Tokens, Standards, NFTs and Asset Identity

Token standards make it easier for applications to recognise common functions. They do not guarantee genuine assets, valuable rights or safe contracts. This lesson compares interchangeable tokens, unique-token identifiers and multi-token systems, then connects technical identity to the rights a holder actually receives.

Education only. Crypto assets can lose substantial value or become worthless. No lesson requires buying an asset, depositing money or sharing real passwords, private keys or recovery words.

Meet ERC 20 the common token standard

Think about electrical sockets. Because every socket in a country follows one standard, any lamp or charger built for it plugs in and works.

Token standards do the same job on Ethereum. A token is not a coin with its own blockchain; it is a set of balances kept inside a smart contract. ERC-20, proposed by Fabian Vogelsteller in November 2015, is the standard for fungible tokens, where each unit is identical to every other, like one €10 note and another. Because every ERC-20 token offers the same basic functions, wallets and apps can support a new one without custom work. Many stablecoins from the stablecoin and transfer lessons in Level 3 are ERC-20 tokens, and Level 5 sorts tokens by purpose.

Four functions are worth recognising: transfer (send tokens), approve (let another address spend some of your tokens), allowance (check how much that permission covers) and transferFrom (let the approved address move them). The last three are the heart of approvals, coming shortly.

The socket analogy has limits. A socket standard is enforced by safety law; an ERC-20 contract only promises the basic functions, and what else its code does depends on its author. ethereum.org also notes that ERC-20 tokens sent to a contract not built to handle them can be stuck for good, with more than US$83 million lost this way by mid-2024.

Fungible tokens are interchangeable by design. The next standard was built for things that are not.

Understand NFTs ERC 721 and ERC 1155

Compare a banknote with a concert ticket. Any €20 note can replace any other. A ticket for seat 14, row C, cannot be swapped for seat 3, row Z without changing what you get. The ticket is non-fungible.

ERC-721, proposed by William Entriken, Dieter Shirley, Jacob Evans and Nastassia Sachs in January 2018, is the standard for non-fungible tokens (NFTs). Each token has its own ID, and "contract address plus token ID" is unique worldwide. ethereum.org lists uses such as collectibles, access keys and numbered event seats. Ethereum Name Service (ENS) names, readable names ending in .eth, are NFTs too.

NFTs grew from games and art. CryptoKitties, a game for collecting digital cats, launched in 2017. In March 2021 Christie's auctioned an NFT of an artwork by Beeple for US$69 million, bringing NFTs into mainstream news.

A third standard, ERC-1155, is the multi-token standard. One contract can hold many kinds of token at once, some fungible and some unique: picture a game's thousands of identical gold coins and a single legendary sword. It can also move several items in one batch, which saves gas.

So an NFT records who holds a token ID. The harder question is what that record actually gives you.

ERC-1155 can manage multiple token types with different quantities in one system. They do not determine a fair price or every implementation detail. Two tokens following a common standard are not the same asset. A marketplace thumbnail is not a complete asset identifier.

Native coins wrapped coins and bridged claims

ETH is native to Ethereum, while a contract token is tracked through its contract state. A wrapped asset commonly represents another asset through a defined mechanism. Some wrapping occurs within one chain's contracts; bridging can move exposure between networks and introduce different parties. These arrangements should not be grouped together without explaining their actual backing and redemption.

A wallet can display both a native asset and a representation with similar names. The representation's usefulness depends on the mechanism and applications accepting it. An issuer-backed representation may rely on custody, while another design may rely on a contract conversion. Map the claim and the exit route. A matching market price does not make the underlying rights and failure risks identical.

A wrapped token is like a gift voucher for an item held in a shop's stockroom. The voucher is handy to pass around, but its value depends on the shop still holding the item and honouring the voucher.

A wrapped token is a token on one network that stands for another asset, one for one, and can normally be swapped back for the original. There are three common kinds:

• Wrapped ether (WETH). ETH itself is not an ERC-20 token, so WETH wraps it into one, letting apps treat ETH like any other ERC-20 token. The ETH is held by a contract, not a company.

• Custodian-wrapped assets, such as wrapped bitcoin (WBTC). A custodian holds the real bitcoin, and for every WBTC on Ethereum, one BTC is meant to sit in reserve. You are trusting that custodian to keep it there.

• Bridged tokens. A token minted by a bridge, like the "1 bridged ETH" in the diagram. Its backing is the bridge vault.

Each wrapped token adds a layer of trust: in a contract, a custodian or a bridge. In 2022, several bridges showed what happens when that layer fails.

Verify identity decimals and issuer documents

Check the intended network, verified contract and issuer documentation. Decimals tell an interface how to display raw units. A contract with six decimals represents 1,000,000 raw units as one displayed token; a different decimal setting changes that scale. This does not change the economic value or prove the token's legitimacy. Fake tokens can copy symbols, names and images.

Unsolicited tokens may appear in a wallet without any action by the user. Their names or metadata may lead to malicious sites. Do not interact just because an apparent balance has a large price label. Verify whether a genuine market and rights exist, and never follow instructions embedded in unsolicited token metadata to claim or unlock value. A displayed holding can be spam rather than a windfall.

NFT ownership and separate rights

Owning an NFT is like holding a numbered certificate for a painting. It shows you hold that item. It does not, by itself, give you the painting's copyright, and it may not even include the painting.

In practice, buying an NFT usually gives you the token, not the copyright. Any rights to use or copy the image come from the licence the creator attaches, which differs between projects, so read it. The media is also often stored off the blockchain: the token points to a metadata link, and if that link stops working, your token can point to nothing.

There are other risks. There may be few buyers when you want to sell, so prices can fall to near zero. Copycat collections imitate famous ones. And because NFTs sit in the same wallet as your other assets, a phishing link aimed at them can endanger everything else.

To buy, sell or use any of these tokens, you usually connect your wallet to an app. That connection is where permissions begin.

Holding an NFT generally means controlling a particular token under its contract rules. An image may be stored through a link rather than entirely in the token, and that link or hosted content may change or become unavailable. For a tokenised real-world asset, identify the legal issuer, enforceable claim, custody of the outside asset, jurisdiction and redemption restrictions. A token cannot by its own technical existence establish that a house, bond or artwork legally belongs to the holder.

Minting freezing transfers and upgrades

Contracts may permit minting, burning, freezing, transfer restrictions or upgrades. Minting creates units under the contract's rules; burning removes units under those rules. Neither operation alone establishes a holder's return. A token with administrator powers may be unusable or altered in ways that a holder did not expect if those powers are overlooked.

Inspect who holds the powers, whether limits exist and which version of the code applies. Some transfers deduct a charge or behave differently from a simple token example. A successful appearance in a wallet is not evidence that selling or transferring will work. Later token research combines these technical facts with allocation, liquidity and legal rights to produce a useful dossier instead of a list of attractive slogans.

Try the following questions aloud or on paper before opening the worked answers. Compare your reasoning as well as your final answer.

References and further reading