When a tokenisation platform creates a token to represent a real-world asset (RWA) it is more than likely that the token will be created to conform with an ERC standard.
ERC stands for Ethereum Request for Comment. It is a formal design and umbrella technical standard used by developers to create smart contracts, tokens, wallets and other applications on an Ethereum-compatible blockchain.
Tokens are digital assets that comprise smart contract code and data hosted on a blockchain, which users and applications use and manage by sending cryptographically signed instructions from their blockchain wallets. The data consists of balance sheets within tokens that track which wallets own tokens, and in what quantity.
Because Ethereum was the first general purpose blockchain, released in 2018, it has become a very popular platform. Thus, many blockchains support Ethereum’s Virtual Machine architecture and so can process tokens built to ERC standards. In addition, several other blockchains support their own branded versions of ERC standards that are functionally identical.
Also, while the Ethereum Foundation – a non-profit dedicated to nurturing the Ethereum ecosystem – provides funding and administrative services to support the ERC standards process, it is not involved in the actual creation of standards, which is an open community process.
The ERC family of standards ensure that all tokens built on them understand the same instructions, establishing uniform functions and interfaces. This allows blockchain applications built to a common ERC standard, like a tokenisation platform, wallet or decentralised exchange to work together seamlessly.
For financial markets applications, a few ERC standards have become important. Here’s a non-exhaustive list with what functionality they provide:
ERC-20 – a technical rule set used to create and run digital tokens. It is important for the financial markets because it lets different tokens, smart contracts, tools, and digital wallets to work together with ease.
ERC-721 – used for Non-Fungible Tokens (NFTs), Unlike standard ERC-20 tokens, where every token is identical in format and interchangeable, each ERC-721 token is unique and indivisible. Every token contains distinct metadata and a unique ID allowing blockchains to track individual ownership of specific, one-of-a-kind assets.
ERC-721 has proven popular to support collector’s items – such as digital art, sports memorabilia, and other virtual items of value because they can be tracked and exchanged just as RWAs are. However, they also have professional uses, such as for representing specific datasets, like alternative data, data needed to train AI models and personal financial data.
ERC-3643 – an extended form of the ERC-20 standard for permissioned digital assets. It embeds compliance, transfer restrictions and investor identity verification directly into smart contracts within tokens to ensure that only verified participants who satisfy rules such as KYC and AML can hold or transfer tokenised real-world assets
Using ERC-3643, tokens work with external registries that maintain lists of approved investors mapped to verifiable credentials and jurisdictions, and so can implement financial compliance requirements even when they are hosted on public, permissionless blockchains.
The ERC-3643 was originally created by Luxembourg-based FinTech Tokeny and was then known as T-REX (Token for Regulated EXchanges). it later became an ERC standard and its management shifted from Tokeny to the ERC-3643 Association.
ERC-1400 – built for security tokens and regulated financial assets. It extends the basic ERC-20 token framework by adding built-in features for legal compliance, transparent ownership tracking, document linking and transfer restrictions required for stocks, bonds and real estate.
The standard can split a single wallet balance into distinct subsets to track separate classes of shares or lock-up periods. It can also link tokens to off-chain legal certificates and disclosures via cryptographic hashes and can validate token transactions using off-chain rules to block non-compliant trades or execute forced transfers, such as lost keys.
Originally developed by FinTech Polymath and individuals, including Fabian Vogelsteller, who created the ERC-20 standard, ERC-1400 evolved into a family of sub-standards to support individual functions.
Token Tech is a regular series that dives into the technologies that underpin the tokenisation and digital assets rails that are powering Wall Street 2.0.
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