Token standards serve as a set of agreed-upon rules that define the design, behavior, and operation of cryptocurrency tokens on a specific blockchain protocol. To be effective, these standards must be widely accepted. Without broad adoption, these rules cannot be considered "standards" since they are meant to be followed by a large community.
Reasons for Token Standards:
- Compatibility: Token standards ensure that products developed using the same standard can seamlessly work together.
- Composability: A composable system in programming allows developers to reuse existing components to build new products, which is also relevant in token creation.
- Efficiency: Token standards improve interoperability between smart contracts. When smart contracts adhere to token standards, they can effectively manage all tokens on the network.
Common Token Standards:
- ERC-20: The leading token standard on Ethereum, facilitating the creation of fungible tokens like Shiba Inu, Tether, Uniswap, and ApeCoin.
- BEP-20: A token standard on the Binance Smart Chain (BSC) that resembles ERC-20 due to shared properties.
- ERC-721: Enables the creation of non-fungible tokens (NFTs) on Ethereum, utilized by numerous popular NFT projects.
- ERC-777: An upgraded fungible token standard compared to ERC-20, offering improved privacy and addressing specific ERC-20 token issues.
- ERC-1155: Reduces costs by grouping transactions and supports both fungible tokens like Basic Attention Token and non-fungible tokens like CryptoPunks.
Wrapped Tokens:
Tokens on various blockchains typically cannot interact with each other. Wrapped tokens tackle this problem by representing assets from one blockchain in a format usable on another. For instance, Wrapped Bitcoin (WBTC) on the Ethereum blockchain is an ERC-20 token backed 1:1 by real Bitcoin. This allows WBTC holders to utilize Bitcoin within the Ethereum network for trading, farming, staking, and engaging with other ERC-20 tokens.
Token standards facilitate the use of diverse assets within the same blockchain, resolving asset compatibility issues and offering network flexibility.
