A Complete Guide to Token Standards: ERC-20 Tokens Explained

Token standards define how digital assets are created, transferred, and recognized across blockchain networks. Popular examples include ERC-20 tokens, ERC-721 tokens for NFTs, and ERC-1155 tokens for multi-purpose assets.

This guide explores the most important token standards, how they differ, and why they matter for traders and developers.

What are token standards?

Token standards are technical rules that define how blockchain tokens are created, transferred, stored, and recognized by applications.

Most token standards are created through blockchain improvement proposals. On Ethereum, these are Ethereum Requests for Comments, commonly known as ERCs. These proposals define specifications developers can adopt when creating digital assets, with each standard serving different purposes.

Why are token standards important?

Token standards are important because they provide several benefits, including:

• Interoperability: Different platforms can recognize and interact with compatible tokens.

• Efficiency: Developers can build applications without creating new token systems.

• Security: Established standards are tested, reviewed, and audited by the community before deployment.

• Accessibility: Wallets and exchanges can support thousands of assets.

For example, once an exchange supports the ERC-20 standard, it can support any compliant ERC-20 token without building a new integration each time.

What is an ERC-20 token?

ERC-20, which is an acronym for Ethereum Request for Comments proposal 20, is a common standard for fungible tokens on the Ethereum blockchain, enabling compatibility across Ethereum wallets, exchanges, and dApps. They are fungible, meaning every token of the same type is interchangeable with another.

The ERC-20 standard outlines a common interface that tokens must follow, including methods for transferring tokens, querying token balances, and tracking token ownership. This standardized structure streamlines the integration of new tokens into various Ethereum-based applications and platforms.

Developers create ERC-20 tokens using smart contracts that adhere to the ERC-20 specification, defining how tokens are transferred, managed, and verified. Because of its widespread adoption, ERC-20 became the standard for most tokens launched during the ICO boom.

Like any smart contract, ERC-20 tokens can contain vulnerabilities if they are not properly audited.

Other Ethereum token standards

While ERC-20 is the most widely used token standard for fungible assets, Ethereum also supports other standards designed for different use cases.

What are ERC-721 tokens?

ERC-721 tokens are a standard for representing non-fungible tokens (NFTs) on the Ethereum blockchain, allowing for the creation and transfer of unique digital assets. Unlike fungible tokens, every ERC-721 is unique and cannot be exchanged on a one-to-one basis.

ERC-721 tokens are widely used for digital art, collectibles, gaming assets, and virtual real estate. Because each token is unique, they are ideal for representing ownership of individual assets.

CryptoKitties is a well-known ERC-721 application where users collect, buy, and sell NFT-based virtual cats. At its peak, its popularity caused significant congestion on Ethereum, demonstrating demand for NFT collectibles.

What is an ERC-1155 token?

ERC-1555 tokens are a versatile token standard on the Ethereum blockchain, allowing multiple assets, such as gaming items, or both fungible and non-fungible tokens, to be managed in a single smart contract. Before ERC-1155, fungible and non-fungible tokens required separate smart contracts. ERC-1155 allows multiple token types to exist within one contract, reducing deployment costs and improving efficiency.

These tokens support batch transfers, allowing multiple token types to be sent in a single transaction to reduce gas fees. They are also widely used in gaming, where currencies, skins, and unique items can all be managed within a single smart contract. As well as this, they can tokenize both fungible and unique assets, including digital art and real-world assets.

Beyond Ethereum tokens

Ethereum hosts some of the most popular and widely adopted token standards, but it is not the only blockchain to do so. Other networks have developed their own token standards to support different approaches to asset creation, trading, and dApps.

What is BEP-20?

BEP-20s are a token standard on Binance's BNB Smart Chain. Much like its Ethereum counterpart, the ERC-20, BEP-20 offers a set of rules and guidelines for creating fungible tokens within the BNB Smart Chain ecosystem.

BEP-20 defines a common set of rules for fungible tokens, allowing wallets, exchanges, and applications to support them more easily. 

They standardize functions for transfers, balance queries, and approvals, ensuring compatibility across supported applications. These functions are critical in guaranteeing interoperability and a consistent user experience across different services and applications on the BNB Smart Chain.

BEP-20 tokens are commonly used in DeFi and other blockchain applications, although BNB Smart Chain also supports other token standards.

How token standards enable crypto trading

Token standards make crypto trading at scale possible by creating a common framework that allows digital assets to be recognized, transferred, and exchanged across different platforms (centralized exchanges, decentralized exchanges, wallets, and applications).

For the contracts to work effectively, they need a reliable way, or rules, to identify, transfer, and manage digital assets. This is why token standards are essential in setting out standardized rules for decentralized exchanges (DEXs).

Token standards also help improve liquidity as they make assets easier to integrate across multiple platforms; a token that is compatible with many wallets and exchanges has more opportunities to be traded.

Standardized tokens also allow for token swaps as blockchains can easily recognize and transfer the assets correctly. One example of this kind of infrastructure is the 0x Protocol.

What is the 0x Protocol?

The 0x Protocol is a key infrastructure layer within the DeFi ecosystem, specifically designed for trading digital assets in a peer-to-peer manner. Built on the Ethereum blockchain, it offers a standardized framework for developers to create DEXs and other financial applications.

The 0x Protocol uses smart contracts to establish a set of rules and a standardized infrastructure for DEXs, allowing different applications to access liquidity from multiple sources. By making liquidity easier to share and aggregate, it helps reduce fragmentation and creates a more efficient trading experience.

One core component of 0x is the Relayer, which hosts off-chain order books. Orders are matched off-chain before being settled on-chain, reducing costs while maintaining security.

Another is its flexibility. It doesn't dictate specific user interfaces or trading strategies, so developers have the freedom to build on top of 0x to create a diverse range of decentralized financial products, from simple asset swaps to complex financial derivatives.

Token standards and taxes

If you are using ERC-20 tokens (such as SHIB, USDT, or DAI) for buying, selling, or trading, you may be subject to Capital Gains Tax. If you are receiving them as staking rewards or payments, then it’s likely you’ll need to pay Income Tax.

Koinly can calculate your crypto taxes for you and generate specialized tax reports you can use to file your taxes.