Standardizing value: Why token standards are critical for non-fungible tokens

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The CoinFund Blog

7 min readAug 3, 2018

What do railroads, credit cards, and CryptoKitties have in common? The answer is that they were all enabled by industry standards. As a definition, industry standards are established norms or requirements followed by the members of an industry. Many industries have embraced standards as a way to unlock value from emerging technologies. I believe that cryptoassets, and specifically non-fungible tokens (NFTs), will follow a similar path.

Historical examples

Standards can be physical. The invention of the railroad was a fast, cheap and effective way of sending products cross-country. This was made possible by the standardization of the railroad gauge in 1886, which established the uniform distance between two rails on a track. Imagine the chaos and wasted time if a train starting out in New York had to be unloaded in Kansas because the tracks did not line up with the train’s wheels…

Standards can also be financial. In 1987, the International Organization for Standardization (ISO) established the ISO 8583 standard, which defined a message format and communication flow for electronic card payments. While some people pay for coffee using Bitcoin, most still rely on Visa and Mastercard, which built their payment networks on top of this standard.

Non-fungible Token Standards

So how does this apply to Turing-complete smart contract platforms such as Ethereum? The answer, which is also alluded to by Jake Brukhman and Chris Burniske, is that standards enable interoperability and integrations, both of which lead to increased utility and network effects for their associated cryptoasset.

The ERC-20 standard, proposed in November 2015 and adopted in September 2017, established the first standard for Ethereum-based fungible tokens. This standard enabled the first killer app of smart contract platforms — crowdfunding (i.e. ICOs). While there are proposals to improve the standard (e.g. ERC-223, ERC-677, ERC-777), ERC-20 continues to be widely used and has growing support from compatible wallets and decentralized exchanges.

I will focus on token standards for NFTs, however, because the design space is much larger (e.g. real-world assets, digital collectibles, gaming). Fundamentally, I believe that standards are the cornerstone of the NFT ecosystem because they will drive adoption for these various use cases.

ERC-721

The NFT ecosystem was ignited by the ERC-721 token standard, which was proposed in September 2017 and finalized in June 2018. Since then, many wallets, exchanges, and marketplaces have popped up that allow buyers to view and trade various NFTs on the same platform. For developers, interfacing with every type of NFT becomes painful if they all have different interfaces. Adhering to ERC-721 makes it easier for these projects because they only have to write code that interacts with the standard.

We will live in a world of multiple NFT standards, each of which is best suited for a specific use-case. Indeed, developers and industry practitioners have already begun to realize that ERC-721 isn’t fit for all use cases, such as certain real-world assets.

Not sure if there’s actually coffee beans in there.

To use an example, let’s say we want to track real-world objects such as sacks of coffee. Because each sack of coffee is not actually identical to each other, it is somewhat ideal for tracking as an NFT. We find, however, that at different points in the supply chain, sacks of coffee are divided and combined. This makes NFT’s tricky to implement and keep “attached” to these real-world objects. Specifically, there are two main issues that need to be addressed:

Divisibility: 1x100lb Sack of Coffee ->(Divided) 10x10lb Sacks of Coffee
Combination: 10x10lb Sacks of Coffee ->(Combined) 1x100lb Sack of Coffee

ERC-994

We could also view real estate within the realm of NFTs for real-world assets (i.e. each piece of land is unique). Unlike digital assets, physical property requires more than just an ID in a database; it also requires legal validity. Implemented within the Zone Protocol, ERC-994, or Delegated Non-Fungible Tokens (DNFTs), addresses the use case of land and physical property registration. In this standard, NFTs are arranged in a federated, tree-like format where NFTs can delegate and sub-contract NFTs within a certain area. DNFT “zones” can be established by land registry authorities as a root DNFT for a given area, and can delegate DNFTs as subdivisions of the root zone to existing property holders as a way to upgrade land registries.

ERC-420

You might be thinking: “But ERC-721 works great for all other crypto collectibles, right?” Not exactly. Recently, PepeDapp, the Ethereum version of Bitcoin’s Rare Pepe, announced that it will not be an ERC-721 standard and instead is creating its own token standard, ERC-420. This is because each card has multiple instances, identical with one another but different from other cards. So, each card is fungible with cards of the same type. If adopted, ERC-420 might become the standard for collectible cards, like Magic the Gathering or Pokemon.

