Explain ERC-20 vs ERC-721 smart contracts

Understanding the Basics of ERC-20 and ERC-721

When discussing Ethereum-based tokens, two of the most commonly referenced standards are ERC-20 and ERC-721. These are smart contract templates that define how tokens behave on the Ethereum blockchain. ERC-20 is primarily used for fungible tokens, meaning each token is identical and interchangeable with another of the same type. This makes it ideal for use cases like currency or utility tokens.

On the other hand, ERC-721 represents non-fungible tokens (NFTs), where each token is unique and cannot be directly replaced by another. This standard enables digital collectibles, art, game items, and more to have distinct properties and ownership records on the blockchain.

The distinction between these two standards lies in their intended use cases and the way they handle token transfers and identification.

Token Structure and Interchangeability

In an ERC-20 contract, tokens are structured as a simple balance associated with an address. Each token has the same value and functionality as any other token of the same contract. For example, if you own 100 DAI tokens, each DAI is worth exactly the same as another DAI, and transferring one doesn't affect the overall value or identity of your holdings.

Conversely, ERC-721 tokens are uniquely identifiable through individual IDs. Each token has metadata and attributes that distinguish it from others, even within the same contract. When you own an NFT representing a piece of digital art, no other token can replace it because its ID and content are unique.

This structural difference affects how developers implement features such as transfers, approvals, and ownership tracking in decentralized applications.

Smart Contract Functions and Interfaces

The ERC-20 standard defines several core functions and events that must be implemented in a compliant contract. These include:

• totalSupply() – returns the total number of tokens in circulation
• balanceOf(address account) – retrieves the token balance of a specific address
• transfer(address recipient, uint256 amount) – allows a user to send tokens to another address
• approve(address spender, uint256 amount) – authorizes another address to spend tokens on behalf of the owner

These functions ensure seamless interaction between wallets, exchanges, and dApps.

For ERC-721, the interface includes functions that accommodate uniqueness:

• balanceOf(address owner) – checks how many NFTs an address owns
• ownerOf(uint256 tokenId) – identifies the current owner of a specific token ID
• safeTransferFrom(address from, address to, uint256 tokenId) – securely transfers a token while ensuring the receiver can handle it
• approve(address approved, uint256 tokenId) – grants permission to transfer a specific token

These differences in function sets reflect the contrasting needs of fungible and non-fungible token ecosystems.

Use Cases and Real-World Applications

The ERC-20 standard powers a vast array of projects, including stablecoins like Tether (USDT) and Dai (DAI), governance tokens like UNI and COMP, and utility tokens across DeFi platforms. Because of their uniformity, these tokens are well-suited for financial applications where divisibility and interchangeability are crucial.

In contrast, ERC-721 has fueled the rise of NFT marketplaces such as OpenSea, Rarible, and Foundation, where digital collectibles, virtual real estate, and in-game assets are traded. Projects like CryptoPunks, Bored Ape Yacht Club, and Decentraland leverage this standard to assign verifiable scarcity and ownership to unique digital items.

Developers often choose between these standards based on whether the asset being tokenized requires individuality and provenance tracking or simple fungibility and exchangeability.

Gas Efficiency and Transfer Mechanisms

Transferring ERC-20 tokens typically involves a single transaction per transfer, making them relatively gas-efficient when dealing with large volumes. The simplicity of the standard also means fewer computations are required to execute transactions.

However, moving multiple ERC-721 tokens requires separate transactions for each token, which can lead to higher gas costs. To mitigate this, some developers bundle multiple NFTs into a single transaction using batch transfer extensions or alternative standards like ERC-1155, which combines both fungible and non-fungible features.

Moreover, ERC-721 requires additional logic to track token ownership at the individual level, increasing contract complexity and execution cost compared to ERC-20 contracts.

Frequently Asked Questions

Can an ERC-20 token ever become non-fungible?No, an ERC-20 token is inherently fungible due to its design. However, developers can create a new contract using ERC-721 or ERC-1155 to represent unique assets derived from the original token, though this would not change the nature of the existing ERC-20 token itself.

Is it possible to convert an ERC-721 token into an ERC-20 token?Technically, yes, but only by creating a mechanism where ERC-721 tokens are locked and represented as fungible tokens via a wrapper contract. This is often seen in fractionalization platforms where NFTs are converted into divisible shares.

Which standard is better for gaming assets: ERC-20 or ERC-721?It depends on the asset type. Use ERC-20 for consumables like in-game currency or potions that are interchangeable. Use ERC-721 for unique items like weapons, characters, or skins that have individual traits and rarity.

Do ERC-20 and ERC-721 contracts support metadata?ERC-20 does not natively support metadata beyond basic token details like name and symbol. ERC-721, however, includes metadata support through off-chain storage references (like IPFS) that allow for rich descriptions, images, and attributes tied to each token.