What is a token standard (like ERC-20) on a blockchain?

Understanding Token Standards in Blockchain Technology

A token standard defines a set of rules and functions that govern how tokens operate within a blockchain ecosystem. These standards ensure compatibility, predictability, and interoperability among different applications, wallets, and exchanges. By following a predefined blueprint, developers can create tokens that seamlessly interact with existing infrastructure.

ERC-20: The Foundation of Ethereum Tokens

1. ERC-20 is the most widely adopted token standard on the Ethereum blockchain. It was introduced in 2015 and formalized through an Ethereum Request for Comment (ERC).

2. This standard specifies a common list of functions and events such as transfer(), balanceOf(), and totalSupply(), enabling any wallet or service to recognize and manage these tokens.
3. Projects launching initial coin offerings (ICOs) frequently use ERC-20 due to its simplicity and broad support across platforms like MetaMask, Uniswap, and Coinbase.
4. Because ERC-20 tokens follow uniform behavior, decentralized applications (dApps) can integrate them without needing custom logic for each new token.
5. Despite its popularity, ERC-20 has limitations, including the inability to handle incoming token transfers automatically, which sometimes leads to lost funds if users send tokens to non-receiving contracts.

Diverse Token Standards Across Blockchains

1. Beyond ERC-20, other Ethereum-based standards have emerged to address specific needs. ERC-721 enables non-fungible tokens (NFTs), where each token is unique and indivisible, making it ideal for digital art and collectibles.

2. ERC-1155 expands on this by allowing both fungible and non-fungible tokens within a single contract, improving efficiency for games and multi-asset platforms.
3. On Binance Smart Chain, BEP-20 mirrors ERC-20 functionality but operates within BSC’s network, offering lower transaction fees and faster confirmation times.
4. Solana utilizes SPL (Solana Program Library) tokens, which are analogous to ERC-20 but optimized for Solana’s high-throughput architecture.
5. Polkadot implements standards through its FRAME system, allowing projects to define custom token logic while maintaining cross-chain compatibility via parachains.

The Role of Standards in Decentralized Finance (DeFi)

1. In DeFi protocols, token standards enable trustless interactions between lending platforms, automated market makers, and yield aggregators.

2. When a user supplies a token to Aave or deposits liquidity into SushiSwap, the platform relies on standardized interfaces to verify balances and execute transfers securely.
3. Composability—the ability to combine multiple DeFi services—is made possible because all components speak the same technical language defined by token standards.
4. Governance tokens used in DAOs typically adhere to ERC-20 or similar standards, ensuring they can be distributed, voted with, and traded universally.
5. Security audits often focus on whether a token contract correctly implements its intended standard, reducing risks associated with flawed code execution.

Frequently Asked Questions

What happens if a token does not comply with a standard?A non-compliant token may fail to work with wallets, exchanges, or dApps expecting standard functions. Users might be unable to view balances or initiate transfers, leading to loss of access or reduced utility.

Can a token belong to more than one standard?Yes, some tokens implement multiple standards simultaneously. For example, a contract could support both ERC-20 and ERC-777 to offer backward compatibility while adding advanced features like hooks for transfer notifications.

Are token standards legally binding?No, token standards are technical specifications, not legal agreements. They are community-driven guidelines maintained by developer groups rather than regulatory bodies.