Blockchain technology has revolutionised the way we conceive and transact value in the digital realm. At the heart of this transformative landscape lie token standards, the essential protocols that define and govern the creation and operation of digital assets. In this concise guide, we delve into what token standards are and the intricacies of two prominent token standards: ERC-20 and ERC-721. Whether you're a newcomer to the world of blockchain or a seasoned enthusiast, understanding these protocols is crucial for grasping the fundamental building blocks that power blockchain interoperability, security, and innovation.
Before jumping into the various token types, it is important to grasp the concept of token standards. Token standards refer to a set of rules governing the construction and operation of token smart contracts on a blockchain. In the ever-expanding universe of blockchain technology, token standards serve as the guiding principles that underpin the creation, management, and exchange of digital assets. These standards, like ERC-20 and ERC-721, are essential frameworks that define how tokens operate within a blockchain ecosystem. But why are they so vital, and what purpose do they serve?
Uniformity and Interoperability: Token standards provide a common language for developers and users alike. In a decentralised landscape composed of diverse applications, platforms, and smart contracts, having a shared set of rules ensures that digital assets can seamlessly move across different protocols. This interoperability is the linchpin of a flourishing blockchain ecosystem.
Security and Trust: Standardisation isn't just about convenience; it's a powerful tool for enhancing security. By adhering to established token standards, developers create a foundation of reliability and predictability. This, in turn, fortifies smart contracts against vulnerabilities and promotes a more secure digital environment. Trust is built not just on the promise of innovation but on the assurance of a robust and standardised framework.
Innovation and Creativity: Token standards provide a canvas for innovation. They offer a set of rules that, when followed, enable developers to create diverse and groundbreaking applications. Whether it's the fungible nature of ERC-20 tokens driving decentralised finance (DeFi) or the uniqueness of ERC-721 NFTs revolutionising digital ownership, these standards become the catalysts for a new era of creativity in the blockchain space.
As the blockchain ecosystem continues to gain widespread popularity, developers are actively diversifying their creation of blockchain protocols. While some protocols still adhere to the Ethereum Token Standards, various blockchains adopt distinct token standards tailored for specific purposes. The formulation of these standards is intended to establish shared conventions among developers and users alike. Let's go over some of the more prominent token standards out there currently.
Ethereum (ERC)
The Ethereum blockchain is widely recognised as the leading platform for smart contracts. Within the Ethereum ecosystem, token standards are documented as Ethereum Request for Comment (ERC). However, before a standard becomes an ERC, it starts as an Ethereum Improvement Proposal (EIP) that undergoes submission to the Ethereum community. This initiates a process involving feedback, revisions, and finalisation, resulting in the creation of a new ERC.
Solana (SPL)
In the Solana ecosystem, token standards are contained in the Solana Program Library (SPL), which is a library of on-chain software programs that run on the Solana chain’s runtime. SPL-compliant tokens are compatible with the Solana chain which adds to composability in the Solana ecosystem. Solana tokens are covered by the Solana Token Program, which is part of the overall SPL. This program creates a standardised interface for the creation, issue, transfer, and destruction of Solana-compatible tokens and is comparable to ERC-20 and ERC-721 in the Ethereum ecosystem.
Algorand (ARC)
Algorand has emerged as a frontrunner with its secure, scalable, and efficient protocol. One of the key features that sets Algorand apart is its support for the creation of on-chain assets, known as Algorand Standard Assets (ASAs). Algorand Standard Assets (ASAs) are assets built directly on the Algorand blockchain that enjoy the same level of security, compatibility, speed, and user-friendliness as the native cryptocurrency, $ALGO. ASAs empower developers and businesses to tokenise a wide range of digital assets, which led to the development of Algorand Request for Comments (ARC).
The Journey Begins with ERC-20 and ERC-721
As we embark on this exploration, our focus will be on two prominent token standards by the Ethereum ecosystem: ERC-20 and ERC-721. These standards have not only become integral to the Ethereum blockchain but have also set benchmarks for token development across the entire industry.
In the following sections, we'll unravel the intricacies of ERC-20, the universal language of fungible tokens, and delve into ERC-721, the revolutionary standard behind non-fungible tokens (NFTs). Together, they epitomise the essence of token standards and illuminate the path to a decentralised future where digital assets are not just created but flourish within a structured and innovative ecosystem.
ERC-20: The Universal Language of Tokens
The ERC-20 standard, or Ethereum Request for Comment 20, is the bedrock of fungible tokens on the Ethereum blockchain. This standardisation has brought about a level of interoperability that has significantly fueled the growth of decentralised applications (DApps) and the broader blockchain ecosystem. ERC-20 tokens adhere to a set of rules, allowing them to be easily exchanged with one another without the need for a centralised intermediary.
Core Principles of ERC-20:
Transferability: ERC-20 tokens can seamlessly move between addresses on the blockchain, enabling efficient transactions and exchange on various platforms.
Fungibility: Each token is identical to every other token of the same type, ensuring a standard unit of value that is interchangeable and divisible.
Approvability: Smart contracts can be programmed to manage and control the transfer of ERC-20 tokens, adding an additional layer of security and governance.
ERC-721: Unleashing the Power of Non-Fungible Tokens (NFTs)
While ERC-20 tokens are interchangeable, ERC-721 tokens introduce a new dimension to the blockchain landscape with the concept of non-fungible tokens (NFTs). Each ERC-721 token is unique, representing ownership of a distinct digital asset, be it art, collectibles, or virtual real estate. This standard has revolutionised the digital ownership landscape, offering unprecedented possibilities for creators and collectors.
Core Principles of ERC-721:
Uniqueness: Each token is distinct, providing a digital certificate of authenticity and ownership for unique assets.
Indivisibility: Unlike fungible tokens, NFTs cannot be divided into smaller units, maintaining the integrity and rarity of the digital asset.
Customisability: Creators can embed metadata and additional information directly into the token, enhancing its uniqueness and providing additional context.
Understanding token standards is crucial for navigating the dynamic landscape of blockchain technology. While various blockchains like Solana and Algorand have introduced their token standards, they still draw inspiration from the foundational principles established by Ethereum, particularly through ERC-20 and ERC-721 standards. These protocols serve as the bedrock for ensuring interoperability, and security in the digital realm.
ERC-20 and ERC-721 have become pivotal in driving the transformative power of blockchain, reshaping concepts of ownership, creativity, and value exchange. As we witness the ongoing evolution of these standards, it becomes evident that they are not merely fundamental building blocks but catalysts propelling us towards a decentralised future.
We, from Blockchain at NTU, thank you for being part of this enlightening journey and extend a warm welcome to the enthralling universe of blockchain!
NOTE: Articles written by Blockchain at NTU ARE NOT FINANCIAL ADVICE!
Written By:
Dann Wee
Research Director of Blockchain at NTU Club AY23/24
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