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A token standard is a set of specific rules and protocols that determine the way a cryptocurrency token is created, behaves, and functions on a blockchain network.
Cryptocurrency tokens represent digital assets that can be created, transferred, and stored on a blockchain. They enable various on-chain functionalities, such as paying transaction fees, securing the network via staking, running liquidity pools, and voting on governance proposals.
To ensure that tokens are standardized to the blockchain protocol on which they run and can interoperate across applications, different token standards have emerged.
These standards ensure that tokens are compatible and can be integrated seamlessly across different blockchain protocols. This facilitates the creation of decentralized applications (dApps), which use tokens to function, and fosters liquidity and interoperability between tokens.
How Do Token Standards Work?
Token standards set out the parameters within which smart contracts must operate in order to perform basic functions on a blockchain protocol.
This allows any developer to create their own cryptocurrency token, as the interfaces and features are standardized. Developers can design smart contracts for tokens that interact with each other because this standardization ensures that data types, functions, and behaviors are always consistent.
Token standards are set by proposals put forward by the blockchain developers and community. For example, the Ethereum blockchain, which pioneered smart contracts and remains the top platform for many applications, uses Ethereum Improvement Proposals (EIPs) to set standards for the core protocol, application programming interfaces (APIs) for nodes and client software, and smart contracts that run the Ethereum Virtual Machine (EVM).
Ethereum Requests for Comment (ERC) are proposals that define standards for Ethereum-based applications, including smart contract and token standards. They act as a set of technical documents that contain the guidelines for smart contract development.
Common Crypto Token Standard Examples
The Ethereum blockchain is the preferred choice for many dApp developers to implement smart contracts. The most used standards for tokens that run on Ethereum are ERC-20, ERC-721, ERC-777, and ERC-1155. But there are also token standards for other commonly used blockchains, such as BNB Chain and Solana.
ERC-20
ERC-20 is the Ethereum standard for fungible tokens, covering different types of cryptocurrencies, such as utility tokens, security tokens, and stablecoins. It is widely used by projects developing utility and governance tokens for dApps running on the Ethereum blockchain or sidechains.
ERC-20 is the most widely adopted Ethereum token standard. It provides details of six required functions and three optional functions that a token must apply to be compliant.
The six primary functions define the total supply, wallet balance, ownership transfer, token transfer on a user’s behalf, and approval for the maximum number of tokens that a smart contract can withdraw. The optional functions can help improve the token’s usability, including the token name, ticker symbol, and number of decimal places it can support.
The standard allows developers to create customized fungible tokens that have utility, such as staking or representing voting rights and can be supported by many different cryptocurrency exchanges and wallets.
All ERC-20 tokens can interoperate with each other and compatible services such as the MetaMask wallet.
Examples of ERC-20 tokens include uniswap (UNI), shiba inu (SHIB), sandbox (SAND), and polygon (MATIC).
ERC-721
ERC-721 is the non-fungible token (NFT) standard for Ethereum. NFTs are unique tokens with distinct identifiers that are not mutually interchangeable, like fungible tokens. They represent ownership of a specific asset, such as digital art, collectibles, gaming items, event tickets, or virtual real estate.
ERC-721 is more complex than other standards, as it has multiple optional extensions and provides the framework for creating, owning, and transferring tokens with unique specifications that cannot be exchanged.
NFTs are created in the same way as other types of tokens, but they all have different values and unique metadata.
CryptoKitties, an innovative blockchain game, inspired ERC-721 and used a beta version of the standard to mint NFTs. CryptoPunks, a collection of 10,000 profile pictures (PFPs) that launched in June 2017, popularized the standard soon after. CryptoPunks were part of the surge in popularity of NFTs in 2021, along with the ERC-721-compliant Bored Ape Yacht Club, Pudgy Penguins, and Beeple’s “Everydays: The First 5000 Days” digital artwork.
ERC-777
ERC-777 aims to extend the functionality of the ERC-20 standard to address its limitations. ERC-777 implements ‘Hooks’, a function that combines sending tokens and notifying a contract into a single message. This makes it more efficient for smart contracts to send and receive tokens. The standard focuses on allowing more complex interactions in trading tokens and introduces the ability to reject transactions from a blacklisted address.
The ERC-777 standard is backward compatible with the ERC-20 standard, so ERC-20 tokens and ERC-777 tokens can interact as both standards have the same underlying functionality.
