Understanding Token Standards: The Blueprint for Interoperability in Cryptocurrencies

Although there are thousands of cryptocurrencies in existence, you may not be aware that most cryptocurrencies are created based on the same design blueprint. These design blueprints are also known as token standards, which specify the key functionalities and attributes of blockchain tokens.

Why adhere to token standards?

1. Interoperability: Token standards ensure that products created using the same standards can interact or work together. If the tokens of a project follow token standards, new tokens can be compatible with existing platforms and applications, such as wallets. For example, if a token complies with the ERC-20 standard, it can interoperate with other products and services that follow the same standard.

It is thanks to token standards that you can trade other tokens using ERC-20 tokens. Without token standards, transactions between multiple cryptocurrencies would be very challenging. You would also need to create dedicated wallets for each token instead of using a universal wallet that can hold multiple cryptocurrencies.

2. Composability: For developers, having a composable system available allows them to reuse existing components to create new products. The same applies to token development, as adhering to token standards reduces development time for basic functionalities, giving developers more time for experimentation and innovation.

3. Efficiency: Token standards also facilitate interactions between smart contracts. When tokens deployed according to token standards, smart contracts can efficiently monitor the created tokens.

For example, tokens developed using the ERC-20 standard can be tracked via the Contract Application Binary Interface (ABI) to monitor token transfers and other data.

Here are some common cryptocurrency and DeFi token standards:

1. BEP-20: BEP-20 is the token standard for the Binance Smart Chain (BSC). It is a technical specification developed for the Binance Smart Chain to support the creation of various tokens, including utility tokens, stablecoins, anchor tokens, and others. The BEP-20 standard also introduces features such as blacklisting, minting and pausing token burning, and more.
2. ERC-20: ERC-20 is a token standard proposed by Fabian Vogelsteller in 2015 and has become the primary framework for developers to design various tokens, including virtual tokens, staking tokens, and virtual currencies.
3. ERC-721: Most non-fungible tokens (NFTs) on the Ethereum blockchain follow the ERC-721 token standard. Whether it’s limited edition NFTs or Proof of Attendance Protocol (POAP), your NFT is likely created based on the same design blueprint. ERC-721 mandates that assets as tokens must have globally unique token IDs.
4. ERC-1155: With the evolution of token standards, a standard that can cater to multiple token types’ needs emerged, known as ERC-1155. ERC-1155 is a multi-token standard that allows for the creation of different types of digital assets, including utility tokens like BNB and NFTs. Additionally, ERC-1155 provides batch functionalities such as batch transfers and batch approvals.

However, token standards also have their limitations. Tokens created using the same standard have similar basic functionalities and can interact well, while tokens created using different standards have different basic functionalities and poor interoperability. Interoperability between tokens adhering to different token standards is limited. In other words, tokens developed using different standards cannot coexist, interact, or be traded on the same platform. To address this issue, a new type of token called wrapped tokens has been introduced.

Wrapped tokens are cryptocurrencies that are pegged to other cryptocurrencies. Typically, the original asset is held in a digital custodian, and a wrapped version is created on another blockchain.

Token standards serve as the design and deployment blueprints for blockchain tokens. Currently, there are several token standards and innovative solutions in the industry, such as blockchain bridges and wrapping mechanisms, to help address the issue of token incompatibility.

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