Cryptocurrency

Introduction to Ethereum Tokens: ERC 20, ERC 721, ERC 1155

Introduction to Ethereum tokens: ERC 20, ERC 721, ERC 1155

Introduction

The world of crypto is not an easy space to navigate, especially for people who are not really aware of the technicalities of smart contracts or the underlying blockchain technology. This however was a solid statement back when the crypto space was yet to be mass adopted. Given the various new projects that are being introduced to the world, these virtual digital assets have brought in many different types of investors. These also include those, who otherwise may have stayed away from the investing sector. 

Knowing the steps to conduct thorough research about the token is enough for investors to understand if a token is compatible with their portfolio. This can be done without having in-depth knowledge about the technology. A beginner-level understanding of a few of the most important properties of some of the well-known crypto assets is indeed helpful in showing an investor the key pointers they need to be aware of, to make their financial decisions. One of the most well-known concepts that constitute a large section of the crypto space, is what is known as the ERC20 token standard. These tokens also help with applications using the smart contracts and smart property, NFTs, DeFi and DApps applications, etc. 

Let’s take a closer look at the different types of ERC tokens!

What is a Token?

A token in the crypto space is usually the asset that is used for various transactions on a blockchain. A token represents a tradable asset or utility that is applicable on its own blockchain and allows the holders of the token to use it for various investment or economic purposes.

What Is ERC-20 Token Standard?

ERC-20 tokens which is the abridged version of Ethereum Request for Comment 20, are the executed standard for fungible tokens that are created using the Ethereum blockchain. This might remind you of NFTs, but the main difference lies in the fact that fungible tokens are interchangeable while NFTs, which are non fungible tokens, are not. The ERC-20 allows tokens to be exchanged within blockchains for various purposes like trading as an exchange for other tokens or investments. 

Also Read: Top 5 ERC20 Tokens

History of ERC-20

In the year 2015, a developer named Fabin Vogelstellar suggested the ERC-20 standard as a way to standardize the tokens within the smart contracts feature on the Ethereum blockchain. On the Github page of Ethereum, Fabin Vogelstellar submitted the proposal for Ethereum Request for Comment. As the submitted proposal was the twentieth comment, the token standard was designated the term ERC-20. After the proposal was submitted, the Ethereum community did their due diligence and implemented the proposal by 2017. During that time, the project was named Ethereum Improvement Proposal or EIP-20, however, as it was already popularly known as ERC-20 before the approval, the crypto space stuck with that.

Which Cryptos are based on the ERC-20 standard?

Some of the well-known ERC-20 tokens in the crypto space today are as follows. Here are the top 14 coins that are ERC20 based.

  • Tether USD (USDT)
  • USD Coin (USDC)
  • Shiba Inu (SHIB)
  • Binance USD (BUSD)
  • BNB (BNB)
  • DAI Stablecoin (DAI)
  • HEX (HEX)
  • Bitfinex LEO (LEO)
  • MAKER (MKR)
  • Uniswap (UNI)
  • Decentraland (MANA)
  • ApeCoin (APE)
  • Wrapped Bitcoin (WBTC)
  • Aave (AAVE)

Also Read: Top 9 ERC20 Wallets 2022

Goals of ERC-20

The introduction of ERC-20 onto the Ethereum blockchain has set a very important role for ERC-20 to play. Since ERC-20 comes with come rules, any token that is built on the Ethereum blockchain, using smart contracts, will have to comply with the set rules. Some of the rules set by the ERC-20 standard include:

  • The process of how the tokens can be transferred
  • How transactions within the tokens are approved
  • The ways users can access data about a token
  • The maximum supply of the tokens

Along with the rules that are set by the ERC-20 standard, it also helps the developers with different backgrounds to get an understanding of new crypto tokens will function within the larger Ethereum ecosystem. The rules also help the developers because they know they will be able to work on newer projects without building the program from scratch. Furthermore, new projects will have the assurance that they will be compatible with the older projects, for as long as the rules that are set by ERC-20 is followed. 

Did You Know? Most of the token developers are how in line with ERC-20, which means that most of the tokens that will now be released using the Ethereum ICO (Initial Coin Offering) will be compliant with ERC-20!

Also Read: Top Ethereum Blockchain Tokens and Applications

What are the Alternatives of ERC-20

With the widespread acceptance of the tokens that maintained the ERC-20 token standard, few development communities pointed out that the possibilities presented by the ERC-20 was limited to an extent. Some even were of the belief that the ERC-20 standard was flawed. To cater to these claims, many more alternative tokens also came into being. However, all fo these alternatives are based on or inspired by the ERC20 protocols. Some of them are:

  • ERC223- They aim to address a concern with the approval and transfer elements of ERC20. 
  • ERC621- These cater to the same solutions provided by ERC20 with additional solutions to adds the capacity to increase or decrease the total token supply.
  • ERC827- These tokens allow its holder to approve the spending of tokens by a third party.

