How To Explore Token Standards (ERC-20, ERC-721)

In the world of blockchain and cryptocurrency, token standards play a crucial role in ensuring compatibility, security, and functionality. Two of the most well-known token standards are ERC-20 and ERC-721, both of which serve different purposes within the Ethereum ecosystem. Understanding these token standards is key for anyone interested in blockchain development, cryptocurrency investment, or even just exploring the broader blockchain ecosystem.

In this article, we will delve into the technical and conceptual details of ERC-20 and ERC-721 standards, explaining their origins, differences, use cases, and how to interact with them. By the end, you should have a comprehensive understanding of how these standards operate and how you can use them effectively.

What Are Token Standards?

In blockchain development, a token standard refers to a set of rules or guidelines that define how a token should behave on a particular blockchain network. These standards ensure that tokens are interoperable with various applications and platforms, fostering a consistent user experience and facilitating secure interactions.

For the Ethereum blockchain, the most common token standards are defined in Ethereum Improvement Proposals (EIPs). These are formal documents that describe changes to the Ethereum protocol or implementations, and some of them detail how tokens should function. Two of the most notable and widely used EIPs are ERC-20 and ERC-721.

ERC-20: The Standard for Fungible Tokens

ERC-20 (Ethereum Request for Comments 20) is the most widely adopted token standard in the Ethereum ecosystem. It defines a set of functions that allow for the creation and management of fungible tokens on the Ethereum blockchain. A fungible token is one where each token is identical in value and utility to every other token. Examples of ERC-20 tokens include Ethereum-based stablecoins like USDT and DAI, as well as tokens like Chainlink (LINK) or Uniswap (UNI).

Key Functions of ERC-20

The ERC-20 standard specifies a set of six mandatory functions and three optional functions. These functions are the core interactions for any ERC-20 token:

1. totalSupply(): This function returns the total supply of the token. It tells how many tokens exist in circulation.
2. balanceOf(address account): This function returns the balance of tokens held by a specific account.
3. transfer(address recipient, uint256 amount): This function allows a user to send a specified amount of tokens to another address.
4. transferFrom(address sender, address recipient, uint256 amount): This function enables a third party (usually a contract) to transfer tokens on behalf of the sender, given that the sender has approved the transfer.
5. approve(address spender, uint256 amount): This function allows an owner to approve a spender to transfer a certain number of tokens from their account. This is commonly used in decentralized exchanges (DEXs) or smart contracts.
6. allowance(address owner, address spender) : This function checks how many tokens the spender is allowed to transfer on behalf of the owner, based on the previous approve function.

In addition to these required functions, ERC-20 tokens may implement optional functions such as:

• name(): Returns the name of the token.
• symbol(): Returns the token's symbol (like "ETH" for Ethereum).
• decimals(): Defines the number of decimal places the token can be subdivided into.

Advantages and Use Cases of ERC-20

• Interoperability: Since ERC-20 is a widely accepted standard, tokens that follow it are compatible with most Ethereum wallets, exchanges, and decentralized applications (dApps).
• Liquidity: ERC-20 tokens can be traded on a large number of exchanges and integrated into various platforms.
• Simple & Flexible: The standard is easy to implement and provides flexibility for developers to create custom tokenomics while adhering to a common set of rules.

The ERC-20 standard is used in various applications, including:

• Initial Coin Offerings (ICOs): Many projects use ERC-20 tokens to raise funds through token sales.
• Stablecoins: Tokens like USDT (Tether) and USDC (USD Coin) are often built using ERC-20.
• DeFi Projects: Decentralized finance (DeFi) platforms rely heavily on ERC-20 tokens for their operations.

ERC-721: The Standard for Non-Fungible Tokens

While ERC-20 tokens are fungible, meaning each token is interchangeable with another, ERC-721 defines a standard for non-fungible tokens (NFTs). NFTs are unique tokens that represent ownership of a specific item, asset, or piece of content. Unlike ERC-20 tokens, each ERC-721 token has unique properties that distinguish it from others. These can be digital assets like art, collectibles, music, videos, or even virtual real estate.

Key Functions of ERC-721

ERC-721 introduces a set of mandatory functions that allow the creation, transfer, and interaction with non-fungible tokens. Some of the key functions include:

1. balanceOf(address owner) : Similar to ERC-20's balanceOf, this function returns the number of NFTs owned by an address.
2. ownerOf(uint256 tokenId) : This function returns the owner of a specific token, identified by its unique tokenId.
3. transferFrom(address from, address to, uint256 tokenId) : This function allows the transfer of an NFT from one address to another, identified by its tokenId.
4. approve(address to, uint256 tokenId): This function allows the owner of a token to approve another address to manage the token on their behalf.
5. getApproved(uint256 tokenId): This function retrieves the address that has been approved to manage a specific token.
6. setApprovalForAll(address operator, bool approved): This function allows an owner to approve or revoke approval for an operator to manage all of their tokens.
7. isApprovedForAll(address owner, address operator): This function checks if an operator has approval to manage all of the owner's tokens.
8. **name() and symbol(): Similar to ERC-20, these optional functions define the token's name and symbol.

