Token Standards: ERC20 vs ERC721 vs ERC1155

What are Token Standards?

Ethereum blockchain came up as an efficient solution for the first generation of blockchain, Bitcoin. 

The goal was to create an open-source blockchain network that will support smart contract development.

By supporting smart contract standards, Ethereum enables to create of tokens with better interfaces and composability. This allows businesses to create or use tokens for their specific needs.

Today, Ethereum is the hub of dapp development, fungible and non-fungible token development and web3 solutions.

Besides, developers use Ethereum token standards and network protocols to build blockchain solutions. They use it to build blockchain apps, wallets, and platforms.

This was all about the Ethereum blockchain. Now, coming back to token standards.

In the early days of the launch, Ethereum allowed users to create tokens without any ERC standards. 

So, if you can build tokens without ERC standards, why come up with one?

If things were fine, there was no need for several token standards.

What was the problem, then?

The problem was that these tokens lacked composability. You cannot use these tokens for Defi services or wallets.

That is why, Ethereum launched the ERC token standard. They offer basic guidelines to build smart contracts on the network. 

What are these guidelines?

To understand the ERC-token standards, you need to first learn about smart contract standards.

• Smart contracts lay down rules that the developer must comply with. 
• He needs to follow these guidelines to build smart contracts or any dApp on the blockchain platform.
• These standards apply to all blockchains that support the development of smart contracts and dApps.
• Smart contract standards include token standards, library themes, formats, name registries, and more.

These smart contract standards are another name for token standards. To sum up, smart contracts on the Ethereum network need to abide by the standards for token creation, transactions, and more.

Besides, Ethereum continues to release unique token standards that cater to specific purposes. For example, ERC-721 token standards are for minting NFTs.

What is ERC-20 Token Standard?

The rise of smart contracts brought some worthy developments in blockchain and crypto. 

Now, with smart contracts, developers can create contracts that can act like digital currencies. While it sounds amazing, the problem was keeping track of all the standards of writing virtual currencies.

Ethereum network was also in need of a structured system to operate on its network. Besides, it also needed to support token development and be able to regulate them on its network.

That is how the ERC-20 proposal came in. The ERC-20 proposal was introduced in 2015, while the token standard was launched 2 years later.

ERC-20 allows you to create fungible tokens on the Ethereum blockchain. Fungibility is the core feature of the ERC-20 token standard. 

But what do you understand by fungible tokens?

Fungible tokens also mean identical tokens. These tokens are exchangeable, as all the tokens have the same value. 

For example, the value of 1 fungible token will always be the same as the value of another fungible token. If the value of 1 ETH is $1800. Then the value of all ETH tokens will be $1800. 

ERC-20 is also the token standard for the native currency, ETH, of the Ethereum blockchain.

The blockchain development company also uses these token standards to build token applications. 

Besides, crypto coin development company also uses different token standards to build crypto coins as per the business needs.

What is ERC-721 Token Standard?

Unlike ERC-20 token standards which support fungible token development, ERC-721 is for non-fungible token development. 

Before we move forward with ERC-721, let’s discuss non-fungible tokens.

Non-fungible tokens are digital tokens on the blockchain network. These tokens represent unique physical or digital assets. 

The assets can be anything from artwork, memes, music, videos, real estate, and more. 

Besides, each of these non-fungible tokens has a different value. Why is it so?

As each token represents unique assets that have different values. Therefore, each token will also have a different value. So, you cannot exchange 1 non-fungible token with another, as both are different.

How did the ERC-721 token come into existence?

Cryptokitties was one of the first and most popular NFT collections. The CTO of Cryptokitties, Dieter Shirley, proposed a new token type in 2017. He brought up the proposal as an Ethereum Improvement Proposal, or EIP. His proposal was approved in 2018. 

ERc-721 token standard enables you to mint non-fungible tokens on the Ethereum blockchain.

If ERC-20 was a milestone in fungible token development. Then ERC-721 is the pillar of NFT development.

ERC-1155: A Multistandard Token

You saw the ERC token standard for fungible tokens and non-fungible tokens. 

Witek Radomski came up with an all-inclusive ERC-1155 token standard. This smart contract standard enables you to create fungible tokens, non-fungible tokens, and semi fungible tokens. 

Let’s understand the ERC-1155 token standard with an example.

Suppose you are playing games. You will earn points for completing missions. Besides, you can use these points to buy game items. Moreover, you can exchange these items as well.

Now developers can use the ERC-1155 token standard to create game tokens. Also, they can use the same standard to build NFTs representing game items.

Let’s take another example. We all know there is only one Mona Lisa painting in the world. Now suppose the museum wants to create a digital twin of the Mona Lisa painting and sell it. 

Now they create 50 digital copies of the Mona Lisa painting. All 50 copies have the same value. But all 50 Mona Lisa painting NFTs are unique to other NFTs and have different values as well.

So here developers can use ERC-1155 token standard to create non-fungible tokens representing Mona Lisa artwork. While all 50 copies will also exhibit fungibility with another. 

Thus, you saw how ERC-1155 tokens give flexibility and accessibility to developers and users.

But why was there an urgent need for the ERC-1155 token standard?

• The limitations of ERC-20 and ERC-721 tokens led to the development of ERC-1155, which addresses these issues. 
• In the case of ERC-20 tokens, if users accidentally send tokens to the wrong address, the transferred tokens are lost permanently due to the lack of a solution for such transfer events. 
• Additionally, both ERC-20 and ERC-721 standards require deploying separate smart contracts for each token type or collection. 
• Furthermore, obtaining a token identifier directly is not possible. This makes transactions with these tokens more challenging. 
• For instance, when a buyer wants to purchase a set of 5 NFTs from you. Transferring them individually requires multiple transactions. It will cost you additional fees and cause network congestion. 
• Moreover, these redundant bytecodes strain the Ethereum blockchain, resulting in high gas fees and longer transaction times.
• Many decentralized applications (DApps) utilize both types of tokens. So, managing their contracts becomes complex due to the significant differences in their creation.

These challenges prompted the introduction of ERC-1155.

How did ERC-1155 resolve the issues?

• This standard allows each token ID to represent a configurable new token type. 
• It reduces the amount of data needed to differentiate tokens. 
• Additionally, ERC-1155 enables the inclusion of different types of NFTs in a single transaction.
• Therefore eliminating the need for separate transactions for each token. 
• These functionalities alleviate network congestion and significantly reduce gas fees.
• Furthermore, DApp developers utilizing ERC-1155 can allow users to register both fungible and non-fungible tokens using the same contract and address. 
• Fungible tokens serve as payment currencies or in-game coins.
• Non-fungible tokens are used for collectables or exchangeable items in games or DApps. 
• This approach maximizes resource efficiency.

Conclusion

Token standards define a specific set of rules which developers must follow for smart contract development on the blockchain network.

Be it ERC-20, ERC-721 or ERC-1155 token standards, all play a significant role in encouraging a decentralized ecosystem.

Looking to create your own token? Or build a dApp for your business?

Blocktech Brew – a leading blockchain development company will help you with custom blockchain solutions aligned to your business goals.

Get on a call with our experts to explore how we can kickstart your business.