Token standards are sets of rules and conventions that govern how a crypto token functions. Popular standards include ERC-20, BEP-20, ERC-721, and ERC-1155. These frameworks define key token properties and behaviors, ensuring consistency and compatibility across decentralized applications and blockchain ecosystems.
Introduction
Although thousands of cryptocurrencies exist, many are built on the same foundational frameworks. These frameworks, known as token standards, define the core functionalities and properties of blockchain-based tokens. By adhering to these shared specifications, developers can create interoperable and efficiently managed digital assets.
Why Are Token Standards Important?
Interoperability
Token standards ensure that all products developed under a specific standard can interact and work together. When a project issues a token built on a widely adopted standard, the new token remains compatible with existing platforms and applications—like wallets and decentralized exchanges.
For instance, assets built on the ERC-20 standard are interoperable with other products and services developed using the same token standard. This is why you can seamlessly exchange one ERC-20 token for another. Without token standards, trading multiple cryptocurrencies would be significantly more challenging. You might even need specialized wallets for specific tokens rather than using a single wallet that supports numerous cryptocurrencies.
Composability
In programming, composable systems allow developers to reuse existing components to build new products. The same applies to token creation: using token standards saves time on foundational functionality, freeing developers to focus on innovation and reuse existing elements for new applications.
Efficiency
Token standards also streamline communication between smart contracts. When smart contracts comply with token standards and deploy tokens, they can efficiently track and manage those tokens.
Standards like ERC-20 and BEP-20 include essential functions such as address lookup and token balance checks, enabling smart contracts to monitor tokens more effectively. For example, developers can use an interface called the Contract Application Binary Interface (ABI) to track token transfers and other data for an ERC-20 token.
Common Token Standards in Crypto and DeFi
BEP-20
BEP-20 is the token standard for the BNB Smart Chain (BSC). Developed as a technical specification for BSC, it allows developers to launch various tokens, including pegged coins, utility tokens, and stablecoins. The BEP-20 standard also introduces features like blacklisting, minting, and token burn mechanisms.
Key functions of the BEP-20 token standard include:
- TotalSupply: Defines the total supply of a specific BEP-20 token.
- BalanceOf: Determines the token balance of a given address.
- Transfer: Allows users to transfer token ownership to another party.
- TransferFrom: Enables a smart contract to transfer tokens on a user’s behalf.
- Approve: Sets a limit on the number of tokens a smart contract can withdraw.
- Allowance: Specifies external addresses permitted to spend tokens.
ERC-20
Proposed by Fabian Vogelsteller in 2015, the ERC-20 token standard became the foundation for developers to design their tokens—including virtual tokens, staking tokens, and virtual currencies.
ERC-20 is a standard for developing assets that follow common rules and are mutually interchangeable (fungible). If you create 1,000 units of an ERC-20 token, each unit will have the same features and value.
The BEP-20 standard is very similar to ERC-20. However, they belong to different blockchain networks: ERC-20 is used on the Ethereum blockchain, while BEP-20 operates on BNB Smart Chain (BSC).
ERC-721
Did you know that a large portion of Ethereum’s non-fungible tokens (NFTs) share the same token standard—ERC-721? Whether it’s a limited-edition NFT or a Proof of Attendance Protocol (POAP), your NFT was likely built on the same blueprint. What makes NFTs unique? According to the standard, each asset must have a globally unique tokenId.
ERC-721 functions include token transfer, current balance, total supply, and, as mentioned, global uniqueness.
ERC-1155
As token standards evolved, a new direction emerged to address the industry’s need for handling multiple token types. ERC-1155 is a multi-token standard that allows the creation of various digital assets, including utility tokens like BNB and NFTs.
Among other features, ERC-1155 offers batch capabilities such as:
- Batch Transfer: Transfer multiple assets at once.
- Batch Balance: Retrieve balances of multiple assets in a single step.
- Batch Approval: Approve all tokens for an address simultaneously.
- NFT Support: A token is treated as an NFT if its quantity is only 1.
Limitations of Token Standards
While tokens built on the same standards are aligned in core functionality and can communicate effectively, those using different standards are often incompatible. Since token standards are governed by different rulesets, it’s unsurprising that they aren’t always interoperable. This means tokens developed on different standards may not coexist on the same platform, communicate with each other, or be traded directly.
If you hold multiple cryptocurrencies, you may have experienced the frustration of not being able to use your BTC on the Ethereum network. To address this limitation, the crypto industry introduced wrapped tokens.
Wrapped Tokens
Wrapped tokens are cryptocurrencies pegged to the value of another asset. Typically, the original asset is locked in a digital vault (a wrapping mechanism), and a wrapped version is created on another blockchain.
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Final Thoughts
Token standards serve as blueprints for designing and issuing blockchain-based tokens. Today’s crypto economy features multiple token standards, and innovative solutions like blockchain bridges and wrapping mechanisms help mitigate interoperability issues between these tokens.
Frequently Asked Questions
What is the most widely used token standard?
ERC-20 is one of the most widely adopted token standards, especially on the Ethereum blockchain. It’s commonly used for fungible tokens like utility tokens and stablecoins.
Can different token standards interact with each other?
Generally, tokens from different standards are not natively interoperable. However, solutions like cross-chain bridges and wrapped tokens enable interaction between disparate blockchain ecosystems.
Why are token standards necessary?
Token standards ensure interoperability, composability, and efficiency in token creation and management. They allow developers to build on existing infrastructure and ensure compatibility with wallets, exchanges, and other decentralized applications.
What is the difference between ERC-20 and BEP-20?
ERC-20 is used on Ethereum, while BEP-20 is specific to BNB Smart Chain. Functionally, they are very similar, but they operate on separate networks with distinct governance and fee structures.
Are token standards only relevant for developers?
No, token standards affect all crypto users. They determine how tokens are stored, transferred, and traded, impacting wallet compatibility, transaction efficiency, and overall user experience.
How do wrapped tokens help with interoperability?
Wrapped tokens represent assets from one blockchain on another network. For example, wrapped Bitcoin (WBTC) allows Bitcoin to be used on Ethereum-based DeFi applications, enhancing cross-chain functionality.