Anyone who’s learning about blockchain development and smart contracts will come across the concept of token standards. GitHub and Reddit are full of discussions and guides about token standards such as the ERC-20 standard, ERC-777 token standard, and ERC-1155. But what do they do? What’s an ERC token standard, and how do these standards differ?
Read on to learn more about ERC token standards and the difference between two popular ones: ERC-721 and 223. We’ll tell you the advantages and uses of each one so you pick the correct standard for your project!
What Is A Token?
Tokens are programmable units that represent a specific value found on blockchain networks and digital ledgers. They can be classified into security tokens and utility tokens.
Security tokens are created as investments and can be traded between token holders. They represent ownership over virtual assets through stored personal information. Much like bonds, these tokens give their holders the ability to participate in real-life transactions such as dividends and interest payments.
Utility tokens are also called app coins or user tokens, and they grant certain rights and permissions to their owners. Examples of these rights include the use of a product, voting for company issues, or access to rewards.
While some crypto enthusiasts may talk about tokens and coins interchangeably, there are key differences in how they work. Tokens hold assets and are proof of ownership in one unit. Coins are essentially digital currency operating on a blockchain.
What Are ERC Token Standards?
“ERC” stands for “Ethereum Request for Comment”. This is the technical term for conventions used within the Ethereum ecosystem. ERCs cover smart contracts, tokens, wallets, and other applications in blockchain platforms.
An ERC token standard is a series of rules that Ethereum-based tokens are required to follow. Standardized rules are important for making predictable, smooth interactions for users. They also make it easier for developers to understand their interaction with other applications, allowing for additional functionality later on.
ERC token standards are important because instead of starting from scratch with your project, you can start with an existing ERC that already has most of your token functions. This also ensures compatibility with additional tokens and smart contracts under the same ERC.
Here are some of the common token standards used in a variety of blockchain projects, as well as their key differences:
- ERC-20: This Ethereum-based standard is one of the most widely used for cryptocurrency and blockchain projects.
- ERC-865: This standard lets holders use tokens to pay for token transfers instead of gas by bundling them in a single transaction.
- ERC-827: This token standard is a “patch” for ERC-20’s transaction-handling mechanisms, preventing tokens from being lost in invalid contracts.
- ERC-1155: This token standard is used for managing fungible and non-fungible token transactions in games.
What Is The ERC-721 Token Standard?
Those who’ve encountered NFTs a.k.a. non-fungible tokens like the Bored Ape Yacht Club and CryptoKitties collections may have heard of ERC-721. This token standard turns digital assets like image files and videos into NFTs.
The ERC-721 token standard does this by adding parameters that define uniqueness and value. By including an extra layer of data that defines an NFT as one of a kind, it prevents others from copying it. It also prevents NFTs from being made interchangeable with another, different non-fungible token.
ERC-721 tokens used to be called “deeds” by blockchain programmers. This is because developers wanted to indicate that ownership of a token comes with all other related rights, as well as proof of ownership. However, it was too closely related to real estate, so the use of “deeds” fell out of favor. Devs began to call these tokens “NFTs”, as a more accurate reflection of what ERC-721 token standards do.
Advantages And Uses Of The ERC-721 Standard
Because it adds non-fungibility to digital assets and collectible items, ERC-721 token standards are widely used by the NFT art community and the gaming industry. While many blockchain projects rely on this token standard alone, other crypto projects have included more protocols for extra functionality.
These are just some of its current uses, as blockchain developers speculate it can be used in a wide range of transactions related to ownership of both digital and real-world assets. Real estate transactions, loan financing, and physical art trading are just a few of the potential uses being explored on the blockchain network.
What Is The ERC-223 Token Standard?
The ERC-223 token standard was created to fix a bug with ERC-20 standard tokens. The ERC-20 token standard is used by virtually all Ethereum-based coins to interact with its applications and ecosystem. However, despite ERC20 tokens’ widespread use, they do have a significant flaw that resulted in the loss of tokens worth millions of dollars.
With this flaw, transfers to invalid contracts keep trying to push through, which eventually results in the ERC20 tokens being “burnt” or “stuck” in the transaction and lost forever to the blockchain. The ERC-223 standard addressed this issue by changing transfer functions for ERC-20 tokens, having tokens sent back if the token contract cannot accept them.
Advantages And Uses Of The ERC-223 Standard
Because it’s meant to be an improvement on ERC-20 tokens and their standards, ERC-223 standards fulfill the same functions. They also handle the same types of tokens, making them compatible with Ethereum-based tokens and smart contracts. Your ERC-20 tokens and wallets should work seamlessly with your ERC-223 ones.
When ERC-223 standards are used, there’s a change in how a transfer of tokens is executed. This standard will check if the receiving account is a smart contract or an externally-owned account (EOA). If during this check, it detects that the receiving smart contract can’t accept the tokens, this standard executes the “tokenFallBack” function. This stops the forced token transfer and sends them back, preventing loss for the token owner.
Another advantage that ERC-223 has for token transactions is reduced gas costs. Its transfer function uses half the gas that an ERC-20 token transfer needs. This is because ERC-20 standards use a combination of two commands for token transfer: “approve” and “transferFrom”. ERC-223, on the other hand, only uses “tokenFallback”.
Security Advantages Of ERC-223
ERC-223 standards offer several advantages over ERC-20’s basic functionality. Firstly, it helps prevent the accidental loss of tokens because of their incompatibility with the receiving token. It simply sends the tokens back to their current owner’s wallet.
It also allows token holders to use just one function transfer to send their tokens, instead of the two commands used in ERC-20. Because a single transaction successfully transfers to a contract, ERC-223 token standards prevent the blockchain from being bloated with requests.
The ERC-223 standards also do not distinguish whether a recipient is a contract or not. Both address-to-address and address-to-contract transfers operate smoothly and securely. This keeps tokens from being deducted from a transferor’s balance despite never being received.
What Are The Major Differences Between ERC-721 vs ERC-223?
ER-721 and ERC-223 token standards are vastly different from each other. ERC-721 token standards are what establish the rarity and value of a non-fungible asset like a piece of art. They protect ownership, provide proof of ownership, and define their uniqueness so they can’t simply be swapped.
ERC-223 standards are an improvement on one of the most common standards for Ethereum-based projects. While it doesn’t define ownership of digital assets or uniqueness, it provides a transfer mechanism that protects digital currencies from being lost. Because each standard has different basic functions, it’s important to choose the right one that executes your project’s uses.
One of the greatest things about the crypto community is the openness of devs and programmers alike in developing tech solutions for more functions. You’ll see many discussions online talking about refining token standards like ERC-721 and ERC-223 to become smoother, faster, or add more uses.
While both standards are popular for decentralized applications, they serve very different purposes. Choose one that best fits what you have in the works! If you need help picking a standard for your project, browse Tokenfy to guide you through the process and build your crypto know-how!