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Everything You Need to Know About Ethereum Token Standards

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Juniper Research estimates that there will be over $1 trillion in value stored on blockchain by 2025. From stablecoins to utility tokens, each type of token must adhere to certain standards for the ecosystem to function properly. This is where token standards come into play, but let’s begin at the beginning.

What is a Token?

In short, a token is a unit of value used to represent some asset or utility. Tokens can be used for various purposes, such as representing ownership in a company, being traded as a currency, or being used to purchase goods and services.

One important thing to note about tokens is that they are not all created equally. In fact, different standards have been established to ensure that all tokens function similarly and can be interchanged with each other. These standards are known as token standards.

What is Ethereum?

Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of fraud or third-party interference. It’s fair to say that the Ethereum architecture is the most suitable for virtually every application in Web3, and here’s why.

Ethereum enables developers to build and deploy decentralized applications. A decentralized application or DApp serves some specific purpose to its users. Bitcoin, for example, is a DApp that provides its users with a peer-to-peer electronic cash system that enables online Bitcoin payments. Because decentralized applications are made up of code that runs on a blockchain network, they are not controlled by any individual or central entity.

Ethereum is often referred to as a programmable blockchain because it allows developers to build applications on top of it. The Ethereum Virtual Machine (EVM) is a Turing-complete software that runs on the Ethereum network. It enables anyone to run any program, regardless of the programming language given enough time and memory. The Ethereum Virtual Machine makes the process of creating blockchain applications much easier and more efficient than ever before. And because Ethereum is a public blockchain, anyone can access and use these applications.

What are Token Standards?

Token standards are specifications that determine how a token should be built and what it should be able to do. By having these standards in place, it allows for different tokens to be interchangeable with each other. For example, the ERC20 token standard dictates how an Ethereum-based token should be built to be used in conjunction with other ERC20-compliant tokens.

Benefits of Using Ethereum Token Standards

There are a few key benefits to using token standards. First and foremost, it creates interoperability between different tokens. This interoperability is crucial for the success of any decentralized economy because it allows for different assets and utilities to be swapped or exchanged without any problems.

Another benefit of using token standards is that it helps to reduce the risk of fraud or scams. When everyone is adhering to the same rules, it becomes much harder for anyone to take advantage of the system. Lastly, having these standards in place, it helps to promote innovation because developers know precisely what they need to do to create a new token that meets all the requirements.

Most Common Token Standards

ERC20

ERC20 is by far the most popular token standard and is used for the majority of Ethereum-based tokens. Its popularity is mainly because it provides a basic template for how a token should be built so it can be integrated with other ERC20-compliant tokens and platforms.

ERC721

ERC721 is another popular standard used for non-fungible tokens (NFTs). NFTs are unique digital assets that another cannot replace because each is entirely unique. The most popular use case for NFTs is in the gaming industry, where players can purchase in-game items, such as skins or avatars, that cannot be replicated or exchanged for anything else.

ERC-777

ERC-777 is another upcoming token standard that is still in development. However, it is expected to be more advanced than ERC20 and offer more features and functionality. Some of the features that are being planned for ERC-777 include on-chain governance, off-chain transactions, and multi-signature support.

ERC1155

ERC1155 is a newer standard that has been gaining traction lately due to its ability to mint both fungible and non-fungible tokens on the Ethereum blockchain. This makes it a very versatile standard that can be used for various applications.

Creating New Tokens Using Standards

If you want to create a new token that adheres to one of these established standards, there are a few things you need to do. First, you need to identify which standard you want your token to adhere to. Once you’ve done that, you’ll need to set up some infrastructure so that your token can actually exist on the blockchain network.

For example, if you want to create an ERC20-compliant token, you’ll need to set up a smart contract on the Ethereum blockchain that interacts with the ERC20 standard contract so that your token can be created and tracked properly. You’ll also need to ensure that you adhere to all the rules and guidelines laid out by the standards of your chosen contracting order for it to be processed and working correctly.

Where do Smart Contracts Fit In?

A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts allow the performance of credible transactions without third parties. These transactions are trackable and irreversible. Blockchain technology is what enables the creation of smart contracts.

Standards are essential for blockchain technology and particularly for smart contracts because they provide rules that ensure consistent behavior among all participants in the network and avoid situations where one party can take advantage of another party’s lack of knowledge. For smart contracts to be deployed on a blockchain, they must comply with certain standards so that they can function as intended on the underlying blockchain network.

It is important to note that while there are many different standards, not all of them are compatible with all blockchain platforms. For example, ERC20 is only compatible with Ethereum, while ERC721 is only compatible with Ethereum and EOSIO. Therefore, choosing the right standard for the intended platform is important before deploying a smart contract on a blockchain network.

Conclusion

The popularity of Ethereum-based tokens and the various standards that have been developed for them is a testament to blockchain technology’s potential for businesses and other organizations. By adhering to established standards, businesses can create tokens that are interoperable with other tokens on different platforms, which makes it easier for customers to use and exchange them. Additionally, by using smart contracts to deploy their tokens, businesses can utilize blockchain technology’s security and trust.

FAQ

What is a token standard?

A token standard is a set of rules that govern the behavior of tokens on a blockchain network. These standards help to ensure that all tokens are compatible with each other and can be exchanged easily. The most popular token standards are ERC20, ERC721, and ERC777.

What is a smart contract?

A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts allow the performance of credible transactions without third parties. These transactions are trackable and irreversible. Blockchain technology is what enables the creation of smart contracts.

What is the difference between a token and a coin?

A token is a digital asset that is created on a blockchain platform. A coin is a type of token that has its own blockchain. Bitcoin, for example, is a coin because it has its own blockchain. Ethereum, on the other hand, is a platform that can be used to create tokens.

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