ERC20 vs. ERC721 vs. ERC1155: Token Standards Simplified
Ethereum is an open-source, public blockchain platform that allows for developing decentralized applications (Dapps) through smart contracts. Ethereum has one native token called Ether, which fuels DApps on the network.
Tokens are created by developers who wish to have their form of currency within their respective ecosystem/platform. The number of tokens held per account, which can be either personal or contract-based, varies depending on the specific Ethereum token standard.
The Ethereum ecosystem is vast, and developers can create various tokens that are compliant with different token standards.
Ethereum has three main types of token standards: ERC20, ERC721, and ERC1155. Before covering all these three tokens in detail, let's first understand ERC.
What is ERC for Ethereum?
ERC is short for Ethereum Request for Comment. It is a technical document used within the Ethereum community to outline recommendations or proposals submitted by the public.
Ethereum token standards are all outlined in ERC; this ensures that different tokens created on the Ethereum platform - whether it be live currently or in the future, will all follow common compatibility with each other, reducing user confusion and increasing liquidity across the ecosystem.
Different token numbers denote some unique property assigned to that token. For example, ERC20 has the number 20, and it is considered a user interaction token (i.e., tokens issued on exchange platforms). So any user of Ethereum will be able to store this token in their wallet or transfer it to another account without any increased risk of incompatibility.
It creates standardized value across different cryptocurrencies and makes the process of exchanging coins between them more transparent and secure than ever before.
One of the earliest standards that became widely adopted is ERC-20. It specifies the functions and events that an Ethereum token contract must implement. These functions enable basic functionality like transferring tokens & calculating the total number of tokens in circulation. Also, it provides some guidelines on how new members can contribute to the system through token contracts. In short, it offers a token standard for creating fungible tokens.
An ERC-20 token defining a currency can act like the native currency for a use case. It can be used to transfer value within its ecosystem amongst other standard features that are enabled by the Ethereum network.
Some of the use cases of ERC-20 token:
- Lottery tickets
- Financial assets
- Reward system for any other applications
ERC-20 brings more uniformity and compatibility to Ethereum. However, most of its features were not initially designed for the decentralized ecosystem. These tokens are primarily used in token sales and ICOs due to their compliance with various wallets and exchanges found on the market.
Tokens developed using ERC-20 standard protocol allow the transfer of information between accounts/clients by pushing a value from one wallet to another without requiring intermediaries.
ERC-721: Non- fungible tokens
Non-fungible tokens (NFTs) extend the ERC20 token standard that makes each issued token unique and entirely distinguishable from others. According to the founders, "they can represent ownership over digital or physical assets such as:
- Characters/items in video games;
- Stocks and other financial instruments;
- Collectibles, like cards or art."
There is no standard for NFTs, and developers can create their formats for managing non-fungible tokens on the blockchain. However, every application has its unique set of requirements regarding the uniqueness and manageability of certain data types. These requirements let us differentiate between fungible and non-fungible tokens. If a company wants to represent a particular asset on the blockchain, non-fungible passes are possible solutions.
This token enables businesses to use NFTs in their ecosystems to represent unique assets that are not interchangeable. In addition, this token type prevents users from sending or receiving tokens that have no relation to each other.
Every token generated is unique, and its transfer results in the change of the asset owner (just like in the case with physical assets). However, the peculiarity of NFTs lies in its ledger entry forgery protection; it means once you buy a certain NFT, your ownership over this token cannot be overturned.
Some of the use cases of ERC-721:
- For unique digital artwork
- In-game collectibles
- Ownership on social media posts
ERC-1155: Multi-token Standard:
An advanced token standard enables a single contract to manage multiple tokens. In addition, ERC-1155 allows the creation of rules for how each token should behave. In terms of security, it uses a new method called "authority patterns," which provides access to individual tokens without exposing all keys used for signing them.
In terms of liquidity, it can simplify transactions between fungible and non-fungible tokens (ERC20 and ERC721). Furthermore, it designates specific roles like managers and users during the entire process: managers approve user behavior and actions; users take part in transactions; managers enforce conditions that prove whether certain types of activities are valid or not; these conditions implement restrictions on who can contribute to such actions as well as which type of tokens can be sent to receive a specific response from the smart contract.
In addition, it supports updates and backward compatibility with any future iterations of ERC-1155 tokens. It is intended to help large catalogs of items in video games or online marketplaces, track unique assets by the owner, tokenize physical property such as domain names and deeds, event tickets, etc., enable new classes of asset management applications on the blockchain, including legal contracts and decentralized lending platforms.
ERC-1155 aims to provide a universal standard for managing multiple fungible and non-fungible tokens in a single transaction that automatically processes all operations. It also enables developers to define how each token behaves within its ecosystem when transacting with other ERC-1155 tokens.
Some of the use cases of ERC-1155 tokens:
- It works as a smart contract interface for various tokens
- It can perform functionals of both ERC-20 and ERC-720
- Ideal for creating NFTs
Which one is right for your business?
To find the best one, you must first identify your business requirements and goals. Seven Bits is a leading Ethereum development company that offers full-fledged token development services. Our experts will understand your project requirements and provide you with the best solutions. Get in touch with us at [email protected] to explore more.