Summary
A token standard is a set of rules and conventions to govern how crypto tokens work. Popular standards include ERC-20, BEP-20, ERC-721, and ERC-1155.
Introduction
While there are tens of thousands of cryptocurrencies, you might be surprised to learn that most of them are built on the same blueprint. The blueprint, the token standard, defines a number of key functionalities and characteristics of blockchain tokens.
Why Use a Token Standard?
Interoperability
Token standards ensure that all products built using the standard can interact or work together. If a project issues a token built on a token standard, then the new token will remain compatible with existing platforms and applications such as wallets. For example, ERC-20 assets have interoperability with other products and services developed using the same token standard.
This is also the reason you can trade one ERC-20 token for another. Without a token standard, it would be much more difficult for you to trade some cryptocurrencies. You also have to create a specific wallet for a specific token rather than using a wallet that can store multiple cryptocurrencies.
Composability
In programming, having a system with composability allows developers to reuse existing components to create new products. This applies to token creation as well – by using a token standard, the time spent on basic functionality is reduced, so developers have more time to experiment and innovate.
Efficiency
Token standards also facilitate interactions between smart contracts. After following token standards and deploying tokens, smart contracts can be used to monitor the tokens created.
Token standards such as ERC-20 and BEP-20 come with important functions, including address retrieval and token balance, so that smart contracts can monitor tokens more efficiently. For example, to examine ERC-20 tokens, developers can use an interface called Contract Application Binary Interface (ABI) to track the transfer of tokens and other data.
Common Token Standards in Crypto and DeFi
BEP-20
BEP-20 is a token standard on the BNB Smart Chain (BSC). Developed as a technical specification for BSC, this standard allows developers to launch a variety of tokens, including peggy coins, utility tokens, stablecoins, and others. The BEP-20 standard also brings features such as blacklisting, minting, and pausing token burning.
Following are the main functions of the BEP-20 token standard:
TotalSupply: defines the total token supply of a particular BEP-20 token.
BalanceOf: defines the token balance.
Transfer: allows users to transfer ownership of tokens to others.
TransferFrom: allows tokens to be transferred to others on behalf of a user via a smart contract.
Approve: defines a limit on the number of tokens that can be withdrawn by a smart contract.
Allowance: defines external addresses that have permission to spend tokens.
ERC-20
In 2015, Fabian Vogelsteller proposed ERC-20, a token standard that would later become the main outline for developers to design their own tokens, including virtual tokens, staking tokens, and virtual currencies.
ERC-20 is a token standard for developing assets that follow common rules and are interchangeable (in other words, fungible). So, if you create 1,000 units of an ERC-20 token, each unit will have the same functionality.
The BEP-20 standard is very similar to ERC-20. However, note that each is part of a different blockchain network. The ERC-20 token standard is used on the Ethereum blockchain, while BEP-20 is found on the Binance Smart Chain (BSC).
ERC-721
Did you know that most of the non-fungible tokens (NFTs) on Ethereum use the same token standard, namely ERC-721? Whether it's a limited edition NFT or a Proof of Attendance Protocol (POAP), your NFT is likely created with the same blueprint. So, what makes NFTs unique? According to one of the guidelines, to be an ERC-721 token, an asset must have a globally unique tokenId.
ERC-721 functionality includes token transfers, current balance, total supply, and is globally unique, as mentioned.
ERC-1155
As token standards evolved, a set of guidelines emerged that covered the industry's need to have multiple types of tokens. ERC-1155 is a multitoken standard that enables the creation of various types of digital assets, including utility tokens such as BNB and NFTs.
Among other features, the ERC-1155 offers token batch functionality, including:
Batch transfer: multiple assets can be transferred at once.
Batch balance: the balance of multiple assets can be obtained in one step.
Batch approval: all tokens can be approved to an address.
NFT support: tokens are treated as NFTs if their supply is only 1.
Token Standard Limitations
Tokens created to the same standard have aligned basic functionality and can interact well with each other. However, tokens of different standards cannot do so. Since there are various rules governing token standards in the industry, it is not surprising that tokens are not always compatible with each other. This means that tokens developed using different standards may not exist on the same platform, or tokens may not communicate or be traded with each other. If you own some cryptocurrencies, you've probably been annoyed that you can't use BTC on Ethereum. To overcome this limitation, the industry introduced a new genre of tokens called wrapped tokens.
Wrapped token
Wrapped tokens are cryptocurrencies that are pegged to the value of another cryptocurrency. Typically, the original assets are stored in a digital vault called a wrapper. Then, a wrapped version of the asset is created on another blockchain like an avatar.
Closing
Token standards are similar to blueprints for designing and launching blockchain-based tokens. Currently, there are several token standards in the industry. Innovative solutions such as blockchain bridges and wrapping mechanisms can help smooth out incompatibility issues between tokens.
Further Reading
Introduction to ERC-20 Tokens
Three Popular Crypto Bridges and How They Work
How to Use Polygon Bridge?
Explanation of Atomic Swap