ERC-809

Furthermore, what if I want to rent my CryptoKitty? Don’t stress, dawg, ERC-809 has you covered. This standard would allow for any “rival” NFT on Ethereum to be handled by general purpose applications for renting purposes. A good is rival if its consumption by one individual prevents simultaneous consumption by other individuals. For example, driving a car is rival but watching the sunset is non-rival. With this standard, we can imagine new use-cases like breeding with CryptoKitties that you don’t own or renting land in Decentraland.

ERC-998

One of the biggest innovations enabled by NFTs is composability. This property enables digital assets to be assembled in various unique combinations. In other words:

“You own the cat. But the cat owns the hat.”

Enter ERC-998, a proposed standard for crypto composables. It is effectively an ERC-721 token with added functionality for owning or being owned by other ERC-721 tokens. An ERC-998 can also own ERC-20 tokens.

ERC-998 could enable several use-cases. For fashion, one could create outfits that group together different products from a given brand. For gaming and specifically virtual avatars, an avatar NFT can be equipped with digital items and accessories that can add value to that avatar.

ERC-1155

While on the topic of gaming, the team at Enjin have created the ERC-1155 Crypto Items Token Standard. In this standard, one can create many non-fungible and fungible tokens from a single contract and transfer batches of tokens. This model makes it possible to instantly create thousands of tokens, which would cost too much gas in the ERC-721 model.

ERC-725

In addition to real-world assets and gaming, we could also consider identity as a non-fungible token. Enter the ERC-725 standard, proposed by ERC-20 creator Fabian Vogelsteller and used by the Origin protocol. While the ERC-725 standard provides a single contract to manage identity, uPort takes a layered approach and utilizes the ERC-780 standard, a proposal for an Ethereum Claims Registry (ECR) which allows persons, smart contracts, and machines to issue claims about each other and themselves.

The next decade of (NFT) standards

It’s important to state that outside of ERC-721, none of these proposals are finalized. I don’t claim that it is these specific proposals that should be accepted by the community; instead, I claim that additional standards should be adopted to make a reality the many use cases that NFTs enable.

“Rough Consensus and Running Code”

Internet history can help inform us of potential ways token standards could play out over the next decade. In his book “Open Standards and the Digital Age: History, Ideology, and Networks”, Andrew Russell demonstrates that standards-setting doesn’t have to be a fully democratic process. He describes the rise of the Internet as a shift in standards-setting processes, away from the democracy of Open Systems Interconnection (OSI) and toward a middle ground between markets and hierarchies. This resulted in the more meritocratic process of the Internet Engineering Task Force (IETF), described by David Clark as “rough consensus and running code.” Here’s a secret — this has already been developing in the Ethereum community for years. In fact, the Ethereum Request for Comments (ERC) itself is based on the IETF’s Request for Comments (RFC)!

Chicken and Egg

At the recent NIFTY conference, Alex Attalah of OpenSea said the following:

“There’s a cognitive dissonance that we have between creativity and standardization; when you make a core standard, there’s an incentive to break the standard and do something creative that hasn’t been thought of by the community yet.”

I agree with this comment and predict that the standards-setting process for NFTs will continue along this route. We will see cycles of experimentation and standardization, with projects introducing successful use cases (i.e. those with wide-spread user adoption) and the developer community standardizing and building around those implementations. In fact, I believe it was because of the success of CryptoKitties that the ERC-721 standard was adopted.

Balance is important

While standards are good, too much of a good thing can be a bad thing. We don’t want a “Tower of Babel”(i.e. hundreds of standards), as Matt pointed out in his post. That said, I think we can arrive at a happy medium that balances both sides, with several standards emerging that are fit for most use cases. My ask is that the Ethereum (and any smart contract platform) community doesn’t become political about these standards and continues to compare each by its own merit. Overall, the progress in standard-setting has been impressive and is a testament to Ethereum as a platform. I’m looking forward to seeing how the industry continues to develop.

Thank you to Brian Flynn, Alex Attalah, and the CoinFund team for their feedback on this piece. You can find me on Twitter here.

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