Understanding Ethereum Token Standards: From ERC-20 to ERC-4626

Tokens are the building blocks of the Ethereum ecosystem, representing everything from currencies and assets to access rights and digital collectibles. Understanding the various token standards is crucial for anyone working with decentralized applications or blockchain technology. This comprehensive guide explores the major Ethereum token standards and their real-world applications.

What Are Tokens and Why Do They Matter?

Tokens on Ethereum serve multiple purposes beyond simple currency. They can represent:

• Digital currencies with value established through trading
• Physical or digital assets like real estate, gold, or in-game items
• Access rights to exclusive services or properties
• Voting rights in decentralized organizations (DAOs)
• Digital collectibles like CryptoPunks or digital art
• Identity certificates and attestations
• Utility tokens for accessing specific services

Key Concepts: Fungibility and Risk

Fungibility means tokens are interchangeable – any single unit has the same value and function as another. Bitcoin and most currencies are fungible, while unique collectibles are non-fungible.

Counterparty risk occurs when multiple parties are involved in a transaction. For example, if you own a token representing gold stored by a custodian, you're trusting both the token issuer and the custodian. Understanding who controls the underlying asset is crucial.

Intrinsicality refers to whether tokens represent something native to the blockchain (like NFTs) or external assets (like real estate or company shares).

ERC-20: The Foundation of Fungible Tokens

ERC-20 is the most widely adopted standard for fungible tokens on Ethereum. It defines a common interface ensuring all compatible tokens work uniformly across wallets and applications.

Core Functions

The ERC-20 standard requires specific functions:

• totalSupply(): Returns the total number of tokens in existence
• balanceOf(): Shows token balance for a given address
• transfer(): Enables direct token transfers
• approve(): Authorizes another address to spend tokens on your behalf
• transferFrom(): Facilitates third-party transfers (used with approve)
• allowance(): Shows remaining approved amount for spending

Safe Transfer Considerations

A common issue with ERC-20 tokens occurs when sending them to smart contracts that can't handle token transfers. These tokens become permanently locked. Modern implementations often include "safe transfer" methods that verify the recipient contract can properly handle incoming tokens.

ERC-777: Enhanced Token Transfers

ERC-777 was proposed as an improvement over ERC-20, though ERC-20 remains the recommended standard for most use cases.

Key Features

• Backward compatibility with ERC-20
• Hook functions that notify contracts before and after token transfers
• Operator functionality allowing trusted third parties to move tokens
• Metadata support for additional transaction information
• Uniform operation whether sending to contracts or externally owned accounts

The hook system prevents accidental transfers to contracts that can't handle tokens by requiring recipient contracts to register appropriate hook functions.

ERC-721: Non-Fungible Tokens (NFTs)

ERC-721 introduced non-fungible tokens, where each token is unique and represents ownership of a specific item or "deed."

Fundamental Difference from ERC-20

While ERC-20 tracks balances per address, ERC-721 tracks ownership of individual token IDs:

// ERC-20: address -> balance
mapping(address => uint256) balances;

// ERC-721: token ID -> owner
mapping(uint256 => address) deedOwner;

Applications

NFTs are ideal for representing unique digital assets like artwork, collectibles, gaming items, or certificates. Each token has a unique identifier and can have associated metadata describing its properties.

ERC-1155: Multi-Token Standard

ERC-1155 revolutionizes token management by allowing a single contract to handle multiple token types simultaneously.

Benefits

• Efficiency: Batch transfers of multiple token types in one transaction
• Flexibility: Supports fungible, non-fungible, and semi-fungible tokens
• Reduced costs: Lower gas fees through batch operations
• Rich metadata: Detailed attributes for each token type
• Simplified approval: Single approval for entire contract

This standard is particularly valuable for gaming applications where players might own various types of items, currencies, and collectibles.

ERC-2612: Gasless Approvals

ERC-2612 introduces permit functionality, allowing token approvals through off-chain signatures rather than on-chain transactions.

How It Works

Instead of sending a transaction to approve token spending:

1. Token holders create a digital signature off-chain
2. The signature includes amount, spender, nonce, and deadline
3. Spenders submit the signature to the permit function
4. The contract verifies the signature and sets the allowance

This approach saves gas fees and improves user experience, especially in DeFi applications requiring multiple approvals.

ERC-4626: Tokenized Vaults

ERC-4626 standardizes interfaces for tokenized vaults, creating a common framework for yield-bearing strategies and investment funds.

Core Concept

Vaults accept deposits of a specific ERC-20 token and issue shares representing proportional ownership of the vault's assets and any generated returns.

Key Functions

• Asset management (deposit/withdraw)
• Share conversion calculations
• Maximum operation limits
• Standardized interfaces for DeFi integration

This standard enables seamless integration between different vault strategies and DeFi protocols.

Token Extensions and Customizations

Real-world token implementations often extend basic standards with additional features:

Common Extensions

• Access control: Owner privileges for minting, burning, or recovery
• Supply management: Caps on total supply or controlled minting
• Compliance features: Whitelisting and blacklisting capabilities
• Recovery mechanisms: Backdoors for fund recovery or emergency stops
• Crowdfunding functions: Token sales and distribution mechanisms

Trade-offs

Extending token standards involves balancing innovation and specific requirements against interoperability and security. More features often mean more complexity and potential attack vectors.

Choosing the Right Standard

Selecting the appropriate token standard depends on your specific use case:

• ERC-20: Fungible tokens, currencies, utility tokens
• ERC-721: Unique collectibles, certificates, gaming items
• ERC-777: Enhanced fungible tokens with hooks (use with caution)
• ERC-1155: Multi-token applications, gaming, complex asset management
• ERC-2612: When gasless approvals improve user experience
• ERC-4626: Yield-bearing vaults and investment strategies

Understanding these standards empowers developers and users to make informed decisions about token implementations and interactions within the Ethereum ecosystem.