Lesser-Known ERC Tokenization Standards On Ethereum

Introduction to ERC Token Standards

The crypto ecosystem is populated by two main types of blockchain-based digital assets: cryptocurrencies and tokens. Cryptocurrencies are the native assets of particular blockchains, while tokens represent units of value developed on top of pre-existing blockchain networks. For example, the Ethereum network’s native cryptocurrency is ether (ETH), and the thousands of other digital assets the network supports — such as UNI, MKR, and BTT — are Ethereum tokens.

Rather than creating entirely new blockchains from scratch, many new blockchain projects elect to build on top of existing blockchain architecture that is already well-established and suited to their needs. Without a native blockchain to host a native cryptocurrency, the vast majority of blockchain-based digital assets exist as tokens that are supported by underlying networks like Ethereum. The vast majority of tokens in existence within the blockchain ecosystem are built on top of Ethereum.

Tokenization standards outlining rules and technical specifications have developed over time, helping to increase the speed and efficiency with which developers can create new tokens. These standards are essentially templates that provide built-in interoperability with other tokens of the same structure. Interoperability and composability are especially important considerations when building new decentralized finance (DeFi) applications that require compatibility with the existing DeFi ecosystem.

Drawing on the experience and innovation of the decentralized Ethereum community, anyone can author and submit an Ethereum Improvement Proposal (EIP) to create a new tokenization standard. These EIPs are presented as Ethereum Request for Comments (ERCs), and solicit the feedback of community members before potentially advancing to become full-fledged tokenization standards.

The ERC-20 token standard is by far the most popular and widely used standard interface for creating fungible (or interchangeable) tokens. With it, developers and entrepreneurs can build new tokens that interoperate within Ethereum’s ecosystem of decentralized apps (dApps), but despite it being the most popular, other ERC token standards have seen rising popularity and use cases as well, like the ERC-721 tokenization standard, which represents the most prevalent iteration of non-fungible tokens (NFTs).

In addition to ERC-20 and ERC-721, a number of other ERC token standards have emerged to support a variety of different use cases, and are increasing in popularity throughout the Ethereum ecosystem. Here, we will discuss some of those lesser-known Ethereum tokens, many of which are targeted at improving various functionalities of the ERC-20 standard, and all of which are aimed at furthering the growth and development of the Ethereum network at large.

What Is ERC-223?

ERC-223 was conceived to help prevent tokens from accidentally becoming permanently lost due to mistakes made when transferring tokens between wallets or smart contracts. The ERC-20 token standard noticeably lacks any sort of recovery mechanism for tokens sent to incompatible addresses or smart contracts. If, for example, ERC-20 tokens are sent to an ERC-721 smart contract, or to any smart contract that isn’t designed to support ERC-20 tokens, the tokens would not be rejected and returned — instead, they would be lost forever. This is because the receiving contract simply would not be able to recognize incoming transactions of ERC-20 tokens. These accidents happen more often than many consider, with several millions of dollars’ worth of tokens permanently lost due to incompatible addresses and other errors made during token transactions.

The ERC-223 standard proposes added token recovery functionality — with a feature called tokenFallback — that would enable ERC-223 smart contracts to recognize incoming transactions and return tokens to their original sender in case they are accidentally sent to incompatible smart contracts. By design, ERC-223 is backwards compatible with ERC-20, and therefore would support all existing and functional ERC-20 contracts and services.

As of 2021, ERC-223 has not been implemented as a finalized ERC token standard, and even its status as a draft has been removed. Many of the Ethereum developers interested in solving the problems that ERC-223 is intended to address opted instead for the newer, slightly more nuanced ERC-777 token standard.

What Is ERC-777?

Similarly to ERC-223, ERC-777 is characterized by efforts to improve upon the widespread ERC-20 tokenization standard platform, featuring the addition of several advanced features for token interaction.

First, ERC-777 entails the creation of a new classification of addresses known as operators, which are able to send tokens on behalf of another address. Within the ERC-777 token framework, operators are envisioned to be verified smart contract facilitators such as a cryptocurrency exchange, or an automatic charging system — both of which might accelerate their services by automatically withdrawing or sending funds from a token holder’s wallet (with permission).

