Understanding Smart Contracts: Comparing ERC Standards with Other Blockchain Token Systems

Introduction to Smart Contract Technology and ERC Standards

The aim of this guide is to take you from the foundations of smart contracts, through the tokens that power them, and the standards that define them – including why smart contract technology is necessary to fully unleash the powers of blockchain technology.

What is a Smart Contract?

Before we delve into different token standards, it’s important to grasp the overall concept of smart contracts. Smart contracts are self-executing programs that automate some actions against a blockchain, typically by utilizing tokens to record and retrieve the necessary information. They’re more efficient than traditional pen and paper, as smart contracts do away with the ‘middle men’ traditionally required to ensure trust between parties; utilizing the blockchain technology as a ‘trustless’ source instead. The essential aim of smart contracts is to increase speed, automate processes, and reduce the costs associated with traditional financial or business transactions (‘contracts’). 

Token Standards and Smart Contracts – What’s The Difference?

For Ethereum, the different types of tokens such as ERC-20 or ERC-777 are actually smart contracts. Token standards provide the parameters, best practices, and ‘common interface’ for interoperability throughout a blockchain’s ecosystem. Token standards provide the ‘rules and regulations’ for creating these types of smart contracts. 

So are tokens and smart contracts the same thing? You may see tokens referred to as smart contracts. By definition, tokens are always smart contracts. However, smart contracts aren’t always tokens – they can also be other code or features (or 3rd party programs executed against a blockchain). In summary, token standards are a type of smart contract. 

The Role of Token Standards

Token standards are what is most important to us collectors, investors, artists and creators because they set a common framework for interoperability and define the ‘official’ or ‘approved’ means of using and implementing different blockchain tokens and smart contracts.

Token Standards provide the right logic and interfaces so that a new project can ensure it is compatible across the vast ecosystem of apps, wallets, protocols, marketplaces etc. They also give credibility to projects when they’re verified as following the known, trusted, ‘tried and tested’ methods set in the standards.

A Present Guide to Tokens And Their Standards

Here are some ERC token standards that you’re likely to come across, and some popular tokens from competing blockchains such as Solana, NEO, Tezos, and Bitcoin.  

ERC-20: The Backbone of Ethereum’s Fungible Tokens

The first major standard to be published on Ethereum at its launch in 2015, ERC-20 ushered in a thousand ICOs (Initial Coin Offerings – the crypto equivalent of startup IPOs). ERC-20 is a fungible token standard that enables anyone (with the ‘gas’ fees and know-how) to issue named tokens. Currently, there are over 450,000 ERC-20 tokens in existence and you might be surprised by the list of cryptocurrency names built on ERC-20 – some are at the top of the market cap listing, such as SHIB (Shib Inu, a meme coin) and USDT (Tether, a 1-1 stablecoin pegged to $1USD). 

Although new blockchains and standards have since emerged, ERC-20 remains widely in use especially for those who seek exposure to ETH’s dominant position.

ERC-721: The Standard for Unique Digital Assets

Initially proposed by Dieter Shirley then published in 2018, ERC-721 is the ‘Non-Fungible Token Standard’ as described by Ethereum. The ‘CryptoKitties’ series of NFTs were a major milestone in showing the world this class of non-fungible digital assets had arrived. 

Working with Ethereum, CryptoKitties is credited with pioneering the use of ERC-721, paving the way for the NFT universe we have today. CryptoKitties was the first product of this type to receive wide media coverage and attention during 2018 as these virtual cats traded for vast sums. 

Today, there are thousands of NFT creators who use ERC-721 tokens. Under this standard, each and every ERC-721 token is in itself unique and irreplaceable. Though frequently used for digital art, they can represent the ownership of real world items such as real–estate, luxury goods, etc.

The majority of digital art is minted using this standard. However, ERC-721 has proven to have high network costs and poor interoperability with ERC-20. This has resulted  in newer standards to address shortcomings and bring improvements.

ERC-721A: An Optimized Approach for Batch Minting

One of the main limitations of the ERC-721 standard is that only one NFT can be minted at a time. This means a user has to perform the full transaction process and pay the gas fees for each NFT within a collection that could comprise thousands of unique digital items. Therefore ERC-721A came about to cater to batch creation, where the parameters can be set to mint NFTs in large batches, being more gas efficient in the process. 

This standard helps NFTs to be batched and minted more easily and in new ways, for example a number of limited edition identical items, or an all-in-one transaction. Given its capability for batch minting, ERC-721A is useful for cases where minting of similar items is required, as it saves time and money compared to using ERC-721. 

ERC-1155: Multi-Token Standard for Versatility

One of the most impressive mass-adoptions of NFT and blockchain technology has arrived in the form of gaming. The demands of vast catalogs of unique items and the trading volume of massive multiplayer online games, led to the creation of ERC-1155. The advantages of ERC-1155 over ERC-721 is that ERC-1155 provides the versatility, scale and speed required of gamified experiences. By combining both fungible and non-fungible properties under one smart contract, ERC-1155 eases the development process and allows for efficient use of blockchain resources. 

ERC-1155’s core example is creating a token for a game, which is fungible to spend and earn, for the in-game ecosystem; yet said token is also mintable for the creation of unique in-game items such as NFTs. Enjin is a major gaming player using this standard to reward users with unique items and provide in-game trading and market experiences. 

