In this lesson you will learn to:
- Explain what a token is technically.
- Distinguish fungible from non-fungible tokens.
- Explain why standards matter.
A token is an entry in a contract
A blockchain like Ethereum has its own native unit, used to pay for gas. A token is something different: a unit recorded by a smart contract. The contract keeps a table — "this address holds this many units" — and contains the rules for moving them. When people talk about "sending a token", what actually happens is a transaction that asks the token's contract to update its table.
Tokens can represent many things: a membership, a voting right, a ticket, a claim on something held elsewhere. What a token represents depends entirely on the promises made by whoever created it — the blockchain itself only enforces the contract's code.
Fungible and non-fungible
- Fungible tokens are interchangeable: any unit is the same as any other, like coins of the same denomination. Contracts track how many each address holds.
- Non-fungible tokens (NFTs) are unique: each has its own identifier, like numbered seats in a theatre. Contracts track which address holds which item.
An NFT usually contains only an identifier and a link to a description. The picture or document it refers to is often stored elsewhere, which is worth remembering when people describe NFTs as "owning" a file.
Why standards exist
If every token contract used different commands, every piece of software would need custom code for every token. In 2015, developers proposed a shared interface for fungible tokens on Ethereum, later finalised as ERC-20: a short list of functions such as "what is the balance of this address?" and "transfer this amount". In 2018, ERC-721 did the same for non-fungible tokens.
Standards are like the shape of an electrical plug: they don't say anything about what the device does, only how to connect to it. Thanks to them, software can work with any compliant token without knowing it in advance.
What standards do not guarantee
A standard describes an interface, not honesty. A contract can follow ERC-20 perfectly and still include hidden rules — for example, allowing its creator to freeze or create units at will. Reading what a token's contract actually does, or relying on independent technical reviews, is the only way to know. This is one reason why this course never recommends specific tokens.
Tokens and regulation
Because tokens can represent almost anything, regulators look at what a particular token does and promises rather than at the technology. Some tokens may fall under securities law, others under specific crypto-asset rules such as the EU's MiCA regulation. Lesson 6.2 gives an overview.
Key takeaways
- A token is a unit recorded by a smart contract, not by the blockchain's base rules.
- Fungible tokens are interchangeable; non-fungible tokens are unique.
- Standards like ERC-20 and ERC-721 give tokens a common interface.
- A standard says how to interact with a token, not whether its creator is trustworthy.
Check yourself
What actually changes when a token is "sent"?
The token's smart contract updates its internal table of which address holds what.
What is the difference between fungible and non-fungible tokens?
Fungible units are interchangeable; non-fungible tokens each have a unique identifier.
Does following ERC-20 make a token safe?
No. The standard defines an interface; the contract may still contain other rules.
Sources
This lesson is for general education about how the technology works. It is not a recommendation to acquire, sell or hold any crypto-asset and is not financial advice.