Tokens & Standards

01 · Concept — what problem does it solve?

A token is an entry in a smart contract that says "this address owns N of this thing." The breakthrough wasn't tokens themselves — it was standards. Ethereum's ERC-20 specified a handful of functions every token must implement (balanceOf, transfer, approve). Once every token spoke the same interface, any wallet, exchange, or protocol could handle any token without custom code. That interoperability is what made DeFi composable — money Legos that snap together because they share a plug shape.

02 · Mechanics

• Fungible (ERC-20): every unit is identical and interchangeable, like dollars or casino chips. Stablecoins, governance tokens, and wrapped assets are all ERC-20.
• Non-fungible (ERC-721): each token is unique with its own ID, like a trading card or a deed. NFTs use this — art, but also Uniswap v3 LP positions.
• Semi-fungible (ERC-1155): one contract managing many token types, fungible or not — efficient for games and batches.
• approve / transferFrom: the two-step that lets a protocol move your tokens on your behalf after you grant an allowance. Powerful, and the source of "approval drain" exploits.
• Wrapping: ETH itself predates ERC-20, so "wrapped ETH" (WETH) is an ERC-20 version of it, used everywhere a standard token is required.

03 · Formulas

// the ERC-20 core interface (simplified)
balanceOf(owner) → uint
transfer(to, amount) → bool
approve(spender, amount) → bool        // grant an allowance
transferFrom(from, to, amount) → bool  // spender pulls within allowance

// a token balance is just a number in the contract's ledger:
balances[your_address] = 1500

04 · Edge cases & risks

• A token is only what its contract says: "USDC" on an unknown contract may be a worthless look-alike. Always verify the contract address, not the ticker.
• Infinite approvals: dapps often request unlimited allowances for convenience; a later contract bug or exploit can then drain the whole balance. Revoke unused approvals.
• Tokens ≠ shares: an ERC-20 confers whatever rights its contract and the law grant — usually none of the ownership/dividend/vote rights of a stock.
• Fee-on-transfer & rebasing quirks: non-standard tokens that take a cut on transfer or change balances silently break naive integrations — a recurring source of bugs.