What is a blockchain token?

Token is defined as a cryptographic unit of value issued, typically, intended to be means of transaction in an ecosystem or a platform. Practically anyone can issue a token, be it a startup, an organization or a person, but recently tokens have gained popularity as a unit powering emerging fundraising models, such as ICOs, STOs, and IEOs. Depending on their properties, such as total supply, utility, legal status, and many others, tokens have greatly varying value. Tokens are supported by blockchains, where they exist in the form of registry entries, can be stored and transferred. One of the first tokens were the ERC20 operating on the Ethereum protocol, and even though many newer blockchains possess comparable token and smart contract support qualities, Ethereum ecosystem still retains dominance in this regard.

The intended primary function of tokens is to power transactions, directly or via smart contracts and protocols, within a certain ecosystem, rather than being traded for fiat or cryptocurrency on exchanges (although they may be traded on exchanges, by all means, if it’s technically possible and the tokens have enough liquidity). If we are talking of tokens compared to how gambling functions, the casino chips, just as tokens, power games within the casino and hold a certain value, but unlike blockchain tokens, they are not supposed to have liquidity outside of their native “ecosystem”. A lot of blockchain game items happen to require these properties and a certain degree of liquidity (in order to be tradeable), so this is a use case to keep in mind.

In this article, we will attempt to briefly review the evolution of token types on the example of Ethereum blockchain and in context of gaming applications.

ERC-20 Token - the Industry Standard

The ERC-20 standard used in Ethereum smart contracts contains just six basic functions that make the token functional, yet these tokens are currently the industry standard, their functionality being sufficient for such use cases as proof of ownership (a share in a company), points for various apps or loyalty programs, and DApps, including even some basic blockchain games.

While the ERC-20 standard is very useful, it’s far from perfect. For instance, a single design flow with ERC-20s made it possible for tokens to be lost when people mistakenly send them to a smart contract, using the process they would use for sending tokens to an ordinary wallet.

ERC-20 Tokens:

ERC-223 - a Step Forward

ERC-223 addresses this design flaw by allowing users to transfer tokens to smart contracts and wallets with the same function. Additionally, ERC-223 tokens improve on the efficiency of ERC-20s by making transfers require only one step rather than two. That means that ERC-223 token transfers require only half the Gas as compared to ERC-20 transfers.

On top of that, ERC-223 tokens are backward compatible with ERC-20 tokens, meaning that they maintain all the original functionality while solving those oversights mentioned above.

As a result of these advantages, the ERC-223 standard may someday replace ERC-20 as the most widely used standard for Ethereum tokens. However, most Ethereum wallets do not yet support ERC-223 tokens, so adoption by project developers has been slow, and given the decentralized nature of the blockchain industry, could still take a while.

ERC-223 Tokens:

  • Address key flaws with the ERC-20 token standard
  • Require only half the Gas of ERC-20 tokens
  • Are backward-compatible with ERC-20
  • Have not yet achieved wide adoption

ERC-721 - Implementation of NFT (Non-Fungible Tokens)

The key difference between the ERC-721 token standard and other ERC standards is that ERC-721 enables developers to easily create non-fungible tokens (NFTs). In other words, one token can be worth a different value than another token that’s being exchanged within the same ecosystem.

Non-fungible tokens are extremely useful because they enable the tokenization of unique individual assets. That includes carefully bred digital cats (CryptoKitties was one of the most famous use cases for ERC-721), but also much more conventionally valuable assets such as artwork, vintage wines, real estate, diplomas, and other real-world assets.

ERC-721 Tokens:

  • Are non-fungible tokens (NFTs)
  • Can be used to tokenize unique individual assets
  • First used by the Ethereum DApp CryptoKitties, but have many possible applications beyond digital gaming

ERC-1155 - a Flexible Standard for Crypto Items

Modern multiplayer games, especially those that involve collectible items, can have tens of thousands of different items that players can own, use and transfer to each other, or perform even more complicated manipulations depending on game mechanics.

The biggest problem with existing token designs is that they require deploying a separate contract to the blockchain for each and every item type.

It’s like being forced to buy a brand new computer for every single app you want to use.

What does it do to the blockchain? Every single distributed node will need to keep each token’s code and interface alive for (almost) eternity. The performance and cost would be too much for any budget to bear.

ERC-1155 takes a new approach to defining tokens. Items are now stored in a single contract with the minimum possible amount of data needed to distinguish the token from other ones. The contract state contains configuration data per Token ID and all the behavior governing the collection.

In ERC-1155, it’s possible to send any number of items to one or multiple recipients in a single transaction. This reduces gas and congestion on the Ethereum transaction pool.

Besides, while ERC-20 is limited to fungibles, and ERC-721 is limited to contracts with individual unique copies of items. The two token types are not very compatible or mixable.

ERC-1155 crypto items improve on this by combining the benefits of both. This token type enables developers to create thousands of different types of items for their games and depending on the use case, each unit may have a unique index or be fully fungible with the others.

It’s important to note, that this particular standard is open, and it’s a community effort that can be observed on Github. With the rise of blockchain games and platforms like Enjin Coin, game developers may be creating thousands of token types, and a new type of token standard is needed to support them. However, ERC-1155 is not specific to games, and many other applications can benefit from this flexibility.

Looking Ahead

The Ethereum platform (as well as its competitors) isn’t staying static and neither are the token standards for building on top of it. While ERC-20 tokens dominate the Ethereum-based portion of the market, for now, the future should see more and more projects moving to the new and improved token standards, enabling the development of all kinds of blockchain-based games, not necessarily limited to casino-type games.

With over 100,000 Token Contracts already live just on Ethereum blockchain, the pace of development is showing no signs of recession. Most of those tokens will no doubt be redundant, useless, and valueless, but a select few of them might just change the world as we know it.

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