Tokens and Token Standards

The Concept

A blockchain's native currency (BTC on Bitcoin, ETH on Ethereum) is built directly into the protocol — it's what miners or validators earn, and it's what gas fees are paid in. A token, by contrast, is an asset created by a smart contract that runs on top of an existing blockchain, without needing its own separate network, miners, or validators. Instead of inventing new consensus rules, a token's creator simply writes a smart contract that keeps a ledger of balances (who owns how much of this token) and rules for transferring it, and lets Ethereum's (or another chain's) existing nodes enforce those rules for free, the same way they enforce ETH transfers.

This only works at scale because of token standards — shared technical specifications that define exactly which functions a token contract must implement, so that wallets, exchanges, and other contracts can interact with any compliant token without custom code for each one. The most important standard is ERC-20, used for fungible tokens — tokens where every unit is interchangeable with every other unit, like dollars or shares of a company. An ERC-20 contract must implement a small, fixed set of functions: totalSupply() (how many tokens exist), balanceOf(address) (how many a given address holds), transfer(to, amount) (move tokens from sender to recipient), and a few others like approve() and transferFrom() that let a user authorize a third-party contract (such as a decentralized exchange) to move tokens on their behalf, up to an approved limit. Because every ERC-20 token implements the exact same interface, a single wallet app can display and send thousands of different ERC-20 tokens without the wallet's developers writing custom code for each one.

The second major standard, ERC-721, defines non-fungible tokens (NFTs) — tokens where each individual unit is unique and not interchangeable with another, covered in depth in the next lesson. A third common standard, ERC-1155, lets a single contract manage a mix of fungible and non-fungible tokens together, useful for things like video game items where some items are identical stacks (ammo, currency) and others are unique (a specific sword) — without deploying a separate contract for every item type, which saves significant gas cost for projects with large item catalogs.

Token standards matter because they turn "building a new asset" from a months-long engineering project into something that can take an afternoon — deploy a contract that implements the standard interface, and immediately every wallet, exchange, and decentralized application that already understands that standard can interact with it, no partnership or custom integration required. This is also why scams are common: deploying a token is cheap and easy, so the existence of a token following ERC-20 says nothing about whether the project behind it is legitimate, has real utility, or has a trustworthy team — the standard guarantees interoperability, not quality or honesty.

Other chains have their own equivalents — Solana's SPL token standard and Bitcoin's newer token protocols (like BRC-20, built unconventionally on top of individual satoshis) serve a similar purpose on their respective networks, even though the technical implementation differs from Ethereum's.

Worked Example

Imagine "BlockCoin," a new ERC-20 token someone deploys on Ethereum with a total supply of 1,000,000 tokens, all initially assigned to the creator's address. Because the contract implements the standard transfer function, the creator can immediately send 100 BlockCoin to a friend's wallet address using any standard Ethereum wallet — the wallet software doesn't need any BlockCoin-specific code; it just calls transfer(friend_address, 100) on BlockCoin's contract address, the same generic call it would make for any other ERC-20 token. A decentralized exchange can also list BlockCoin for trading against ETH without custom integration, because it already knows how to call balanceOf and transfer on any contract following the ERC-20 interface, and can use approve/transferFrom to move BlockCoin into its liquidity pool on the user's behalf. This is the practical payoff of a shared standard: BlockCoin works everywhere ERC-20 is understood, from day one, with zero coordination required between BlockCoin's creator and the wallet or exchange developers.

Exercise

In two or three sentences, explain why a new token following the ERC-20 standard can be listed on an exchange or displayed in a wallet without that exchange or wallet's developers writing any custom code specifically for it — and contrast that with how much work it would take if every token used its own unique, non-standard set of functions. Then, in one more sentence, explain why the mere existence of a working ERC-20 token tells you nothing about whether the project behind it is trustworthy.

Recap

• A token is an asset defined by a smart contract running on an existing blockchain, rather than a chain's own native currency.
• Token standards (ERC-20 for fungible, ERC-721 for non-fungible, ERC-1155 for mixed) define a shared interface so wallets and exchanges can support any compliant token automatically.
• Standards turn creating a new asset into deploying a contract, not building new infrastructure — which is powerful for legitimate builders and easily abused by scammers, so the standard itself is never a sign of trustworthiness.