Advantages and Use Cases of ERC-721

• Digital Scarcity: Since each ERC-721 token is unique, it can be used to represent rare, limited, or one-of-a-kind assets, making it ideal for creating collectibles.
• Ownership Proof: NFTs provide a way to prove ownership of digital assets on the blockchain, and this ownership can be transferred or sold in a transparent, secure manner.
• Programmability: Developers can create custom functionality for ERC-721 tokens, allowing for unique attributes, metadata, and even interactive experiences.

Some of the most popular use cases for ERC-721 tokens include:

• Digital Art and Collectibles: Platforms like OpenSea allow users to buy, sell, and trade ERC-721 tokens representing digital art, trading cards, and other collectibles.
• Gaming: NFTs are being integrated into blockchain-based games, where players can buy, sell, or trade in-game items, characters, and assets.
• Metaverse: Virtual real estate in projects like Decentraland and The Sandbox are often represented as NFTs, enabling users to buy, sell, and develop virtual land.

ERC-20 vs. ERC-721: Key Differences

At their core, ERC-20 and ERC-721 represent two different types of assets within the Ethereum ecosystem. Here are some of the key differences:

1. Fungibility vs. Uniqueness:

   • ERC-20 tokens are fungible, meaning each token is identical in value and can be exchanged for any other token of the same kind.
   • ERC-721 tokens are non-fungible, meaning each token is unique and cannot be exchanged on a one-to-one basis with another token.

2. Use Cases:

   • ERC-20 tokens are used for things like currency, utility, governance, and other applications where each unit is interchangeable.
   • ERC-721 tokens are used for representing unique assets, such as collectibles, art, or digital land.

3. Implementation Complexity:

   • ERC-20 is relatively simpler to implement and use since it focuses on a single type of token with interchangeable units.
   • ERC-721 is more complex, as it requires unique identification for each token, along with additional metadata and custom properties.

4. Supply:

   • ERC-20 tokens usually have a fixed or capped supply, which can be easily tracked by the totalSupply() function.
   • ERC-721 tokens have an individual identity (tokenId), and the supply is dynamic, with each token being unique.

How to Interact With ERC-20 and ERC-721 Tokens

Now that we have an understanding of the theoretical foundations of ERC-20 and ERC-721, let's briefly explore how to interact with these tokens on the Ethereum blockchain.

Interacting with ERC-20 Tokens

To interact with ERC-20 tokens, you will typically need to interact with their smart contracts via a wallet (like MetaMask) or through an application built on top of Ethereum. Here's a general outline of how to interact with an ERC-20 token:

1. Add Token to Wallet: Many wallets, like MetaMask, support ERC-20 tokens. You can add a token to your wallet by entering its contract address.
2. Send Tokens: To send tokens, you'll need the recipient's Ethereum address and specify the amount to transfer.
3. Interact with dApps: Many decentralized applications (dApps) require you to approve or interact with ERC-20 tokens to access their services.

Interacting with ERC-721 Tokens

To interact with ERC-721 tokens, the process is slightly different because you are dealing with unique assets. Here's how to interact with NFTs:

1. View Your NFTs : Many platforms like OpenSea allow you to connect your wallet and view your NFTs. Each NFT is represented by a unique tokenId.
2. Buy, Sell, or Transfer NFTs: You can buy or sell NFTs through platforms that support ERC-721 tokens, or transfer them to other users.
3. Interacting with Smart Contracts: Some NFTs have additional functionality beyond just ownership (such as game integration or special metadata). Interactions with these features may require smart contract calls.

Conclusion

Token standards like ERC-20 and ERC-721 play a crucial role in the Ethereum ecosystem, providing the foundational structure for creating and managing tokens that can be used across various applications and platforms. While ERC-20 is ideal for fungible assets like cryptocurrencies and utility tokens, ERC-721 is perfect for non-fungible assets such as NFTs, offering unique use cases in art, gaming, and the metaverse.

By understanding the technical aspects of both standards, you'll be better equipped to navigate the rapidly evolving world of blockchain and cryptocurrency, whether you are a developer, investor, or simply someone curious about how these technologies are shaping the future.

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