ERC-1155
The ERC-1155 standard is designed to improve on the previous standards by creating tokens that are fungibility-independent (they can be either fungible or non-fungible) and efficient in the way they use gas for processing transactions on the blockchain. It is essentially the ERC-20 and ERC-721 standard combined with a few complicating factors.
ERC-1155 has been developed by NFT ecosystem Enjin to enable a single smart contract to manage multiple types of tokens. Enjin developed the standard to address the limitations of ERC-721, especially its lack of support for batch transfers.
To send multiple ERC-721 NFTs, a user needs to complete multiple transactions. These flood the network, driving up gas fees (transaction costs). ERC-1155 allows users to bundle multiple assets in one smart contract. This reduces the potential for a transfer to cause network congestion while reducing transaction costs.
BEP-20
BEP-20 is the standard that provides technical specifications for tokens used on the BNB Chain underlying the Binance cryptocurrency exchange. BEP-20 is based on ERC-20 but adapted to the Binance ecosystem.
BEP-20 tokens operate seamlessly with dApps and decentralized exchanges (DEX) on the BNB blockchain. The standard provides a flexible format for developers to launch different forms of tokens. Binance aims to be an alternative platform to the Ethereum blockchain with lower transaction fees and faster processing speeds. BEP-20 provides a framework for how a token can be used, who can use it, and how it operates.
TRC-20
TRC-20 is the token standard that facilitates the creation of fungible tokens on the TRON blockchain and defines the way they work. TRC-20 is similar to and compatible with ERC-20, as it includes six required functions and three optional functions for the creation, transfer, and operation of compliant tokens.
The TRON blockchain is designed to provide high transaction throughput and low fees. The TRC-20 token standard comprises specifications for all-in-one functionality and highly utilizable tokens based on smart contracts. Tokens based on TRC-20 can facilitate fast and convenient payments through instant and scalable transaction processing. TRC-20’s compatibility with ERC-20 means that the ERC-20 code can be extended to a TRC-20 token to add reliable functions.
As with ERC-20 tokens on Ethereum, any developer can create a custom TRC-20 token on the TRON blockchain. Holders can store TRC-20 tokens in supported wallets like TronLink and use them in dApps that run on TRON.
SPL
Solana Programmable Token (SPL) is the token standard for the Solana blockchain. SPL allows developers to create and deploy tokens with high-speed transaction processing targeted at decentralized finance (DeFi) applications and other uses that require scalability.
Solana token standards are stored in the Solana Program Library, which is a depositary of software programs that run on the Solana blockchain’s runtime. The program provides a standardized interface for the creation, use, and destruction of tokens compatible with the Solana blockchain.
Unlike ERC standards (excluding ERC-1155), which are separate for fungible and non-fungible tokens, SPL incorporates both. The functionality of different SPL tokens can vary within the SPL standard, as they can be NFTs, fungible tokens with a low circulating supply, or tokens that combine the features of other types.
SOL, the Solana blockchain’s native fungible token, is an SPL token. Fungible and non-fungible tokens that comply with the SPL standard can interact with SPL-compliant blockchain wallets and smart contracts. This provides an alternative ecosystem to Ethereum for developers to create dApps. They also enable developers to build front ends such as Solscan, to provide data analytics and meta information for research.
Why Are Token Standards Important?
Token standards play a fundamental role in the development of blockchain ecosystems. Standards create a basic framework that simplifies token development throughout the blockchain space and enhances liquidity. They ensure that cryptocurrency tokens are interoperable, compatible, and can be easily integrated into dApps, wallets, and exchanges.
Token standards foster innovation by enabling developers to build on existing standards rather than reinventing the wheel. Similarities between token standards, such as ERC-20 and BEP-20, make it easier for developers to transfer tokens and applications across multiple blockchains, accelerating deployment and adoption.
The Bottom Line
Token standards like ERC-20, ERC-721, BEP-20, TRC-20, and SPL have facilitated the development of the cryptocurrency space by setting out consistent rules for the creation of fungible and non-fungible tokens. Different blockchains can define different stands for tokens using their protocols, although many are based on the protocols set out in the Ethereum ERC standards.
Standardization is necessary to provide the framework for smart contracts to use tokens in their implementation and ensure that tokens are compatible with various decentralized applications.
As the cryptocurrency landscape continues to evolve, token standards will define the ways in which digital assets can be used and drive forward blockchain adoption.
