Token standards are the set of rules that tokens and smart contracts must comply with to be functional on a specific blockchain. On a basic level, knowledge of token standards is important for trading and moving your assets to ensure that you will be able to send them to the correct networks and use them for their intended purposes. On a more advanced level, token standards are what developers use as a framework for building their decentralized applications (dApps).
What are token standards?
For those just starting out in crypto, it can be quite intimidating to encounter technical-sounding acronyms especially if they’re followed by numbers such as “ERC-20” or “BEP-20”– making it sound like one must possess engineering-level knowledge to be able to understand cryptocurrencies. This is far from the truth however, as terms like these are relatively easy to grasp and do not really require that much in-depth know-how from the average user.
Terms like ERC-20 or BEP-20 are called “token standards” which refer to the set of protocols that govern the functions and compatibility of tokens for a specific blockchain. On the most basic level, knowing what token standard your assets use is necessary in determining which network you can send them to or what applications they can be used for.
For example, the ERC-20 designation simply means that a token was developed for use specifically on the Ethereum network. This means that you can only send ERC-20 tokens to wallets that support the ERC-20 standard. Likewise, ERC-20 tokens cannot be used outside of the Ethereum network and will not be read if you try sending them to other blockchains. In fact, sending tokens to unsupported networks could result in you losing your deposits altogether.
Likewise, decentralized applications (dApps) built on Ethereum will only be able to accept ERC-20 tokens. This is important for instance, when determining which of your digital assets can readily be traded for other tokens on decentralized exchanges, or which can be accepted as collateral to take out a loan.
From a developer perspective, token standards serve as the framework for the creation, issuing, and deployment of new tokens and dApps on a blockchain. As different blockchain networks are coded differently and abide by different protocols, building a dApp on a specific blockchain means making sure it is able to operate and execute its smart contracts according to the rules of the network which serves as its foundation.
What are smart contracts?
Smart contracts are one of the defining features of second-generation blockchains especially on Ethereum (ETH), which pioneered “flexible” currency. This means that tokens with smart contract capability can be programmed with other utilities besides being used as a currency.
For example, smart contracts are already being used extensively to automate loans and insurances, or to facilitate gameplay in play-to-earn blockchain games. Many tokens are also used for governance purposes in decentralized autonomous organizations (DAOs) where the tokens can be used to represent community votes for settling disputes and arriving at decisions for the directions for a project.
Simply put, smart contracts automate, certify, and execute cryptocurrency transactions all with the use of algorithms without the need of a human third party to oversee the process.
But different blockchains encode their smart contracts differently according to how they were designed by their developers. Hence, other developers building dApps on a blockchain only need to comply with the token standards that govern their smart contracts, to have their dApp seamlessly interact and communicate with the foundational blockchain underneath.
Seen this way, token standards function like smart contracts in the sense that they are a set of rules and protocols between the dApp and the blockchain, whereas a smart contract is a set of rules between two parties engaged in a transaction on the blockchain.
Commonly used token standards
Here are some of the most popular token standards currently in use today which serve various purposes and applications:
ERC-20 is the most popular token standard, being the first one of its kind ever developed. “ERC” stands for “Ethereum Request for Comment”, and facilitates the transfer of tokens from one address to another, among other token functions and transaction commands. ERC-20 also determines the approval of new tokens that are built on the Ethereum network.
Some of the more popular ERC-20 tokens include stablecoins such as Tether (USDT) and USDC Coin (USDC) as well as decentralized exchange tokens like Uniswap (UNI) and Sushi (SUSHI). Utility tokens such as Chainlink (LINK) and Basic Attention Token (BAT) are also ERC-20 standard.
BEP-20 (BNB Chain)
BEP-20 carries almost the same functionality as ERC-20, except that it’s built on the BNB Chain–formerly known as the Binance Smart Chain (BSC). In fact, BSC is a hard fork of the Ethereum code, which simply means that it used the original Ethereum code as a starting point for developing its own network.
The BNB Chain was made popular as a more economical platform for building dApps, and contributed greatly to the dApp boom in recent years. BNB (BNB), which is a popular discount token on the Binance exchange and is used for developing dApps is one of the the most widely used BEP-20 tokens.
ERC-721 (Ethereum NFT)
The ERC-721 token standard was also developed for Ethereum but is geared specifically for creating non-fungible tokens (NFTs). NFTs are special types of tokens that are coded differently, allowing them to carry individual traits and characteristics that make each token unique.
As individually unique assets, NFTs are not interchangeable or “fungible”, which means that one NFT is never going to be equal in value with another NFT. This is in contrast to other digital assets like Bitcoin wherein one Bitcoin is always going to be exchangeable for another Bitcoin.
Popular NFT collections on Ethereum like Bored Ape Yacht Club (BAYC) and CryptoPunks are regarded as art pieces and are collected and traded as ERC-721 tokens. According to Etherscan, there are over 100,000 ERC-721 token contracts currently on the Ethereum blockchain which represent the growing number of NFT projects being launched.
The SPL token is a fungible token standard for the Solana (SOL) blockchain–which was developed as a faster and cheaper alternative to Ethereum. SPL stands for “Solana Program Library”, and SPL tokens can only be stored on Solana-compatible wallets.
In recent years, Solana has been gradually gaining popularity in the gaming and metaverse space. Tokens used in the popular move-to-earn app STEPN for instance, makes use of Green Satoshi Token (GST) and Green Metaverse Token (GMT) which were first launched as SLP tokens.
TRC-20 is the token standard for the TRON blockchain, which specializes on entertainment-focused dApps, with the goal of connecting creators directly with their audiences. TRON has been especially popular for hosting gaming ecosystems on its blockchain.
Understanding what token standards are can be useful knowledge for a crypto owner, especially when it comes to selecting a crypto wallet. It’s very important that you choose the correct wallet for the correct tokens or choose wallets that can support a wide range of token standards.
On the other hand, many tokens are released in different token standard formats so they can be used in different networks. USDC for example, despite being originally an ERC-20 token, has formats that can be used on Solana, TRON, Avalanche and Stellar.
There are also ways for you to “bridge” together different blockchain networks in order to send tokens from one to another, or to “wrap” tokens so they can be used outside of their native blockchains. Wrapped Bitcoin (WBTC) for example, is an ERC-20 token that can represent your Bitcoin holdings on the Ethereum network.
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DISCLAIMER: The statements in this article do not constitute financial advice. PDAX does not guarantee the technical and financial integrity of the digital asset and its ecosystem. Any and all trading involving the digital asset is subject to the user’s risk and discretion and must be done after adequate and in-depth research and analysis.
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