Token Standards 101: Your Guide to ERC Tokens

What Are Tokens?

Tokens can take many forms. Most people think of a shiny coin, but that is not always the case.

At its most basic form, a token is a representation of value and a concept that has been an integral part of humanity for thousands of years. The earliest stages contained shells and rocks and nowadays we are familiar with things such as money, casino chips, tickets, reward points and more.

In essence, a token derives its value based on what it represents. As blockchain and cryptocurrency reach mass adoption, there are 6 main types of tokens in this Web3 world.

1. Platform Tokens. These are tokens that are critical to how a smart contract platform operates by providing protection against abuse. An example is the ETH token for Ethereum, or MATIC token for Polygon. These tokens are needed to pay for gas (transaction fees), reward miners (in proof-of-work blockchains), and serve as a form of security and validation through staking.

2. Transactional Tokens. These are tokens used to represent value. We can think of money (bills, coins, checks) as a transactional token and by definition all platform tokens fall in this category. A transactional token that is not also a platform token is Bitcoin. One of the biggest improvements of Bitcoin over traditional money is the ability to execute transactions without a central authority within or across countries.
   
   
3. Utility Tokens. Utility tokens are generally integrated into an online service. These are tokens that are used to gain access to the service. An example of a utility token is the Basic Attention Token (BAT). BAT tokens act as a unit of account between advertisers, publishers, and users on the Brave Internet Browser. Users gain BAT for their viewership of ads, advertisers gain better targeting and higher return on investment, and publishers receive BAT from users as donations, access to premium content, or other services.

4. Security Tokens. Security tokens are a special class of tokens that require regulatory oversight. They must be issued by a regulatory approved organization such as a company, trust, or government. Security tokens can be used to represent real estate, bonds, pre-IPO equity, carbon credits, and commodities among other things. Buying and selling security tokens is generally done on Alternative Trading Platforms, which follow strict regulatory guidelines and may limit a user’s ability to transact based on his/her financial circumstance.

5. Governance Tokens. Governance tokens allow holders to partake in future decision-making processes of their native platform. An example of a governance token is UNI, Uniswap’s native token. Holders of UNI have voting power over proposals submitted to the Uniswap protocol and those that hold more UNI have greater voting power.

What Are Token Standards?

Token standards are a set of rules that a smart contract must abide by. It defines how a token works and how it can be created, transferred, mutated and destroyed.

In the Ethereum world, anyone can create their own ERC token. ERC stands for Ethereum Request for Comment and is a set of technical documents that contain guidelines for developing a smart contract.

The most common standards and also the ones supported on Kaleido are ERC-20, ERC-721, and ERC-1155. Below is a quick summary of each.

ERC-20

The ERC-20 token standard  is a “fungible token.” Fungibility is the ability for a token to be exchanged for something of the same value.

In everyday life, an example would be a quarter. Each quarter is always worth 25 cents and can be exchanged for other quarters. Popular ERC-20 tokens include stablecoins and governance tokens.

Use cases for ERC-20 tokens include fiat currencies, financial assets (i.e. stocks), reward points, commodities (i.e. gold), and more. Additionally, ERC-20 tokens are often used to fundraise through ICOs (initial coin offerings).

ERC-721

ERC-721 tokens are “non-fungible tokens.” They are commonly referred to as NFTs. Non-fungible is a fancy way of saying one-of-a-kind. An example in everyday life would be the Mona Lisa painting. The Mona Lisa cannot be exchanged for a replica (no matter how perfect) since it is unique.

In the blockchain world, popular NFTs such as Cryptopunks cannot be exchanged for replicas since they are unique. A copied or saved image may look identical but only the original Cryptopunk NFT can be identified and verified on chain so anyone in the world can verify its authenticity.

There are many use cases for NFTs including digital art, collectibles, IP, real estate, ESG, and more. To learn more, check out our article on 10 Ways Enterprise NFTs Will Change How We Do Business.

ERC-1155

ERC-1155 is a multi-token standard that supports both fungible and non-fungible tokens. An example of this in real life would be general admission event tickets. Before the event takes place, the tickets act like ERC-20 (fungible) tokens that can be exchanged for each other. Afterward, however, they lose their event value and become collectibles (non-fungible).

The most popular use case for ERC-1155 tokens right now are in the Web3 gaming space. Assets in the game can act as fungible tokens such as skins or in-game currencies. However, other assets such as unique or limited edition weapons take on non-fungible characteristics. ERC-20 and ERC-721 contracts work in a way where a weapon item that only differs in aesthetics—such as color—could be minted as the same contract. An example might be a gold sword and black sword. However, new contracts would be needed if the weapon item works any differently. For example, an ice sword and a fire sword may need separate contracts because they have different functions. Similarly, a sword and gun may require different contracts.This means a game with thousands of different weapons would require thousands of smart contracts.

With ERC-1155, an infinite number of items could be stored in a single contract. Exchanging different items between a group of friends can now be done in a single transaction instead of multiple. These token transfers are called batch transfers.

While ERC-1155 can take on the functionality of both ERC-20 and ERC-721 tokens, there are some downsides as well which is mainly how metadata is stored. Querying an owner is more difficult as some accounts may have one token while others may have multiple. The ERC-1155 token standard is ideal for a collection of tokens while ERC-20 and ERC-721 are better suited for individual tokens.

Conclusion and CTA

Tokens have been an integral part of society for thousands of years and there are many real world use cases already being used in blockchain. You may choose one ERC standard over another depending on your use case, be it a fungible token, NFTs, or a need to make a complex transfer on the Ethereum network.

At Kaleido, we make it easy to create your own tokens and you can create your own NFT in less than 5 minutes by following this guide. Be sure to check out Kaleido’s YouTube channel, blogposts, and docs for some of our other features as well!