What is Token Standards?

The definition of how digital tokens can be created, managed, and transferred on the blockchain ecosystem is determined by token standards. They define a set of rules and protocols which developers must abide by to guarantee that tokens can work smoothly with decentralized applications (dApps), wallets and exchanges. Digital assets like cryptocurrencies, utility tokens, or non fungible tokens (NFTs) come to life on blockchain platforms using token standards to stay interoperable and secure within the ecosystem.

How Token Standards Work

A token standard (or types of tokens) is nothing more than predefined smart contracts that define functionality and properties of the token. With these standards, we guarantee that if you build tokens on one particular platform that is for example Ethereum or Binance Smart Chain, all tokens built on that platform follow the same basic rules, meaning they can all be used with all kinds of application and service. For example, ERC-20 standard, defined by Ethereum, provides the rules for creating fungible tokens, ERC 721 and ERC 1155 — intended for creating non fungible tokens (NFT). By following these standards, tokens can be easily incorporated in to DeFi platforms, marketplaces and wallets.

Types of Token Standards

There are many types of token standards, each one dedicated to different digital assets and use cases. One of the most commonly used is Ethereum's ERC-20, which standardizes the creation of fungible tokens, that are exchangeable, and commonly used with cryptocurrencies and DeFi applications. Though, other side is ERC-721, the standard for non fungible tokens (NFTs) which are unique and cannot be exchanged on equal basis for to one another and thus suitable for digital collectibles and art. ERC-1155 is a multi token standard allowing you to create both fungible and non-fungible tokens in one single contract; good for games and marketplaces. BEP-20 standard is the ERC-20 of Binance Smart Chain and allows fungible tokens to be created to carry out transactions in the Binance network with low fees and high speeds. These standards, when working together, will guarantee compatibility and ease of use across a number of blockchain platforms and applications.

Benefits and Challenges of Token Standards

Interoperability is the main benefit of token standards. Following a standard allows tokens to seamlessly communicate with other platforms, wallets and exchanges without friction to the user. Additionally, this makes the development process for projects easier as developers don’t need to build a separate custom solution. They can instead use well established frameworks to create secure and reliable tokens.

But token standards come with a challenge. They offer a good basis for any successor, but they can be restrictive. For example if you follow a token standard there will be a set of rules that you have to follow, which are not necessary suited to cover your case. Furthermore, the more token standards there are on different blockchains, the more likely that fragmentation will make it difficult to interact with different blockchains and prevent a completely interoperable system.

Conclusion

The backbone of any blockchain ecosystem is token standard — they allow creating, managing and transferring of digital assets in a consistent, secure way. Standards like ERC-20, ERC-721, ERC-1155 and BEP-20 define rules and protocols for how tokens' functionality will work, allowing tokens to successfully interact with decentralized applications and platforms. Token standards come with too many benefits in terms of interoperability as well as development easiness and the problem is that the more variety of standards is the less crosschain integration becomes possible. With continued development of the blockchain space forward, token standards will no doubt continue to play a crucial role in the development of decentralized ecosystems.

Token Standards

How Token Standards Work

Types of Token Standards

Benefits and Challenges of Token Standards

Conclusion

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