Token Standards: Everything You Need to Know
Tokens must adhere to certain standards for them to operate properly in the cryptocurrency space. Common standards are ERC-20, BEP-20, ERC-721, and ERC-1155. These standards provide rules, conventions, and protocols for token creation and management.
You might find it surprising that, despite the vast number of cryptocurrencies, most of them follow the same blueprint. These blueprints are token standards that outline the functionalities and properties of blockchain tokens.
What Benefits Do Token Standards Provide?
Token standards guarantee that all items created utilizing that standard can interact or cooperate. If a project distributes a token constructed according to a token standard, the new token will stay perfect with existing platforms and such applications as wallets. For example, ERC-20 assets are compatible with different products and services created utilizing the same token standard.
Token standards such as ERC-20 make it relatively easy to exchange one cryptocurrency for another. Swapping tokens would be much more difficult and time-consuming without such standards. You would also need to create individual wallets for different digital tokens rather than relying on a single wallet that can store multiple coins.
Composability in programming means that developers can take pre-existing components and assemble them to build new products. The same applies to token creation — utilizing standards for tokens reduces the time spent on core functions, leaving developers more time to explore and develop their ideas.
Token standards enable smart contracts to interact with one another. Once tokens are deployed by smart contracts following the standard, they can be monitored by smart contracts.
Standards such as ERC-20 and BEP-20 come with foundational functions like address retrieval and token balances, letting smart contracts observe token activity more productively. An instance of this is how a developer can use the Contract Application Binary Interface (ABI) interface to check on an ERC-20 token and monitor token transfers and other information.
Common Token Standards in Crypto and Decentralized Finance
The BEP-20 token standard is essential for the Binance Smart Chain (BSC), allowing developers to create various tokens, including peggy coins, utility tokens, stablecoins, and more. By incorporating features like blacklisting, minting, and pausing token burns, the BEP-20 standard provides a comprehensive solution for developers building on the BSC network.
The BEP-20 token standard offers the following key features:
- TotalSupply: defines the supply of a specific BEP-20 token that has been created and put into circulation.
- BalanceOf: defines the total number of tokens held by a particular address.
- Transfer: allows users to give another person ownership of their tokens.
- TransferFrom: allows a token to be transferred to a different user through a smart contract carried out on behalf of the original user.
- Approve: sets a maximum amount of tokens that can be withdrawn from a smart contract.
- Allowance: specifies external addresses that are permitted to spend tokens.
In 2015, Fabian Vogelsteller proposed the ERC-20 token standard, intended to serve as a blueprint for developers to design their own types of tokens, such as virtual tokens, staking tokens, and virtual currencies.
Developers who create assets using the ERC-20 token standard are making fungible products; these assets will all have the same properties and be interchangeable. For example, producing 1,000 units of an ERC-20 token will mean each unit has the same functionality.
Although the BEP-20 standard is quite similar to the ERC-20 token standard, it's important to remember that the two are designed for different blockchain networks. The ERC-20 token standard is specifically made for use on the Ethereum blockchain, while the BEP-20 is for the Binance Smart Chain.
A large number of Ethereum's non-fungible tokens (NFTs) are built with the same standard, ERC-721. They can range from limited NFT editions to Proofs of Attendance Protocols (POAPs), but the distinguishing factor behind them all is their one-of-a-kind tokenId. By meeting the requirements stated within the ERC-721 guidelines, each NFT is guaranteed to have its unique tokenId, making each of them special.
ERC-721 tokens allow for functionality such as transferring tokens, checking token balances, determining the total supply of tokens in existence, and, most notably, the uniqueness of each token.
One standard emerging to meet the industry's demand for multiple token types is ERC-1155. This multi-token standard facilitates the creation of various digital assets, including utility tokens like BNB and NFTs.
The ERC-1155 offers such batch functionalities as:
- Batch transfer: the capability of batch transfer enables the simultaneous transfer of multiple assets.
- Batch balance: retrieving batch balances of multiple assets in a single step.
- Batch approval: the batch approval process allows for authorizing a single address to receive all tokens simultaneously.
- NFT support: when a token has a supply of only one unit, it is classified as an NFT.
Limitations of Token Standards
Tokens crafted to the same standard tend to have similar basic functionalities and interact well with each other. At the same time, those of varying standards may have difficulty doing the same due to existing industry regulations and different sets of rules. As a result, transactions between non-compatible tokens might not be possible on the same platform or, worse, not be able to be exchanged at all. This is often seen with those who own multiple cryptocurrencies and, for example, are left feeling incapable of using Bitcoin on Ethereum. To counter this issue, new wrapped tokens were introduced as a way of bridging the gap between incompatible tokens.
Wrapped tokens are crypto assets that are pegged to the value of another asset. Typically, the original is placed in a digital vault, known as a wrapper, and a wrapped edition of it is produced on a separate blockchain, similar to an avatar.
Token standards are like plans that show how to construct and introduce blockchain tokens into the world. There are currently several token standards around, and through things such as blockchain bridges and wrapping mechanisms, any difficulties with mismatching these tokens can be minimized.