NFT Deep Dive: ERC-721 Token Standards

Introduction

Now that we’ve written several articles discussing NFTs and NFT-related issues, it’s time to do a deeper dive and talk about some of the beautiful science behind it, which we call blockchain technology. If you’re not familiar with what a blockchain is, in simplest terms, it is a network of nodes (servers/computers) that store information/transactions and rely on each other for correct information. Of course, blockchain technology is much greater than that, and the whole network is interconnected with different elements that rely on each other to get the job done. It is also no different for NFTs, as there are a variety of things that make that one-of-a-kind, cute 8-bit monkey you just bought on OpenSea yours! You should all know by now that NFTs have much more utility than just being your Twitter profile picture, and the utility is dependent on several factors, namely smart contracts and token standards.

Smart Contracts and Token Standards – Explained

To understand token standards, it’s important to first understand smart contracts. Essentially, a smart contract is a program that automatically executes a transaction with the terms of the buyer and seller embedded into the code. The program and terms of agreement contained in it are then distributed across a decentralized blockchain network. Smart contracts also have to follow sets of standards that define the rules of the intended blockchain a smart contract must meet before interaction/use.

One of those smart contract standards is the token standard, which is often used to guide the creation, issuing, and deploying of new tokens on that blockchain. As evident by the majority of NFTs on OpenSea and virtually all other NFT marketplaces, Ethereum is the most commonly used in terms of building smart contracts, which has led to different kinds of standards to be developed for different types of smart contracts to be supported, such as ERC-721.

What is ERC-721?

What if we told you that you’ve been seeing, hearing, shopping for, and owning an ERC-721 token this entire time? Short for “Ethereum Request for Comment,” this token standard of the Ethereum blockchain is most well-known for its potential uses, and is most often referred to as another familiar name – non-fungible token (NFT).

Yes, the concept of NFTs and their unique characteristics were brought to blockchain technology with the help of the ERC-721 token standard, allowing distinctive details about individual digital assets to be registered into the blockchain. The ERC-721 token standard first became popular from the CryptoKitties NFT collection used for the blockchain game under the same name, and today, many of the most popular NFTs still use the same token standard, such as Bored Ape Yacht Club, Cool Cats, and the recently popular Invisible Friends collection.

Due to the unique characteristics of each ERC-721 token, it is believed that the utilization of this token goes far beyond its current uses of digital asset ownership, and used for real life applications such as representation of property, vehicle, business and other asset ownership. Of course, before we get to that point, NFTs, blockchain technology, and cryptocurrencies must be used in a law-abiding and moral manner for acceptance amongst the greater population and corporations.

Other Token Standards

Needless to say, with the vast world of blockchain technology, comes with a variety of different token standards. To keep things more simple, we’ll stick to the popular Ethereum token standards.

ERC-20

1. The most popular by far and used for most cryptocurrencies
2. Fungible – Each are identical and easily exchanged
3. Can be used for purchases, traded for fiat and other coins/tokens, in-game assets, and more!
4. Usually used for token generation events (TGE)/initial coin offerings (ICO)
5. Very versatile – Which is why it is so popular

ERC-1155

1. The most advanced Ethereum token standard
2. Aims to optimize transaction efficiency and security
   1. Bundle transactions (lowering transaction costs)
   2. Returns crypto sent to the wrong address (as opposed to losing them entirely with other token standards)
3. Helps combine ERC-20 and ERC-721 through development/utilization of non-fungible, semi-fungible (SFT), and non-fungible tokens
4. Can be used for creating both traded cryptocurrencies from TGE/ICO and non-fungible tokens; batch transfers of tokens, and more!

ERC-777

1. For fungible tokens fully compatible with decentralized exchanges
2. Utilizes “Hooks” which allows smart contract to “react” to transactions by
   1. Rejecting tokens on specific terms (i.e., amount less or greater than)
   2. Redirecting tokens to another address
   3. Etc
3. Allows users to add functionalities such as
   1. Mixer contract (greater transaction confidentiality)
   2. Emergency recovery feature (assists in the case of lost private keys)
4. Upgraded to the ERC-820 token standard due to its issues

Conclusion

To fully grasp the idea and appreciate NFTs, knowing the purpose of token standards and what they can do can be helpful. Using this information, you will be able to use another factor to assess the value of an NFT you are looking to buy and sell. Although this is not always the case, some NFTs can be worth a lot more than others depending on their utility, which is limited to the token standard they use. Who knows, perhaps if you keep learning, you’ll be able to contribute in the making of the next greatest token standard!