Ethereum request for comment (ERC) is a standard to implement a token. The Ethereum community adopts these standards to ensure that the projects built on top of the Ethereum network remain interoperable. These standards further ensure that the smart contracts follow specific rules, making development easier while ensuring platform usability.
The ERC standards are introduced as Ethereum Improvement Proposals (EIPs). The community members discuss the proposed improvements and approve the EIPs after they undergo a standard process.
There're many ERC standards which are all categorized into three token categories as follows:
Fungible tokens: These tokens are interchangeable because they are equivalent. To understand fungible tokens better, we consider an example of a dollar bill. The two dollar bills can be exchanged freely as they have the same value and are interchangeable.
Non-fungible tokens: These tokens—most commonly known as NFT—are used to represent unique tokens and can't be considered equal to another token in value, as it is one of their kind.
Semi-fungible token: This standard is considered the best of both worlds. These tokens are neither unique nor interchangeable. To understand this token better, consider an example of a game where an in-game object, like a car, can have multiple copies, each belonging to different players. They aren't NFTs because they aren't unique, as a car belonging to a player will be the same as another player's own but differentiated from the car’s ID.
Note: There're many more standards for each token type, but we consider the most commonly used ERC standards in this answer.
ERC-20 is one of the most widely used terms in the blockchain community. It's the most commonly used standard for implementing a token. It was introduced in 2015 to develop a standard for launching a new token. This made creating a token and launching it very simple, thus leading to the boom of Initial coin offerings (ICO) in 2017.
The ERC-20 smart contracts must contain six compulsory functions and three optional functions to meet the standard of ERC-20. These functions allow a standard interface that allows the tokens to be listed on different exchanges quickly.
ERC-20—although a very widely used standard—has some limitations. The most prominent of all is when some tokens are sent to a smart contract that isn't suitable for handling that token, those tokens will remain stuck there forever, thus leading to a loss of the tokens.
ERC-223 tends to solve this problem by implementing an extra function that approves the transaction only if the receiving smart contract can handle those tokens. Many more standards like ERC-777, ERC-621, ERC-884, and more build upon the ERC-20 and add more functionalities.
This standard is used to implement unique tokens representing valuable collections. The ERC-721 smart contracts must contain eight compulsory functions and two optional functions to meet the standard of ERC-721. This standard defines a specified amount of non-fungible tokens and functions to identify the owner of the NFT and transfer ownership of the NFT from one entity to another.
ERC-721 was the first standard to tackle the non-fungible token. It became widely used after the launch of the game CryptoKitties. The game clogged the Ethereum network because every transfer of ownership required a transaction resulting in a massive backlog of transactions. Another limitation of ERC-721 is that once the contract is deployed, no more tokens can be added to it, meaning for every new NFT, a new contract has to be deployed.
The ERC-1155 standard can overcome the limitations of ERC-20 and ERC-721. This standard requires the smart contract to implement six mandatory functions and four events. The ERC-1155 standard can handle fungible and non-fungible tokens from a single smart contract. Semi-fungible tokens start as fungible tokens that can be readily traded for other tokens. However, later on, they can be converted to NFTs. They are used for trading multiple tokens at once.
To understand it better, consider an example of a game where the player unlocks a handgun which is an asset in the game. At that time, the player can easily exchange it with other players having the same gun, but after a certain level, that handgun is upgraded to a flamethrower as specified by the smart contract. Now, this is converted to an NFT.
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