One of the most useful features of Ethereum technology is its ability to host other cryptocurrencies, known as ‘tokens’, directly on its blockchain. These tokens are established and managed by a smart contract, which self-executes commands based on a unique, immutable code.
There are several different types of tokens on the Ethereum blockchain, and multiple sub-categories exist within those types. We’ll take a quick look at the most popular token varieties and address some aspects of their uses.
The most common type of token launched on the Ethereum blockchain follows the ERC20 standard. ERC stands for ‘Ethereum Request for Comment’, which is basically a development proposal for the framework of the Ethereum blockchain. Proposals for new features or standards on Ethereum can be proposed to the developer comunity, and if accepted, they are built and extensively tested before being added to Ethereum mainnet operations.
You can read about the way token standards work in out smart contracts article, but all you really need to know is that ERC20 tokens are the kind you see most frequently in crypto. Each has a pre-specified supply and purpose, while still relying on ETH for the gas (transaction fees) to deploy the contract. These tokens hold their own value separately from ETH, and can have hundreds of uses and applications. Crypto projects use tokens to attract users and build communities, to supply liquidity, and to create governance structures.
For an in-depth look at stablecoins, check out our stablecoin explainer. The short version is that stablecoins are a sub-genre of ERC20 tokens that maintain the same value by being pegged to a real-world asset, usually a fiat currency like the US dollar. Stablecoins create a safe space for investors and those looking to decentralize their financial lives to explore crypto in a less volatile, more familiar way.
Some stablecoins are backed directly by real fiat currencies, some are backed by physical assets like gold, and some are managed by smart contracts to keep the value stable at a predetermined price. DAI, for example, is managed by smart contracts that keep its value at $1 USD. This process allows DAI to remain fully decentralized, while other types of stablecoins have been criticized for using a centralized foundation to maintain their stability.
It’s important to note that not all stablecoins are ERC20 tokens. Some are based on their own blockchains, separate from Ethereum (one well-known example is Tether), and they can’t be stored in an ERC20/ETH wallet.
Tokens Moving to Mainnet
Occasionally a project with an ERC20 token can get too large or ambitious to stay on the Ethereum blockchain. They may want to change the framework of the technology that their currency runs on, or they may just simply want more control over what they can and can’t do. When this happens, the team can decide to transition to mainnet.
This means the team is building their own separate blockchain for the token, in order to graduate it to a separate coin. It is no longer bound to Ethereum in this case, but instead becomes a currency on a different blockchain. These currencies can not be kept in Ethereum wallets, so generally the token’s team will hold a swap on a major exchange like Binance. The exchange takes the ERC20 tokens and swaps them for the new coins which are placed into a different wallet on the new blockchain. Old tokens can lose their value during token swaps, so it’s important to follow updates on all your token investments to see if they plan to transition to mainnet.
Non-Fungible Tokens, or NFTs, are very different from the regular, ERC20 tokens. Tokens like DAI Each NFT represents a single, unique thing. No two NFTs are alike, so holding one proves without doubt that you are the true owner of whatever it represents. Whether that’s a digital collectible character (like a CryptoPunk) or the deed to your house, NFTs are ground-breaking for their individualized properties that can be applied to both digital objects and real-world assets.
Airdrops and Spam Tokens
Anyone can build a token on the Ethereum blockchain – there are no licenses or permissions required, and no rules to observe. Creators can also send, or 'airdrop' their tokens to a wide range of Ethereum wallet addresses – or even to all existing addresses! – as a way of marketing their project.
On one hand, this lowers the barrier to entry for developers and opens the door to innovation. On the other, it means that random, unsolicited tokens can appear in your wallet without your knowledge. A token can't 'infect' your wallet with a virus just by being there. However, scammers can create a web DApp where they will offer to help you trade these tokens. After you connect your wallet, the scam DApp can get you to approve a transaction for other tokens in your wallet and move your coins out. So, stay vigilant – if it's too good to be true, it usually is.
In all aspects of life, things change. The Ethereum blockchain is no exception, and it benefits from an active community of ambitious developers always working on improvements to the ecosystem as a whole. One such improvement in the works is the ERC223 token standard.
ERC20 tokens have many functions, but one thing you should never do is send them directly to a smart contract. Remember, each token is tied to a smart contract that governs its actions through code. One shortcoming of ERC20 smart contracts is that if they receive tokens directly to the contract address, they cannot send them back out again.
ERC223 seeks to fix this issue with a fallback ‘return to sender’ function, where these misplaced tokens can be returned, instead of stuck permanently in a smart contract. Since the Ethereum blockchain is immutable, this only applies to contracts that will be created after the widespread adoption of this new code. All tokens that are currently stuck in smart contracts will remain there indefinitely.
New token standards are constantly being innovated by the Ethereum community – ERC777, ERC1155, and others. If this is something that interests you, a good place to explore new Ethereum proposals is the Fellowship of Ethereum Magicians, an active discussion board for Ethereum developers. For now, ERC20 and ERC721 are the most widely used and accepted token standards for Ethereum, but as other proposals become fully implemented, MEW is committed to integrating the latest Ethereum technology with the platform.
That’s all folks!
Now you’ve been acquainted with the basic categories of tokens that exist on the Ethereum blockchain at this time. Take this information with you when searching for cryptocurrencies to invest in, because the choices can get overwhelming. New tokens are being launched daily, but it’s up to the investor to determine if their vision and goals align with the token’s purpose.
If you feel strongly about these subjects, join the discussion on Reddit or Twitter. Make yourself heard! The Ethereum community is very accepting of new ideas. While you’re at it, don’t forget to follow us on Twitter and Reddit for updates and more educational articles, like this one.