While, in theory, every Ethereum address is responsible for moving its own tokens, separating the concepts of operators and holders could allow for more flexibility in the Ethereum ecosystem. This framework is also designed to allow token holders to easily authorize and revoke permission from particular operators who might send and receive tokens on their behalf.

Another advanced feature of ERC-777 tokens is the ability to send and receive hooks, which enable smart contracts, addresses, and operators to be made aware of incoming transactions and control and reject which tokens they send and receive. By deploying hooks to accept or reject certain types of tokens, transaction recipients may limit the occurrence of incompatible token type transfers which might otherwise result in tokens becoming lost.

The ERC-777 tokenization standard is backwards compatible with ERC-20 and builds upon its functionality rather than rendering the standard obsolete. ERC-777 has also been proposed to improve upon perceived shortcomings and vulnerabilities of the older ERC-223 tokenization standard, with hooks reprising the role of ERC-223’s tokenFallback function. As of August 2021, the ERC-777 token standard is one of only a small batch that has achieved a finalized status in the Ethereum community, though it is still not used nearly as often as the de facto gold standard ERC-20.

What Is ERC-1155?

Also finalized, the ERC-1155 multi-token standard introduces a powerful smart contract interface that enables smart contracts to manage any amount of fungible and non-fungible token types. Typically, ERC-20 tokens, ERC-721 tokens, and other token types are wholly managed by their own respective smart contracts. ERC-1155, however, is designed to allow for any number of token types to be supported and managed by a single smart contract. This functionality has the potential to greatly reduce computational overhead for decentralized applications (dApps) composed of different types of tokens and smart contracts.

For example, the rise of blockchain-based gaming has introduced the possibility for game developers to create potentially thousands of different token types — both fungible and non-fungible — to fulfill various in-game functionalities. ERC-1155 smart contracts are capable of supporting all major Ethereum standards in one convenient location. ERC-1155 also allows for new functionalities such as transferring multiple types of tokens in a single transaction, cutting down on overall transaction costs, and increasing transaction speed and network efficiency.

What Is ERC-1337?

ERC-1337 is a proposed ERC token standard designed to accommodate blockchain-based recurring subscription models, such as monthly subscriptions to access particular content. Monthly subscription models — and other Software-as-a-Service (SaaS) models — are widely used by traditional providers of popular web-based services such as editorial content, streaming platforms, cloud-based storage, and countless other applications. ERC-1337 is designed to help bring the same recurring payment structure to the world of blockchain and decentralized services.

When processing recurring payments, a traditional web merchant will typically store a token that is retrieved from a payment processor that in turn grants them permission to charge a customer’s designated payment method, like a credit card. In this case, the merchant doesn’t actually store the credit card information itself, but only a token (or abstracted representation) of that information that helps retrieve the necessary data from the third-party processing service upon the date of the recurring payment.

ERC-1337 is similarly structured to enable users to sign transaction input data that allows merchants to store the customer’s signature to retrieve recurring payments in the form of pre-signed transactions according to a set schedule. So, for example, a yearly subscription divided into monthly payments would require 12 pre-signed transactions. This system would allow users to make recurring contributions to blockchain-based projects of their choosing with the ability to cancel at any time — a less complex, less committal version of actually purchasing and holding a project’s native token.

ERC-1337 focuses on enabling Ethereum wallets to sign recurring payment smart contracts, as well as providing an accessible user interface for managing subscriptions on the blockchain. ERC-1337 is still in a draft stage as of 2021, and will likely receive many more changes before its eventual finalized implementation. Nonetheless, the potential for ERC-1337 to usher in a bonafide subscription economy on Ethereum is an exciting prospect for the ecosystem at large.

The Future of ERC Token Standards

As token standard development and EIPs are ongoing community-driven initiatives, the ERCs discussed here by no means represent an exhaustive compilation, but rather a mere snapshot of ERC token standard development. It is likely that as long as the Ethereum network is operational, an increasing number and variety of tokenization standards will be developed to satisfy all kinds of use cases.

That said, the tried-and-true ERC-20 token standard is still the most widely used as of 2021 — and for good reason. Many believe it presents the narrowest surface area for potential attacks, and that other more complex tokenization standards have the potential to increase network congestion or transaction costs. But as Ethereum and its DeFi ecosystem continue to grow exponentially, perhaps the need for more complex, interoperable, and accident-proof tokenization standards might trump the simplicity and ubiquity of established standards like ERC-20.