In the world of cryptocurrency, the terms 'crypto token' and 'cryptocurrency' are often used interchangeably, but they possess a subtle difference. While cryptocurrencies are native to a blockchain, tokens do not have their exclusive blockchain. On the Ethereum blockchain, crypto tokens can be of different types, each defined by whether or not they are fungible. The degree of fungibility of a token is represented by one of the three token standards on Ethereum: ERC20, ERC721, and ERC1155.
In this article, we explore the meaning of ERC tokens in general and delve into each of these three token standards. Their concept becomes very simple once you understand the role they play.
Understanding Blockchain Coins vs Tokens
First came the coins. The story starts with Bitcoin — the first blockchain network. The design of Bitcoin was to allow people to make global peer-to-peer payments using its native currency, also called Bitcoin or BTC. Then came similar blockchains such as Litecoin (LTC) and Dogecoin (DOGE) that offered a similar use case.
All these cryptocurrencies that live on their own blockchain network are referred to as coins.
Then came Ethereum, which introduced the concept of blockchain-based decentralized applications and protocols. Although the Ethereum blockchain also has its own 'coin' called ETH that can be used in the same ways as BTC, its primary use case is to serve as gas to power transactions and operations on apps and protocols built on the network.
Developers of these apps can create in-app currencies that do not have a dedicated blockchain and are instead stored on Ethereum itself. Ethereum also allows users to create other forms of standalone digital assets that can be immutably stored on the blockchain. These in-app currencies or digital assets created and stored on Ethereum are called tokens.
To sum it all up, a crypto asset that has a dedicated blockchain is technically a coin. While all other assets created on a third-party blockchain are called tokens.
What Are Ethereum Tokens? The ERC Standard Explained
The Ethereum ecosystem is decentralized, but it still needs someone to set the rules, make calls for upgrades, and set standards that define what is possible on the blockchain. To achieve this, the very users of Ethereum need to create Ethereum Improvement Proposals (EIPs), discuss their details, and vote on them to either reject or start their implementation.
There are several types of EIPs for different categories of improvements and additions. One such type was defined by the core Ethereum developers to propose, discuss, and implement different technical standards for the creation of tokens, smart contracts, applications, wallet formats, etc. on Ethereum.
This subcategory of an EIP was dubbed the Ethereum Request for Comments, or ERC. So far, there have been many Ethereum Request for Comments to set standards for the tokens that can be created on Ethereum. All tokens that are created on Ethereum must follow the standards set by these ERCs. Hence, they are ERC tokens.
Today, there are three ERC standards that are most common on Ethereum: ERC-20, ERC-721, and ERC-1155. The numbers following ERC are simply the serial numbers of 'request for comments' that proposed these standards.
But what do these standards exactly mean, and why is there a need for them? Let’s find out.
Understanding the ERC Token Standards
ERC-20: The Fungible Token Standard
First implemented in 2015, ERC20 is the token standard that allows developers to create fungible tokens for their Ethereum-based applications or protocols.
You can imagine 'fungible tokens' as any regular currency based on a blockchain. The term 'fungible' simply means that you can interchange one unit of a token with any other unit of that token because they represent the same value. An example of this would be a stablecoin. Other examples include crypto assets like UNI or LINK — the ERC20 tokens of Ethereum-based protocols Uniswap or Chainlink. Each of these tokens are fungible because one UNI or LINK token will always be equal to any other UNI or LINK token.
That means you can exchange the above tokens on a one-to-one basis. It won’t matter which UNI you own because their underlying value will always be the same as all other UNI tokens.
ERC-721: The Non-fungible Token Standard
As the use cases of blockchain expanded, there was a need to tokenize and represent unique data on the blockchain. This led to the introduction of the ERC721 token standard, which allows you to create non-fungible tokens. These tokens each possess a unique value and act as verifiably unique digital objects that cannot interchange with each other like ERC20 tokens.
So, suppose you want to represent a piece of digital art on the blockchain. You clearly cannot use an ERC20 token to do that. Instead, you can use an ERC721 standard token to create an NFT art piece. This NFT of the digital art piece can easily prove the authenticity of the artwork and its record of ownership.
As the record of ownership and the identity of the NFT artwork is immutable and stored on a blockchain, it also makes forging any artist’s original work nearly impossible.
ERC-1155: The Semi-Fungible Token Standard
The problem with ERC20 and ERC721 standards was that they allow one smart contract to only support a single type of fungible or non-fungible token. So, every time you want to deploy a new token, you have to write a new smart contract. Besides, the above two standards do not offer a way to create semi-fungible tokens.
This led to the establishment of the ERC1155 token standard, enabling Ethereum developers to create fungible, semi-fungible, and non-fungible tokens using the same standard. Furthermore, using ERC-1155, you can create a single contract to support multiple types of individually configurable tokens, thus reducing the complexity of the token creation process.
Suppose a developer wants to develop an NFT game. They plan to create one fungible token as the in-game currency and multiple non-fungible tokens for unique in-game assets such as skins, guns, merchandise, etc. If they use ERC-20 and ERC-721 standards, they would have to write new smart contracts to support every new type of asset they create. However, using ERC-1155 would enable them to write just one contract to support all kinds of tokens they want to have in the game.
All of this is not to say that one of the standards is better than the other. They simply have different applications.
The Endless Possibilities on Ethereum
Ethereum has very well propelled blockchain beyond just being a technology for secure digital money. Plus, the ability to propose and establish new token standards creates more room for newer use cases of the Ethereum network.
Thanks to this innovation, today, it is possible for an artist to create a unique token representing their art piece. It is possible for creators to represent the scarcity of their creations and monetize their work. Possible 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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Frequently Asked Questions
What is the main difference between ERC-20 and ERC-721 tokens?
ERC-20 tokens are fungible, meaning each token is identical and interchangeable with any other token of the same type. ERC-721 tokens are non-fungible, meaning each token is unique and cannot be replaced by another token.
Can one smart contract manage multiple token types?
Yes, but only if it uses the ERC-1155 standard. ERC-20 and ERC-721 require separate contracts for each token type, while ERC-1155 allows multiple token types within a single contract.
Why are token standards important on Ethereum?
Token standards ensure compatibility across the Ethereum ecosystem. They define how tokens behave, making it easier for wallets, exchanges, and other smart contracts to interact with them seamlessly.
What are some common use cases for ERC-1155 tokens?
ERC-1155 is often used in gaming for in-game items, digital collectibles, and platforms that require both fungible and non-fungible assets within the same application.
How do I create my own token on Ethereum?
To create your own token, you need to write a smart contract that follows one of the ERC standards, test it thoroughly, and then deploy it to the Ethereum network. You'll also need ETH to pay for gas fees.
Are there other ERC standards besides ERC-20, ERC-721, and ERC-1155?
Yes, there are many other ERC standards that propose different functionalities and improvements. However, these three are the most widely adopted for token creation on Ethereum.