Token Standards: ERC-20, ERC-721, and Beyond

Ethereum token standards define interfaces enabling interoperability across wallets, exchanges, and applications. Understanding these standards helps evaluate different token types and their capabilities.

ERC-20: Fungible Tokens

ERC-20 is the original and most common token standard. It defines functions for transferring tokens, checking balances, and managing approvals. Each token is identical and interchangeable - like traditional currency.

Most cryptocurrency tokens implement ERC-20, including stablecoins, governance tokens, and utility tokens. The standard's simplicity enabled rapid ecosystem growth after its introduction in 2015.

Key functions include transfer, approve, and transferFrom. These enable direct transfers and delegated transfers through smart contracts. This pattern powers DEXs and DeFi protocols. Without standardization, each token would require custom integration everywhere.

The totalSupply function reports how many tokens exist. balanceOf checks how many tokens an address holds. These simple interfaces create powerful composability across the ecosystem.

ERC-721: Non-Fungible Tokens

ERC-721 introduced non-fungible tokens where each token is unique. NFTs can represent digital art, collectibles, gaming items, or real-world assets.

Unlike ERC-20, each token has a unique identifier. Transfer functions specify individual tokens rather than amounts. Metadata URLs can point to associated data like images or descriptions.

This standard enabled the NFT market boom starting in 2020-2021. Its flexibility supports various use cases from digital art to identity systems. CryptoPunks and Bored Ape Yacht Club popularized this standard.

Ownership is easily verifiable on-chain. The ownerOf function returns the current owner of any token ID. This transparency and provenance tracking differentiates NFTs from traditional digital files.

ERC-1155: Multi-Token Standard

ERC-1155 manages both fungible and non-fungible tokens in one contract. This efficiency suits gaming and applications managing many token types.

Batch operations enable transferring multiple token types simultaneously, reducing gas costs. The standard supports complex use cases while maintaining simplicity for basic operations.

Gaming applications benefit significantly. Instead of deploying separate contracts for each item type, one contract manages all in-game assets. Transferring an entire inventory can occur in a single transaction.

Token Metadata

ERC-20 tokens typically include name, symbol, and decimal fields. These inform wallets and exchanges how to display tokens. Total supply tracking is common but not required by the standard.

ERC-721 and ERC-1155 support metadata URIs pointing to token information. This data can be stored on-chain, on IPFS, or traditional servers. Storage method affects permanence and censorship resistance.

IPFS storage provides decentralization but requires pinning to ensure availability. On-chain storage is most permanent but expensive for large data like images. Most NFT projects use hybrid approaches - contract on-chain, large files on IPFS.

Approval Patterns

The approval pattern allows third-party contracts to transfer tokens on your behalf. You approve a spending limit; the contract can then transfer up to that amount.

This enables DeFi interactions - DEXs trade your tokens, lending protocols move collateral. However, unlimited approvals create security risks if contracts are compromised.

Many users unknowingly approve unlimited spending to save gas on future transactions. This creates permanent risk exposure. Revoke.cash and similar tools help manage and revoke old approvals.

Security Considerations

Token contracts require careful implementation. Reentrancy vulnerabilities, integer overflows, and approval race conditions have caused losses. Later Solidity versions and libraries like OpenZeppelin address common issues.

Malicious tokens can appear legitimate but include hidden behaviors. They might prevent selling, steal approved funds, or manipulate balances. Always verify contract addresses when adding tokens to wallets. Honeypot tokens lure buyers who then cannot sell.

Ponzi tokens disguise themselves as legitimate projects. Examining contract code before purchasing protects against obvious scams. However, this requires technical knowledge beyond most users.

Beyond Ethereum

Other blockchains implement similar standards. BEP-20 on BNB Chain matches ERC-20 functionality. Many EVM-compatible chains adopt Ethereum standards directly, ensuring compatibility.

Non-EVM chains use different approaches. Solana's token program, Cardano's native tokens, and others offer alternative architectures with different trade-offs. These may offer better performance or security properties but sacrifice Ethereum ecosystem compatibility.

Wrapped Tokens

Wrapped tokens bring assets from other chains to Ethereum. WBTC wraps Bitcoin, enabling its use in Ethereum DeFi. The wrapping process involves custodians holding the underlying asset.

This introduces trust assumptions - wrapped tokens are only as secure as their backing mechanism. However, they enable cross-chain liquidity and composability. WBTC enables Bitcoin holders to access Ethereum DeFi without selling their Bitcoin position.

WETH (Wrapped ETH) converts native ETH to ERC-20 format. This enables ETH to interface with contracts expecting ERC-20 tokens. While technically unnecessary, it simplifies smart contract logic.

Stablecoin Implementations

Most stablecoins implement ERC-20 with additional features. USDC and USDT include blacklisting functions, enabling regulatory compliance but introducing censorship capabilities.

Decentralized stablecoins like DAI use standard ERC-20 without special privileges. This provides stronger censorship resistance but less ability to respond to court orders or stolen funds.

Frax and other algorithmic stablecoins also use ERC-20 with additional mint/burn mechanisms. The standard's flexibility accommodates various stablecoin designs.

Governance Tokens

Many governance tokens extend ERC-20 with voting features. These might track voting power through checkpoints or delegation mechanisms.

Some implement vote escrow systems where longer lockups grant more voting power. Curve's veCRV model has been widely copied. These mechanisms attempt to align long-term interests with governance influence.

Snapshot voting uses off-chain signatures to reduce gas costs. Tokens remain in wallets while votes are recorded elsewhere. This improves participation by removing transaction costs from voting.

Evolving Standards

New standards emerge regularly. ERC-4626 standardizes yield-bearing vaults, enabling composability between different yield strategies. Account abstraction standards enable flexible authentication beyond simple private keys.

Domain name tokens like ENS use custom standards fitting specific needs. ERC-721 could work but lacks functionality for managing subdomains and records.

Standardization benefits the ecosystem through interoperability. However, innovation sometimes requires new approaches beyond existing standards. The balance between standardization and innovation shapes ecosystem development.

Token Extensions

Some tokens add functionality like pausability, snapshots, or supply caps. OpenZeppelin provides modular extensions implementing common features securely.

Burnable tokens allow destroying supply permanently. Mintable tokens enable creating new tokens after deployment. These extensions must be chosen carefully - they introduce new admin powers and potential vulnerabilities.

Practical Implications

Understanding standards helps evaluate tokens and applications. An ERC-20 token with unknown functions might be malicious. An ERC-721 with metadata on a single server faces availability risks.

Developers should use established implementations rather than writing token contracts from scratch. OpenZeppelin contracts have undergone extensive auditing and battle-testing.

Conclusion

Token standards enable Ethereum's composable ecosystem. Understanding ERC-20, ERC-721, and related standards helps evaluate tokens and applications. These standards continue evolving to support new use cases while maintaining backward compatibility. The standardization enabled DeFi's explosive growth by ensuring any wallet, exchange, or protocol can interact with any compatible token without custom integrations.