What are the Properties of ERC-20 tokens?

ERC-20 tokens are most commonly tokens that are used for transactions. All of the ERC-20 tokens are designed in such a way that they can be used for paying for functions and are known as utility tokens. Thus, these are the most significant properties of ERC20 tokens:

  • Fungible: ERC20 tokens are fungible. The code used to make the tokens are similar to each other. However, to figure out the different tokens involved in the transactions, one would have to take the help of transaction histories. 
  • Transferable: All ERC20 tokens can te transferred from one wallet to another, but an interesting fact is that, ERC20 standard allows executions of transfers of a specified number of tokens to a specified address

Also Read: Top 5 DeFi Tokens 2022 by Market Cap

What are the Disadvantages of ERC-20 tokens?

Since the introduction of the ERC20 standard within the Ethereum blockchain, the process for developers to adhere to certain rules while creating a token has become quite simple. Though, this fails to negate any disadvantages. Below are some of the disadvantages of Fabin Vogelstellar’s suggested ERC-20 standard tokens.

  • Low Throughput: Since the ERC20 tokens are based on the ETH blockchain, it faces network slow downs and higher/expensive transactions when the blockchain is clogged with various heavy DApps. For example with Crypto Kitty; which has since been transferred to its own Flow Blockchain. 
  • Slow Transactions: Block time of ERC20 tokens is around 14 seconds, which can result for transactions to take up almost a minute to get processed. This functionality can be too slow for some or users may find it adequate. 

Future of ERC-721

Ethereum has been compared to many upcoming crypto projects like MATIC or Solana. The crypto space has also gone a step further and compared many blockchains like Solana to ETH and termed thm as “Ethereum Killers” due to their faster transaction rates. However, Ethereum has not succumbed to any of the predictions, rather it has maintained being the second largest crypto with the second largest market cap; sitting just behind Bitcoin. 

The usage of ERC20 tokens are wide! Their transactions will keep up with the current flow, as long as Ethereum maintains its status. Their competition, therefore,will be coming from the tokens available within; i.e. tokens based on new Ethereum Standards. While the community is choosing from the available standards set in place, the ERC variants will have to be the fittest to survive the competition. 

What is a Non-Fungible Token?

Non-Fungible might not sound like something that is dealing with technology or anything Finance, but it is. Let us break it down in layman’s terms to understand it better. Non-fungible is a type of crypto asset that is unique, collectible, and assets that cannot be replicated.

NFTs can also be described as cryptographic token that uniquely defines an asset. They can be used to represent digital assets which are in the form of images and also can track real-world assets like a house or a song for example. As these NFTs make the assets unique, i.e. there can only be one of any NFTs, which gives one to prove ownership over the said asset and prove the authenticity of the ownership. 

Additional Read: How to Create an NFT and Sell it?

What Is ERC-721 Non-Fungible Token?

Described in the Ethereum website, ERC721 is standard for NFT, in other words, this type of Token is unique and can have a different value than another Token from the same Smart Contract, may be due to its age, rarity or even something else like its visual. Visual? Yes, NFTs, which are digital arts, follow the ERC721 standard. The most unique rule that made it so valuable within the crypto space is its property of non-fungibility. Not one NFT can be used to replace any other. Each and every NFT is unique. 

The ERC-721 (Ethereum Request for Comments 721) was proposed by William Entriken, Dieter Shirley, Jacob Evans, Nastassia Sachs in January 2018, is a Non-Fungible Token Standard that implements an API for tokens within Smart Contracts. 

History of ERC-721

  • September 2017 – Dieter Shirley introduces EIP721 to the ETH blockchain.
  • December 2017 – The widely popular CryptoKitties congests the Ethereum network, causing it to slow down significantly.
  • December 2017 – The well known NFT marketplace, OpenSea is launched. 
  • June 2018 – ERC-721 is accepted as ‘final’ by the ETH organization. This meant there is a strong consensus among Ethereum developers to accept it as a standard.
  • May 2019 – Nike files and is awarded a patent that utilizes ERC-721 standard.
  • February 2020 – The crypto space introduces Decentraland to the world, a virtual world built using ERC-721 NFTs to represent land and virtual objects, and launches.
  • March 2021 – Beeple’s “EVERYDAYS: THE FIRST 5,000 DAYS” NFT sells for $69.3 million at Christie’s auction house.
  • December 2021 – NFT sales in 2021 reached $25 billion.

