Tokens and Their Standards

Today we will learn about what tokens are and the different token standards.

What is a Token?

A token is a digital unit that represents "ownership" or rights to something. Tokens can give holders access to services, act as digital collectables, or represent equity in a project.

Some key features of tokens:

• Tokens are not a payment method like traditional currency
• Their utility depends on the issuing protocol or platform
• They can be exchanged for other tokens or services within their ecosystem
• Two main types: fungible (interchangeable) and non-fungible

Fungible vs. Non-Fungible Tokens

Fungible tokens (FT) are interchangeable with each other, like dollars or subway tokens.

Non-fungible tokens (NFT) are unique collectables, like trading cards. Each has a different value.

Popular Token Uses

Some examples of how tokens are used:

• Access - Get access to services/platforms like games or networks
• Collectables - Digital art, music, videos, etc.
• Investment - Represent equity, get dividends, fund projects
• Rewards - Earn tokens for participating in a platform

NFT application

NFTs have a wide variety of use cases. Since they are not interchangeable, they represent a set of unique objects. Therefore they can act as collectible items. The display of unique objects is the first use of NFT in the blockchain sphere. In addition, NFT is used to display paintings, digital art, music tracks, videos, and more.

Utility tokens

First, there is a big category of utility tokens. These tokens are used to access certain services and protocols. They can be exchanged for services or other tokens and used as tokens in general.

Security tokens

It’s important to remember that we can treat tokens as digital assets — stocks. Stock tokens are used to raise funds for development projects or build a network from scratch.

Why Token Standards Matter

For tokens to work across different services, common standards are needed. This allows platforms to integrate any token that follows the standard easily.

Popular token standards:

• ERC-20 - One of the most popular standards. It was created to standardize the interaction of exchanges with tokens. It has utility, which means it can be applied to their protocols. These are the tokens earlier compared to subway tokens. That's why this token type is often sold to exchangers and exchanges. It belongs to the type of fungible tokens.
• ERC-721 - The standard is used for NFT. Each token is unique and can't be divided into parts. It is a non-fungible token that stores the URL to the file, which will be a graphical representation of the token and its digital signature.
• ERC-1155 - NFT standard. It differs from the previous one in that tokens can be both non-interchangeable and interchangeable — for example, ammunition in the game.
• ERC-777 - Advanced ERC-20. Its main characteristics: Tokens of this standard automatically reject transactions to incompatible addresses. That means such tokens will not be lost in a sending error. It gives the ability to assign operators — addresses that are authorized to send tokens from another address. Backward compatible with ERC-20. If an exchange or service supports ERC-20 tokens, they will also support ERC-777 tokens. When exchanging tokens, it uses one transaction instead of two in ERC-20.

Choosing a Standard

A token standard is:

1. A list of operations that can be done with a token. For instance, sharing it with other users, finding the wallet balance, and allowing a third-party website to debit tokens.
2. The requirements for implementing these actions in code.

That means a token standard is a set of mandatory and recommended functions and fields, as well as implementation methods, which token code must have to interact with various services. What’s more, the standard should describe all the basic principles of token operation: how to determine the number of tokens, how many tokens a specific user has, and how to transfer tokens from one address to another.

Types of Token Standards

Tokens are different in function and structure, and that’s where standards come in. Each standard describes its own mandatory rules. In addition, the standards change over time: they are improved to make the token more functional and secure.

Each blockchain has its standard of tokens. An abbreviation and a number denote them — for example, Binance Smart Chain BEP-20, Tron — TRC-20, Ethereum — ERC-20. As far as we are working with the Ethereum network, we'll only go through the standards of this network.

Common token operations

There are a lot of standards for tokens. As active blockchain networks are developing, new processes require new standards. Ethereum is no exception.

Common operations for all token standards include:

• totalSupply — to see the existing number of tokens;
• balance — to see the number of tokens at a particular address;
• transfer — to transfer tokens from your address;
• transferFrom — to send tokens from someone else's address on request;
• approve — to give the other address permission to perform actions with tokens;
• allowance — to check permission to receive tokens (approve and allowance are the functions responsible for the process of verification of the methods of moving electronic coins).

Here is a small diagram to illustrate how it works on a blockchain network

As you can see, you don't need any transactions to see how many tokens you have. To transfer a token to another person, all you have to do is make a transfer. But for someone to take tokens from you, you need two transactions.

Knowing the transactions common to all tokens, we can break down the most popular token standards. That way you can understand which of them will best suit our exchanger.

Key Takeaways

• Tokens represent digital ownership and utility
• Main types are fungible and non-fungible
• Standards like ERC-20 allow interoperability between platforms
• Must choose right standard for token use case

Conclusion

Understanding token basics and standards is key for blockchain projects. An ERC-20 token standard was chosen for the decentralized exchange project. Next up is learning Solidity to develop the token and take the project forward!