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Tokens are the foundation of decentralized finance and play a crucial role in the blockchain ecosystem. But have you ever wondered how tokens are created and what rules they follow?
This article will provide a clear and concise explanation of token standards, categories of token standards, and the role of improvement proposals. Additionally, we will explore the significance of token standards used in the blockchain network. So, let's dive into the world of tokens and learn more about this fundamental concept.
What are Tokens?
Tokens are digital assets used as storage of value or for making transactions. Compared to coins, they are dependent on an existing blockchain. For example, the Ethereum blockchain is the native blockchain of the Ethereum coin, while Polygon is a token built on the Ethereum network.
Generally, there are two types of tokens:
Fungible tokens are divisible and easily exchange for another because the value is the same. For example, fiat currencies such as US Dollar, and Euros are fungible.
Non-fungible tokens (NFTs): They have unique value or characteristics. They are known as NFTs which include digital assets like images, audio, videos, artworks, in-game collectibles, and more that cannot be directly exchanged for one another.
What is a Token Standard?
Token standards are a subset of smart contract standards and rules that instruct how to create, issue, and deploy new tokens based on their underlying blockchain protocols. It serves as a guideline for developers to create new tokens or decentralized applications according to the rules set out by the blockchain.
The most widely adopted is Ethereum Request for Comment (ERC) for applications, including smart contract and token standards. The common set of rules for the issuance of fungible tokens on the Ethereum blockchain is ERC-20. Other common token standards are ERC-721 for non-fungible tokens on Ethereum, and BEP20 for fungible tokens on Binance Smart Chain.
Significance of Token Standards
Token standards help prevent fraud, technical incompatibilities, and issuance of tokens not aligned with the blockchain’s principles.
It defines the rules (such as the token's name, symbol, total supply, supply limit, minting, and burning process) for the issuance and implementation of new tokens.
It specifies parameters smart contracts, wallets, and marketplaces use when interacting with the token.
NB: To avoid losing tokens, adhere to token standards when transferring between blockchain networks. Sending tokens directly from one network to another, without following token standards, can result in permanent loss.
Categories of Token Standards
1. Ethereum Token Standards
The ERC-20 standard is the technical standard used for smart contracts on the Ethereum blockchain to implement tokens. It provides a set of rules that all Ethereum-based tokens must follow and has been endorsed by numerous cryptocurrency exchanges and Web3 platforms. This standard interface is widely adopted for fungible tokens, which are interchangeable and identical, typically utilized for staking, voting, or storing value. Examples of ERC20 tokens include Ethereum (ETH), Aave (AAVE), Uniswap (UNI), ChainLink (LINK), USD Coin (USDC), and Maker (MKR).
Unlike ERC20, it is a token standard that defines non-fungible tokens (NFTs) which have unique values and are not interchangeable. Most widely used for tokenizing unique items and tracking the ownership of collectibles, game items, digital art, event tickets, domain names, and more on the Ethereum blockchain. It defines a minimum interface a smart contract must implement to allow crypto collectibles to be managed, owned, and traded. Examples of ERC721 tokens include Axie Infinity, CryptoKitties, and CryptoPunks.
ERC1155 is a multi-token standard that eliminates the need for deploying a separate contract for each token type, a drawback present in ERC20 and ERC721. By facilitating the transfer of multiple token types simultaneously, ERC1155 enhances efficiency and reduces costs. This multi-token standard is highly suitable for managing fungible, semi-fungible, and non-fungible tokens, particularly in gaming, where it's crucial to manage both types of elements. An example of an ERC1155 token is Enjin Coin (ENJ).
The ERC-777 provides enhanced functionality for interacting with tokens such as improved transactions and other complex interactions. It is an ERC-20 backward-compatible token standard with the potential to make token transfers more streamlined. It allows users to reject incoming tokens from blacklisted addresses and specifies operators for sending tokens on behalf of another address.
Other Proposed ERC Token Standards
The ERC-725 standard revolutionizes digital identity by empowering users with decentralized governance and reputation control. It grants individuals ownership and management of their digital identity and multiple keys, facilitating seamless integration across various applications and platforms. It extends its versatility beyond individuals, enabling the creation of smart contract identities for machines, objects, and groups.
ERC-223 is an innovative token standard proposal designed to address user errors when sending tokens to smart contract addresses. By providing real-time notifications and allowing the cancellation of transactions, it aims to enhance user experience and protect against fund losses. It aims to reduce operational expenses by efficiently informing users about erroneous transfers to smart contracts and enabling easy cancellation of such transactions.
The ERC-1404 standard was developed specifically for the issuance of security tokens with built-in transfer restrictions, ensuring compliance with regulatory obligations and frameworks. This standard encompasses a range of features, including transfer restriction management, ensuring the transfer of tokens to authorized addresses, and compliance with applicable regulations.
