Ethereum Tokens 101
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.
While there are several different token types in existence, the most popular and widely used is the ERC20 standard, which covers most popular tokens like USDT, DAI, LINK, UNI, SHIBA INU, and thousands more. The other standard that has gotten a great deal of mainstream exposure lately is the ERC721, also known as… the NFT! Let’s take a quick look at these token types and address some aspects of their use, as well as a few security tips to keep in mind.
ERC20
The most common type of token launched on the Ethereum blockchain follows the ERC20 standard. A little background: 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 community, 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 our smart contracts article, but all you really need to know is that each ERC20 token has a pre-specified supply and purpose, while still relying on ETH for the gas (transaction fees) to deploy the contract. Still, 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.
Stablecoins
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 offer the opportunity 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 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 may not be compatible with 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 tokens to see if they plan to transition to mainnet.
NFTs (ERC721)
Non-Fungible Tokens, or NFTs, are very different from the regular, ERC20 tokens. Tokens like DAI are fungible – this means that like a dollar bill, one DAI token is just the same as another DAI token, with the same value no matter who uses it and where it’s presented. Each NFT, on the other hand, 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.
It’s worth keeping in mind that just like any other unique thing – a painting, a house, a song – the value of each NFT is in the eye of the beholder. An NFT series that is hyped by every influencer and celebrity today may or may not be worth more, or anything at all, in a few months or years time. Do your research and make your own judgment on what you are willing to spend – and possibly lose.
Airdrops, Spam, and Scams
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 Ethereum 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 actually get you to approve a transaction for other tokens and move your coins out. This kind of scam can affect NFTs as well: interacting with an NFT that someone dropped to your address can give the scammer a way to compromise the wallet.
In general, it’s a good idea to be aware of the approvals and permissions you give to DApps with your wallet. Some DApps can request unlimited permissions, which means you could end up spending much more than you intended. In other cases, what you think is an approval for one token can actually end up being an approval for other assets in your wallet. Whenever a DApp requests that you sign a message, carefully consider whether you trust the DApp, and avoid interacting with NFT platforms or exchanges that you are not familiar with. Of course, the usual best practices apply: use a reputable secure wallet, never give anyone your keys for any reason, double-check urls and certificates of websites, be extra vigilant when interacting with anyone who claims to be support.
Token innovation
The Ethereum blockchain benefits from an active community of ambitious developers who are always working on improvements to the ecosystem as a whole, and this includes new token standards. Some promise to improve security of transactions, others add token functionality, and a few may end up creating entirely unprecedented markets, like NFTs have done.
With the emergence of Ethereum scalability chains and layer 2 solutions, tokens and NFTs can be minted more cheaply off the Ethereum mainnet, and the variety of available tokens is always growing. Just keep in mind that not all wallets will support tokens on all networks. MEW Mobile app supports all ERC20 tokens and Ethereum-based NFTs, plus assets based Base, Polygon, Binance Smart Chain, and zkSync. Our multichain Enkrypt browser wallet supports over 70 natively integrated networks, AND custom EVM networks, so you are likely to find support for almost any token you can think of.
To have fun with tokens securely, download MEW Mobile or Enkrypt browser wallet for easy token purchases, swaps, bridging and NFT management. And for the latest news on all things Ethereum, sign up for our newsletter and follow us on Twitter!