and utility tokens. Furthermore, specialized standards such as ERC-1400 and ERC-4626 are broadening the range of blockchain applications.

Web3 is built on token standards, which give decentralized apps security, efficiency, and interoperability. These standards will likely evolve as the Web3 ecosystem develops to meet new requirements like cross-chain compatibility and regulatory compliance. Both developers and users must comprehend and select the appropriate token standard to build a robust and adaptable decentralized future.