Ethereum tokens gained popularity in 2016 and 2017 as Initial Coin Offerings or ICOs began to use them to represent ownership or value. Ethereum tokens were later utilized to represent in-game assets in 2017, such as in the popular game CryptoKitties.
One of the most prominent aspects of tokens is their trading potentiality. For example, if you purchase a token, you would definitely try to trade it for another valuable token or probably for Ether. Therefore, the standardization of tokens is crucial, which is why Ethereum Request for Comments (ERC) was created. ERC is an open and public mechanism inspired by the well-known internet Request For Comments (RFCs). RFCs allow anyone to create and comment on recommendations for defining Ethereum smart contracts and tokens. This is distinct from Ethereum Improvement Proposals (EIPs) -focused on the Ethereum protocol.
ERC20 and ERC721 are two of the most widely used ERC token specifications. They are used to symbolize fungible and non-fungible assets, respectively. This article will look at the structure of ERC20 and ERC721 tokens and discuss the differentiating factors of ERC20 vs ERC721 tokens, including how they work.
Fungible and Non-Fungible Tokens: An Overview
Understanding fungible and non-fungible tokens may be aided by familiarity with the idea of fungibility in economics. The sole distinction is that crypto tokens convey their fungibility via a coding script.
Assets or tokens that are fungible are non-unique and divisible. For example, Dollar, which is a fiat currency, is fungible. Bitcoin is another example of a fungible token, but in cryptocurrency, that is, 1 BTC is worth 1BTC regardless of where it is issued.
On the other hand, the tokens that cannot be divided and are one-of-a-kind symbolize non-fungible tokens. They can be considered as a form of deed or title of possession to a unique, non-replicable item. For example, a domain name is a non-fungible asset because there cannot be another domain name of the same sort due to its unique aspects. Thus, non-fungible tokens represent a single, unique and indivisible entity, whether physical or immaterial, such as intellectual property or photograph.
The core technology that can easily verify and validate an intangible digital object’s proprietorship details is perhaps blockchain technology. The critical distinction between fungible and non-fungible assets is the information they contain. Non-fungible tokens store data, such as an academic title or an artwork—however, fungible tokens, such as Bitcoin, store value.
Ethereum Crypto Realm Assets
Assets in the Ethereum crypto realm are also classified as fungible and non-fungible assets.
ERC20 tokens are used to represent fungible assets. For example, these tokens represent project ownership, service vouchers, staking tokens, or governance tokens. In contrast, ERC721 tokens represent non-fungible assets. Presently, the sole prominent application of ERC721 tokens is in-game assets. For example, CryptoKitties is a game where you collect and breed virtual or digital kitties. A unique ERC721 token represents these kitties in the game. In addition, ERC721 tokens can be used in future tokenization of real-world assets such as your home.
The Ethereum blockchain does not distinguish between ERC20 and ERC721 tokens. Instead, tokens are just variables established in smart contracts on Ethereum and can be considered as a ‘coin within a coin.’
Therefore, before delving into the ERC20 and ERC721 standards, it is important to realize that tokens are stored in smart contracts, which are stored on the Ethereum blockchain. Smart contracts are coded manually, and every variable is assigned with a specific meaning during scripting.
So far, we’ve discussed the ERC20 and ERC721 standards at a general level, but in the next parts, we’ll delve into these standards and discover how they function.
ERC20 was developed by Fabian Vogelstellar in 2015. The prime mission of ERC20 is to make a uniform Application Programming Interface (API) for tokens within smart contracts achievable. Thus, ERC20 acts as a standard set of rules for the Ethereum blockchain. It follows a series of regulations for fresh tokens to be swapped, moved, or shared to a cryptocurrency wallet.
Furthermore, the API of smart contracts is described in the ERC20 rather than its implementation. As a result, when you have a smart contract, you have functions referred to as code groups. The interface explains what a smart contracts’ function should be beforehand. Then there is the implementation which happens at the back end. The actual code for these routines may be seen here.
Following are the ERC20 token standards:
- Token Name
- Decimal (up to 18)
- Balance of
- Total supply
- Transfer From
The standards: Token name, decimal, and symbol, are optional, while the remaining standards are essential. For example, a “transfer” function is vital for an ERC20 token, which is where the need for the “transfer and transfer from” function arises. The token owner, recognized by their Ethereum address, can transfer tokens to another Ethereum address using the transfer function. To transfer tokens on behalf of the owner, the “transfer from” function is used with a third-party Ethereum address.
CryptoKitties, a popular game, implemented the ERC721 standard in late 2017. As previously said, participants in this game gather virtual kittens, which are each represented by an ERC721 token.
But then, what is the difference between ERC20 tokens and others? An ERC721 token represents a class of assets, whereas an ERC20 token represents a particular type of asset. In the instance of CryptoKitties, the ERC721 token contract represents all of the game’s unique cats and who owns which of them.
Comparison to ERC20, ERC721 simplifies ownership: a participant either completely owns or does not fully own an asset. In CryptoKitties, for example, it is not feasible to possess “half a kitten”. As a result, the ERC721 token is referred to as a standard for non-fungible assets. This is one of the crucial aspects of the ERC721 standard to understand. However, the rest of the standards, particularly in terms of token transfers, is more or less similar to the ERC20 standard.
The main reason for introducing the ERC721 standards was to address the critical challenge of transferring multiple assets without increasing the operational costs.
In terms of vulnerabilities, ERC20 tokens are at risk of being lost when moved to other wallets or smart contracts that do not support ERC20 tokens. To address this issue, ERC223 and ERC777 standards were designed.
There are various distinctions between both the standards and each provides its consumers with something unique. As a result, they are continually pushing for progress, despite their hurdles.
Briefing the differences
We have already discussed the differences between the two standards in detail. But before concluding our discussion, let us summarize them:
- The main distinction between ERC20 and ERC721 tokens is that the former is a fungible token, but the latter is a non -fungible token.
- ERC20 tokens are interchangeable and represent a single entity, whereas ERC721 tokens represent a collection of assets. Furthermore, ERC721 is not divisible.
- CrytoKitties is a notable example of gaining complete ownership of virtual cats, which is one-of-a-kind and cannot be shared with any other player.
- The game is swiftly gaining traction to the point where blockchain gaming may become more generally embraced in the future.
- ERC20 tokens can be divided in any number of ways. Even sharing 0.1 % of your token is possible.
ERC20 and ERC721 token standards are only the beginning of a digital environment that is both inclusive and efficient. Because token standards are evolving at a much faster rate, it won’t be shocking to see blockchain technology develop dramatically in the future.
If you are familiar with the term NFT, you are probably aware that fungibility is a major issue. But that’s only one of the system’s features. Because dealing with a single, eccentric identity is not always possible. Sometimes, you are dealing with duplicates, copies, or completely similar items. So it’s not only about best NFT tokens; it is much more than that. It is also about managing ICOs, crowdfunding, and introducing additional cryptocurrencies to the market, etc. All of these applications need a certain level of functionality and adherence to rigorous criteria.
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