Source: Decrypt

What’s so special about ERC-721?

The main characteristic that makes ERC 721 special is any token created following this standard is unique. Once an ERC 721 token is created, there will only ever be one of them in existence. 

Fun Fact: ERC 721 tokens are also known as deeds. It is so because if you are in possession of an ERC-721 token, it means that the holder owns the rights to that token and what the token represents.

How do you get hold of ERC-721 NFTs?

It is not an east task to get a hold of an NFT. Why? Mainly because of the prices or bidding amounts. Though one can follow the following steps to create their own NFTs and make use fo the various NFT marketplaces available to sell them.

  • Decide on the Concept
  • Choose your NFT marketplace of choice
  • Connect and build a community
  • Create your NFT
  • Mint the NFT!

What can you do with ERC-721 NFTs?

The most common usage of an NFT today is digital art. Users or investors buy NFTs for various reasons.  They range from supporting their choice of artists to musicians. Though NFTs have more use cases, that range far beyond digital art.

  • NFTs for Games: Online games such as Gods Unchained uses used NFTs to showcase unique elements used on the games. 
  • NFTs for Music: Music NFTs are surely becoming popular now. Mediums, such as Audius are providing a space for artists to mint their music as ERC 721 tokens.

Future of ERC-721

The introduction to ERC-721 was Ethereum’s first encounter into the NFT token standard. The ERC 721 standard helped in setting the groundwork for the proliferation and use cases of NFTs that are available  today. Since 2017, when ERC-721 was introduced, other NFT-compatible token standards have also been introduced. The most notably among them is the ERC 1155 standard. 

What is ERC 1155 Token Standard? 

Before the introduction to ERC-1155, two of the most predominant ERC token standards were ERC-20 for fungible tokens and ERC-721 for non-fungible tokens. However, their fundamental differences barred them for being able to be wrapped into the same smart contract. This limitation of the ERC 20 and the ERC 720 tokens meant that if someone wanted to transfer an ERC-20 token like USDC and an ERC-721 token like CryptoKitties NFT, they would have the need to execute multiple transactions, which was inefficient and expensive.

ERC-1155 solves for this by combining the two token standards. ERC-1155 is a token standard that enables the efficient transfer of fungible and non-fungible tokens in a single transaction. Witek Radomski, Andrew Cooke, Philippe Castonguay, James Therien, Eric Binet, and Ronan Sandford proposed the new standard in June 2018 with EIP-1155.

What’s so special about ERC-1155?

Other than allowing users to transfer multiple tokens at once along with attendant gains in efficiency and lower transaction costs, ERC-1155 has a lot of other special characteristics. They are as mentioned below:

  • ERC 1155 is open to an infinite number of tokens, which is not the case for the other ERC tokens; i.e. ERC 20 and ERC 721.
  • ERC 1155 supports fungible, non fungible and semi fungible tokens.
  • It allows safe transfer functions which allow tokens to be returned if sent to the wrong address.
  • It needs fewer transactions as it removes the need to “approve” individual token contracts separately.

Who’s using ERC-1155?

There are a number of crypto assets using the ERC 1155 standard. Some of the well known applications are:

  • Enjin: The Enjin blockchain offers many products and services who used the ERC 1155 standard.
  • Horizon: A blockchain gaming company, Horizon created a game, Skyweaver, which used ERC 1155.
  • OpenSea: The NFT marketplace’s ERC-1155 implementation allows multiple creators per smart contract but only one creator is able to mint more copies.

Unique Use Cases of ERC-1155

Flexibility of Fungibility: This feature of ERC 1155 is often used for making in-game assets for blockchain games. For instance, online gaming assets like weapons or skins are often fungible, which means there are many copies that can be swapped, however, they even have some features which are non-fungible as a group. This quality allows flexibility and convenience for developers who can easily release both fungible and non-fungible tokens within a single smart contract.

Coin Transfer Capabilities: Similar to an atom swap, ERC 1155 token has the capability to be grouped up and traded in one atomic swap transaction, to a single person or more. This provides traders convenience and cost effectiveness while trading crypto assets. 

Summing it Up!

Ethereum and ERC tokens have a long way to go. With the new innovations taking place within the crypto space, it is just a matter of time till a newer ERC standard is introduced. To explore Ethereum and other ERC standard tokens, you can choose from more than a hundred tokens available on CoinDCX, the crypto investment app or create a watchlist for your favorite token!

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