ERC-777: A New Frontier for Token Interactions

ERC-777 set out to enhance and improve upon the ERC-20 standard with features to address a known issue of tokens being stuck/ lost forever when sent to the wrong contract address. The impact of ERC-777 on smart contract interactions was to make them more dynamic, with enhancements from the learnings of ERC-20; although the latter remains far more widely in use. ERC-777 was also designed to be backwards compatible with ERC-20, meaning existing ERC-20 tokens could simply be ‘upgraded’ to this new protocol. However, this standard has never reached large-scale adoption, and here’s why: 

‘Receive hooks’ were one of the main additions to ERC-777, enabling both user accounts and smart contracts to react dynamically when receiving tokens. These allow for use cases such as simplifying complex token trades with atomic swaps and reverting transactions when the wrong tokens are received. Unfortunately, these features also introduced new attack vectors, and so ERC-777 is fraught with some security concerns greatly limiting its reach compared with ERC-20 or ERC-721. 

Token Standards for NEO: NEP-5, NEP-11, and NEP-17

NEO embodies similar standards to Ethereum for creating fungible and non-fungible tokens. The 2 main standards in use are NEP-11 and NEP-17, the latter a replacement for the earlier NEP-5 standard. 

• NEP-5  sets out to do for NEO blockchain what ERC-20 does for Ethereum, although there are differences. One key difference is on Ethereum. ‘Gas’, used to pay fees, is devised as units of the core currency (ETH), whilst on NEO, gas is implemented as a separate token called ‘GAS’. 
• NEP-11 provides NEO with similar NFT capabilities equivalent to ERC-721.
• NEP-17 replaces NEP-5 with an upgraded improved version, and is again similar to the ERC-20 standard for fungible tokens. 

Tezos Token Standards: TZIP-7 and TZIP-12

This blockchain remains one of the largest, in terms of social engagement. Tezos is a Delegated Proof-of-Stake blockchain, offering faster transaction times and lower fees.

• TZIP-7 is similar to ERC-20 in providing the means for fungible tokens, and TZIP-12 is used for NFTs.
• Unlike most blockchains, Tezos chose a separate standard and naming convention. TZIP-7 is the standard defining FA1.2 fungible tokens (FA is an abbreviation for ‘Financial Application’). The other standard, TZIP-12, caters to a hybrid case of both fungible and non-fungible (NFT) tokens known as FA2. 

SOLANA – Token22 and SPL-404

Solana blockchain went live in 2020 having raised $1.76m in a public token auction. Since then, it has gone from strength to strength, currently sitting 5th on coinmarketcap. Solana also uses proof-of-stake as its smart contract mechanisms. 

• Token 22 is a single set of standards published to cater to both types of fungible and non-fungible token creation and minting on the Solana blockchain.
• SPL 404 is an emerging hot new token standard catering to fungible and non-fungible use cases. SPL 404 can be used to mint NFTs which hold an intrinsic value in underlying tokens, giving them fungibility and liquidity, creating a bridging between NFT and DeFi. 

Satoshi Inscriptions and Bitcoin Tokens – Ordinals and Runes

Bitcoin Ordinals (Satoshi inscriptions, NFTs) and Runes (fungible token standard) are relatively new developments by Casey Rordamor, and are said to outperform other attempts at adding Ethereum-like smart-contract features to Bitcoin. Although BRC-20 (ERC-20 equivalent based on Ordinals) and BRC-721 (NFTs inspired by BRC-20) standards exist, the latest Runes protocol requires dramatically less transaction overhead, resulting in ‘empty space’. This spare bandwidth is called ‘UTXOs’ – Unspent Transaction Outputs. As such, Runes can keep up high activity levels without slowing down the network – making it feasible for Bitcoin to expand with more alternative blockchain-like features.

Bitcoin Ordinals devised a means to leave or ‘inscribe’ a message on individual satoshis, (the smallest unit of Bitcoin), thus making them unique and identifiable. This paved the way for NFTs on Bitcoin, and many collections of these inscriptions now exist.

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Know Your Memes: Many meme and alt coins are in fact ERC-20 tokens created on Ethereum. Others such as Doge were forked from other blockchains. Forked means the code was taken wholesale from open source, modified, then launched as a new blockchain. Litecoin (LTC) was initially a fork of Bitcoin, and Doge was forked from there. 

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Comparative Analysis: ERC Standards vs. Other Blockchain Tokens

Here’s a summary of the blockchains discussed (and their token standards), plus a few more for complete reference. 

The Future of Blockchain Tokens: Trends and Innovations

NFTs and fungible token mechanisms are only just emerging on Bitcoin. Of note is how they open the doorway to all kinds of Bitcoin DeFi, contributing to a healthy NFT market. The trend of NFTs appearing on Bitcoin is certainly one to watch. 

We’re also beginning to see increased dominance from newer blockchains such as Solana, Base and Tezos due to ultra-fast block times and affordable fees. Tezos and Solana are rapidly rising on lists of the most appealing currencies for investment, usability, and scalability, demonstrating that the path for innovation is ripe for growth. 

At minimum, NFTs augment the ownership experience of various digital or real-world possessions. You can already buy real-world goods paired with an NFT to verify scarcity and authenticity. Brands can even promote cross-chain NFTs through innovative sites such as ilunafriq, to solve the inevitable spread of patrons and followers across multiple blockchains. Meanwhile, several token standards on multiple blockchains continue to evolve from early betas and small communities to central exchange listings and media attention.

Of course in the gaming, multiverse, and virtual reality realms, we will doubtless continue to see a galaxy of tokens created for virtual use…whilst their real-world applications warm up, awaiting their chance in the spotlight. 

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