If you’re an entrepreneur or a blockchain developer planning to issue tokens, you might be thinking about building them under the Ethereum blockchain. This blockchain is currently the most popular platform to build tokens for initial coin offerings (ICOs).
Before doing so, you must understand first the different Ethereum Request for Comments (ERC) token standards to help you know what will suit the most for the token you want to build.
What Are Ethereum Token Standards?
Ethereum (ETH) token standards are a set of rules which developers must follow to build and issue ETH tokens. Ethereum smart contract developers use ERCs as technical documents, and they use these to lay out a set of guidelines for implementing tokens in the Ethereum ecosystem. Cryptocurrency developers typically produce these documents, which contain details such as protocol requirements and contract descriptions.
Before discussing these different standards under the Ethereum blockchain, you must familiarize yourself first with the two types of tokens built under a blockchain. These are the fungible and non-fungible tokens.
- Fungible Tokens
These are tokens exchangeable with another token of the same type which value is the same at any given point. For example, a one-dollar bill will always have the same value as another one-dollar bill.
It won’t be a problem for anyone to transfer a fungible token to another address and receive a token of the same type since its value is the same at any given time. Examples are cryptocurrencies like Tether (USDT), Dentacoin (DCN), and Basic Attention Token (BAT).
- Non-Fungible Tokens
NFTs, or non-fungible tokens, are digital assets connected to the blockchain. Not only are they assets, but they also work as a way to prove ownership of a digital object such as a picture, sound file, or document in the same way people can prove ownership of cryptocurrency.
It’s not possible to swap one NFT for another as each NFT is unique and you won’t get the same value for each. Unlike fungible tokens, NFT can’t be broken down and used in smaller denominations.
Aside from these, there are many facts to know about Ethereum since it isn’t just a coin. It uses the Ether (ETH) for the main purpose of having it as a platform for those who want to build their decentralized applications.
So, before buying Ethereum, take note of the list of different Ethereum Token Standards and what they mean to you as a developer or entrepreneur:
1. ERC-20 Token Standard
ERC-20 is the most popular and most used token standard under the Ethereum platform. It’s a set of rules for making fungible tokens within the Ethereum network as a whole.
A cryptocurrency following this standard is called ERC-20 Token—digital assets generatable by anyone, but commonly created by organizations and tech firms. Each token serves a distinct purpose; for example, DCN is aimed for utilization in all transactions in the dental industry, including rewarding customers for completing specific tasks.
ERC-20 tokens are usually sold through various offers to raise early-stage capital for the underlying project.
2. ERC-223 Token Standard
Despite the popularity of the ERC-20 token standards, it still contains many drawbacks. ERC-20 doesn’t contain any protocol regulating transactions with a non-ERC20 token. This means nothing may stop a user from sending ERC-20 tokens to another contract such as an exchange, even if the latter doesn’t support it. This scenario results in money losses.
Owing to the inability of managing incoming transactions, these sent tokens won’t affect the state of the smart contract. For example, if you send an ERC-20 token to an exchange with a non-ERC-20 compliant, the balance won’t get affected. This also makes retrieving them from the smart contract impossible.
This is where ERC-223 comes in. ERC-223 prevents this from happening by allowing users to send tokens to either wallet or contract with the same transfer function, reducing the risk of token loss. It also allows developers to manage incoming transactions and reject non-ERC-20 compliant tokens.
3. ERC-721 Token Standard
ERC-721 is an open specification for creating non-fungible, one-of-a-kind tokens on the Ethereum blockchain free of charge. While tokens such as ERC-20 are fungible, all tokens from ERC-721 are distinct.
ERC-721 tokens, also known as non-fungible tokens, are becoming more and more popular as many individuals are using them to sell or collect artworks and virtual game cards, among others. Many companies are also figuring out how to apply this technology to real-world objects. A good example is Nike which has patented a method for using an NFT framework to verify the authenticity of sneakers.
4. ERC-1400 Token Standard
The ERC-1400 works like a library consisting of different security token standards. A community of industry participants suggested building a stronger basis for the creation and growth of blockchain-based securities.
For several years, the tokenization of existing securities, including bonds and stocks, has been a hot topic of discussion. Blockchains can help record and transact with any security anywhere in the world rather than only displacing current forms of money and currency.
Security tokens are used to reflect full or partial ownership of properties and organizations. They can also have both fungible and non-fungible token characteristics. ERC-1400 token has mechanisms to limit its use based on race, authority, and asset category as its most important features.
For example, if a company decides to issue tokens on a particular continent but wants to exclude a specific country due to some government regulations, they won’t be able to follow the ERC-20 standards. If the company builds it under the ERC-20 token standard, they can filter the initial investors and create a Know-Your-Customer (KYC) whitelist.
However, after the coin offering, the company can’t limit the initial investors in selling their tokens to people belonging to the excluded country. In short, your token wouldn’t comply with regulations if you don’t protect it from being resold to a restricted group of citizens. Using ERC-1400 to create tokens allows developers to impose a variety of restrictions. The goal is to establish a set of requirements and then customize the token to the needs of the issuer.
Below are some of the token standards sitting under the ERC-1400 umbrella:
This standard enables documents to get associated with a smart contract and provides a standard interface for updating and receiving updates on these contracts. The ability to connect legal documents with the related contracts is critical because security tokens and their owners typically require rights and responsibilities from either the investor or the issuer.
By being consistent in this aspect, exchanges and other ecosystem participants can have a better view of these papers, and investors can subscribe to updates.
ERC-1644 is a standard used to underwrite controller operations, also known as forced transfer tokens. It preserves the right of a regulator, an issuer, or someone else acting as a controller to compel the transfer of security tokens between addresses.
Reversing fraudulent transactions, resolving forgotten private keys, and reacting to a court order are all examples of situations where this may be needed.
There are many other token standards other than those under the Ethereum blockchain, so if you’re a developer or an entrepreneur, you have a lot of options. The key is to identify what your goal is, what problem your idea wishes to solve and pick the right set of rules fitting your idea.