The ERC-165 token standard addresses the lack of a consistent method for detecting and publishing the interfaces that smart contracts utilize. It provides a standardized method for identifying contract interfaces, enhancing transparency, compatibility, and interoperability among smart contracts on the Ethereum blockchain.
The ERC621 token standard allows for increasing or decreasing the token supply by authorized users, contract owners, or trusted users.
ERC-865 defines a standard for token transfers. It improves on the ERC-20 token standard by allowing token transfers to be paid for by someone other than the sender.
N/B: This is not an exhaustive list of ERC token standards, other proposals related to token standards are available on EIPs GitHub repository.
2. Binance Token Standards
BEP-2 Token Standard
This is a technical standard used to implement and issue Binance Chain Token (BNB) tokens on the Binance Blockchain. It is widely suitable for trading cryptocurrency pairs, lacks support for smart contracts, and has little access to modern decentralized applications.
BEP-20 Token Standard
This is the token standard for the Binance Smart Chain (BSC), a suitable blockchain for deploying decentralized applications compatible with the Ethereum Virtual Machine (EVM). It is a standard set of directives or rules for token management. and interoperable with the ERC-20 and BEP-2 tokens. The functionalities are modifications of the ERC-20 standard, supporting token transfer, and ownership. BEP20-based transactions involve much lower fees, unlike ERC20.
3. Tezos Token Standard
TZIP-7 introduced a Tezos standard similar to ERC20 for fungible tokens. It also allows users to grant approval to external contracts or accounts for token transfers, such as in auctions.
TZIP-12 is a proposed standard that offers contract developers enhanced flexibility in creating new token types while ensuring a standardized interface for wallet integrators and external developers. It allows for both single-token and multi-token implementations, including hybrid scenarios.
TZIP-10 is a Tezos Improvement Proposal that specifies a standard way for dApps to interact with wallets. This standard enables Tezos users to use their wallet of choice with Tezos dApps.
TZIP-16 proposes a standard for encoding contract metadata in JSON format, accessible either on-chain (tezos storage) or off-chain (IPFS or HTTPS). This aims to enhance the integration, discoverability, and querying of Tezos smart contracts by wallets, explorers, and applications.
TZIP-21, an extension of TZIP-16, is designed to describe various asset and token types, including fungible tokens, semi-fungible tokens, and nonfungibles, providing richness and versatility. It also aims to promote interoperability among ecosystem participants such as contracts, indexers, wallets, and libraries.
TZIP-22 introduces a standard interface for resolving names to Tezos addresses and vice versa, addressing the current issues faced by indexers and wallets. This proposal aims to establish a name resolution interface that ensures a consistent user experience across the ecosystem, enabling all products to provide a reliable mapping between names and addresses.
Role of Improvement Proposals in Token Standards Adoption
Improvement proposals are draft proposals for new features, changes, or improvements to existing features of a blockchain network and its ecosystem. Before any proposal is implemented, it needs to be submitted for review and discussion by the protocol's community. They are utilized to discuss enhancements and standardizations for various aspects of a network to encourage an interoperable decentralized ecosystem.
Token standards are often proposed and implemented through the improvement proposal process.
Common examples of improvement proposals include:
Ethereum Improvement Proposals (EIPs): EIPs provide a framework for proposing, discussing, and implementing new standards and features for the Ethereum ecosystem. Token standards, such as ERC-20, ERC-721, and ERC-1155, are examples of EIPs that propose new standards for creating and managing tokens on the Ethereum blockchain. They are submitted as EIPs, where they are reviewed, discussed, and ultimately accepted or rejected.
Bitcoin Improvement Proposals (BIPs): BIPs are proposals for changes or improvements to the Bitcoin ecosystem. They are submitted to the Bitcoin community for review and discussion before being implemented in the protocol and usually propose changes to Bitcoin's consensus layer, community standards, or the development process.
NEAR Enhancement Proposal (NEP): NEPs propose changes to the specification and standards of the NEAR protocol including APIs, contract standards, processes, and workflows.
Tezos Improvement Process (TZIP): TZIPs is a document that offers ways to improve Tezos blockchain via new features, tools, or standards such as smart contract specifications.
Solana IMprovement Documents (SIMDs): Like every other improvement proposal, SIMDs describe proposed and accepted changes to the Solana protocol.
Token standards are an essential component of blockchain technology, allowing developers to create and issue tokens that function within the rules set out by the blockchain. Improvement proposals play a crucial role in creating, proposing new features, addressing issues, modifying the existing token standards, and seeking feedback from the community. Although they share a common goal of providing a framework for improving or proposing changes for a blockchain network, they can differ in purpose, format, and governance process. While ERC20, which came out of EIP-20 remains the most popular token standard for Ethereum-based projects, new standards such as ERC777, ERC721, and ERC1155 are evolving to provide more advanced features and functionality. Other blockchain networks have also introduced their token standards, such as the Binance BRC20, Tron TRC20, NEO NEP-5, and Terra CW20 tokens.