As blockchain technology continues its rapid expansion in our fast-paced world, it's becoming increasingly vital to grasp the basics. Whether you're an everyday user on the lookout for practical applications, a newbie excited to dive into this captivating world of cryptocurrencies, a seasoned investor navigating the complex crypto landscape, or even an app developer aiming to create decentralized applications (dApps), your presence on this page signifies your active engagement with the dynamic realm of cryptocurrencies. We presume that as you started exploring the intricacies of crypto-finance, you probably stumbled upon a maze of names and acronyms: ERC20, ERC721, ERC223, etc… As you can see, some of these terms may seem remarkably similar at first glance, but beneath the surface they often carry subtle yet significant distinctions. It’s important to realize that this can be a game-changer in your crypto journey because it highlights that not all digital assets are the same. Rest easy, as our mission is to provide you with the guidance and knowledge you need to navigate these intricacies with confidence.
We're here to assist you in thoroughly understanding these differences, empowering you to make informed financial decisions that align with your unique goals and aspirations in the world of cryptocurrencies. Consider this blog to be your trusted resource for unlocking the full potential of blockchain and cryptocurrency technologies.
Today we are going to be talking about ERC20 and ERC721, and the differences between them. The questions that are likely running through your mind – “What in the world do these things actually signify? How are they different?” Without further ado, let’s begin!
What are token standards and why do we need them?
Think of a token standard like a friendly bridge that helps different products work together effortlessly. When a project creates a token using a specific standard, they make it so that the token easily fits into well-known platforms and apps, including different kinds of wallets.
For example, if you have assets that follow the ERC20 standard, they can smoothly interact with other assets and services that also use this standard. In simple terms, it helps users easily trade one ERC20 token for another that follows the same rules. What's even cooler is that these standards give developers the freedom to reuse parts that were already built when they're creating new tokens. This makes it incredibly easy to ensure that different smart contracts can work together without a hitch.
What is ERC?
ERC is one of the token standards unique for Ethereum blockchain. Ethereum functions within a decentralized structure. While it's not as decentralized as Bitcoin, it doesn't hinge on the decisions of a single authority. Instead, all important operations, such as new features or processes, go through a transparent and inclusive decision-making process called the Ethereum Improvement Proposal (EIP). The acronym ERC stands for Ethereum Requests for Comment. One or more programmers write an ERC describing the changes they envision. The Ethereum development community can then comment on the ERC, which can be modified, denied, or adopted as a standard.
Each ERC token comes with a unique numerical identifier, and as you can probably imagine, there's a considerable amount of them. However, as of now, only a relatively small portion have been formally recognized as standards, each with its own level of importance. So it's quite typical for most people to only know about a handful of these standards, and even for experienced developers staying on top of the entire list can be a pretty challenging task.
Understanding the Difference Between Fungible and Non-fungible Tokens
When it comes to token standards, what sets them apart is how easily they can be exchanged. Fungible tokens are completely interchangeable and can be used like regular currency. Semi-fungible tokens, on the other hand, share many similarities but still maintain their unique characteristics. Think of them like movie theatre tickets – the prices are the same, but each ticket corresponds to a specific seat. Now, non-fungible tokens are a league of their own; they're entirely unique, representing one-of-a-kind items, much like copyright-protected objects. As you might have anticipated, ERC20 and ERC721 tokens, which we mentioned earlier, represent two opposite ends of this spectrum.
ERC20 has firmly positioned itself as one of the most widely recognized standards in the world of fungible tokens. In 2015, during Ethereum's early days, just two years after the creation of the blockchain, ERC20 was introduced to the public by Fabian Vogelsteller. Even though Ethereum's native cryptocurrency, ETH, was already in circulation, the introduction of ERC20 marked a significant advancement. It gave users the ability to effortlessly transfer and utilize ETH on third-party platforms that leveraged the potential of smart contracts.
In essence, while many other cryptocurrencies were primarily designed for direct peer-to-peer transactions, ERC-20 broadened the horizon, making it simple for individuals to send and receive Ethereum across a variety of platforms. This innovation played a pivotal role in enhancing Ethereum's practicality within the realm of decentralized applications (dApps).
As time went by, ERC20 underwent further development, becoming a protocol deeply integrated into the Ethereum blockchain. It established a comprehensive set of rules that govern the sharing, exchange, and transfer of new tokens to cryptocurrency wallets.
Let's break down the important specifications that set the standards for an ERC20 token: Token Name, Ticker Symbol, Decimals (Up to 18), Total Supply Pool, Balance Of, Transfer, Transfer From, Approve, and Allowance.
It's good to keep in mind that while the first three are optional, the remaining six are must-haves. For example, every ERC20 token needs to have a transfer function, which handles both the transfer and transferFrom functions, but having a ticker symbol is far less important.
The ERC721 standard is widely used for creating unique tokens and represents a significant milestone in the blockchain world. It was proposed as an Ethereum Improvement Proposal (EIP) by Dieter Shirley in 2017 and officially became a part of the Ethereum ecosystem in 2018. While ERC20 tokens have gained prominence through numerous ICOs, ERC721 may not have received the same level of attention. However, its status as the less-recognized sibling of ERC20 does not diminish its crucial role within the Ethereum ecosystem. In reality, ERC721 serves as a foundational pillar supporting Non-Fungible Tokens (NFTs) valued at billions of dollars. Before the emergence of ERC721, most blockchain tokens had limited utility, primarily serving as currency. The introduction of ERC721 simplified the creation of unique and collectible tokens, as seen in projects like CryptoKitties, or representing virtual land ownership in Decentraland.
Similar to ERC20, ERC721 also encompasses a set of regulations that specify particular aspects of a token: Determining ownership, Token creation procedures, Token transfer mechanisms, Token burning processes.
ERC20 vs ERC721
When we compare ERC20 and ERC721 tokens, we can see some significant differences.
ERC20 key characteristics:
- It follows a fungible standard.
- Typically, it includes a ticker for stock market identification.
- It can be divided, with the number of decimal places determined by the smart contract creator.
- ERC20 tokens must have a total supply, which sets a limit on the number of tokens that can be issued.
ERC721 key characteristics:
- It adheres to a non-fungible standard.
- There's no ticker associated with it.
- Each token is indivisible, as they are unique and cannot be divided.
- ERC721 tokens exist exclusively as single, distinct copies.
ERC20 vs ERC721: drawbacks
For ERC20 tokens, one challenge is the potential loss of tokens when they are transferred to wallets, or smart contracts that do not support ERC20 tokens. However, solutions like ERC223 and ERC777 have been introduced to address this issue.
As for ERC721 tokens, a notable challenge is the potentially higher cost associated with transferring a large number of assets, since each asset represents a single unit.