Currency or token: What’s what?
First came the coins. The story begins with Bitcoin the first blockchain network. Bitcoin was designed to allow people to make global peer-to-peer payments using the native currency also called Bitcoin or BTC. Then came similar blockchains like Litecoin (LTC) and Dogecoin (DOGE) that offered a similar use case.
All of these cryptocurrencies that live on their own blockchain network are referred to as cryptocurrencies.
Then came Ethereum and introduced the concept of decentralized blockchain-based applications and protocols. And although Ethereum also has its own “coin” called ETH that can be used in the same ways as BTC, its main use case is to serve as a gas to power transactions and operations into applications and protocols built on the network.
In addition, the developers of these applications can create coins within an application that do not have the same blockchain and are instead stored on Ethereum itself. Ethereum also allows users to create other forms of standalone digital assets that can be stored unchanged in Ethereum itself. These in-app coins or digital assets created and stored on Ethereum It’s what we call tokens.
To sum it all up, a crypto asset that has a dedicated blockchain is technically a currency, while all other assets created on a third-party blockchain are called tokens.
What are ERC tokens?
The Ethereum ecosystem is decentralized, but it still needs someone to set the rules, apply for upgrades, and set standards that define what’s possible on the blockchain. To achieve this, Ethereum users themselves need to create Ethereum (EIP) enhancement proposals, discuss their details, and vote for them on either the rejection or for the start of their implementation.
Now, there are several types of EIPs for different categories of enhancements and plugins. Such a type was defined by Ethereum’s core developers to propose, discuss, and implement different technical standards for creating tokens, smart contracts, applications, wallet types, etc. on Ethereum.
This subcategory of an EIP was named Ethereum Request for Comments, also known as ERC. And so far, there have been a lot of demands on Ethereum to set standards for the tokens that can be created on Ethereum. Thus, all tokens created on Ethereum must follow the standards set by these ERCs. Therefore, they are called ERC tokens.
Today, there are three ERC standards widely used in Ethereum: ERC20, ERC721, or ERC1155. And just in case you’re confused, the numbers that follow in the ERC are just the serial numbers of the “request for comments” that these standards suggested.
But what exactly do these standards mean and why do we need them? Let’s find out.
ERC20: The Pattern of Fungible Tokens
First implemented in 2015, ERC20 is the prototype token that allows developers to create fungible tokens for their Ethereum-based applications or protocols.
For starters, you can think of “fungible tokens” as any regular currency based on a blockchain. The term “fungible” simply means that you can swap one unit of a token for any other unit of that token because they represent the same price. On this note, take the example of crypto assets such as UNI or LINK the ERC20 tokens the Ethereum-based Uniswap or Chainlink protocols. Each of these tokens is fungible because a UNI or LINK token will always be equal to any other UNI or LINK token.
This means that you can trade the above tokens on a one-to-one basis. It doesn’t matter which UNI you own, because their underlying value will always be the same as all other UNI tokens.
ERC721: The non-fungible token standard
As blockchain use cases expanded, there was a need to create tokens that represented unique data on the blockchain. It was then that the ERC721 token standard was introduced. The ERC721 standard allows you to create non-fungible tokens, i.e., tokens that each have a unique value and act as verifiable unique digital objects that cannot be exchanged for each other, such as ERC20 tokens.
Well, suppose you want to recreate a piece of digital art on the blockchain. You obviously can’t use an ERC20 token to do this. Instead, you can use a standard ERC721 token to create an NFT artwork. This NFT of digital artwork can easily prove the authenticity of the artwork and its ownership history.
As the ownership file and identity of the NFT artwork are immutably stored on a blockchain, it also makes it almost impossible to forge the original work of any artist.
ERC1155: The multi-token standard
The problem with the ERC20 and ERC721 standards was that they allow a smart contract to support only one type of fungible or non-fungible token. So, every time you want to develop a new token, you have to draw up a new smart contract. After all, the above two templates do not offer a way to create semi-fungible tokens.
This led to the establishment of the ERC1155 token standard, enabling Ethereum developers to create fungible, semi-fungible and non-fungible tokens using the same standard. In addition, using ERC1155, you can create a single contract to support multiple types of individually configurable tokens, thereby reducing the complexity of the creation process token. That seems a bit complicated to you, doesn’t it? Let’s simplify it.
Let’s say a developer wants to develop an NFT game and plans to create a fungible token to be used as an in-game currency and several non-fungible tokens for unique in-game items like skins, weapons, merchandise, etc. use the ERC20 and ERC721 standards, they will have to draw up new smart contracts to support each new type of asset they create. However, using ERC1155 would allow them to write only one contract to support all kinds of tokens they want to have in the game.
All this does not mean that one of the standards is better than the other a, they simply have different applications.
The endless possibilities in Ethereum
Ethereum has a very well-promoted blockchain beyond just being a technology for secure digital money. And the ability to propose and create new token templates creates more space for newer cases of using the Ethereum network.
Thanks to this innovation, today, it is possible for an artist to create a unique token representing his artwork, it is possible for creators to represent the rarity of their creations and earn money from their work, it is possible for game developers to convey truly universal value for their players using in-game objects, and it is possible to create a completely new one economy on the Internet that would be controlled by users, something that had never been thought of or edited by anyone ever before.