DeFi Library Foundations: Token Standards and Asset Basics

When I sat down one rainy morning at my old kitchen table in Lisbon, the phone rang. A client, a young mother who’d just bought her first home, was asking if the digital coins she’d heard about on Reddit could protect her family’s future. Her voice was nervous; her eyes were wide because she’d seen headlines about “Moon” coins promising overnight wealth. That conversation is still fresh in my mind, and it reminds me that the world of token standards feels as much like an investment course as it does a technology primer.

Understanding token standards is less about chasing the latest hype and more about knowing how trust is built on a public ledger. When you think about money, the first thing you ask yourself is: who owns it, and how can I prove it? Tokens are the modern answer to that question, and the way to read them is to treat each standard like a set of rules for a new kind of paper money.

Tokens: The New Physical and Digital Papers

At its core, a token is a piece of data that represents a right, ownership, or a claim. Whether that right is for a share in a company, a piece of art, or the ability to borrow, tokens exist on a blockchain—an immutable ledger that anyone can audit, but no single person can change.

When we first entered the crypto space, we were overwhelmed by 60‑plus ERC standards that had been proposed, most of them variations on a single idea: what makes a smart contract “standard.” That’s how we got ERC‑20, the first widely adopted fungible token standard, which people almost automatically assume means “cryptocurrency.” In practice, ERC‑20 tokens could represent fiat currencies, loyalty points, or anything that comes in identical fractions.

The shift from ERC‑20 to the next set of standards—ERC‑721 and ERC‑1155—was driven by the desire to represent items that aren’t identical. Think of a baseball card, a concert ticket, or a share in a private company. Those are not “the same unit” as any other of the same type. That is where non‑fungible tokens (NFTs) entered the scene.

ERC‑721: The One‑of‑A‑Kind Contract

ERC‑721 formalised the concept of a non‑fungible token. It specifies the functions required so that a token can be transferred, identified uniquely, and verified by anyone. The standard focuses on three core properties:

1. Uniqueness – Each token has a unique identifier (tokenId) that no other token shares.
2. Metadata – The token can point to an off‑chain piece of data describing it, from a simple JSON file to a complex IPFS hash.
3. Ownership – The contract assigns the token to an address that owns it and can later transfer it.

In short, ERC‑721 is like a digital certificate guaranteeing that the item it points to belongs to a particular address. The token itself is just a pointer; the magic is in the metadata that links to the actual asset or art.

The first mass‑market NFT that came to mind when discussing ERC‑721 is CryptoKitties. In 2017 it exploded onto the public’s radar: each cat was a unique token. Players could breed cats, sell them, or collect them. The “market” was no longer about trading stocks; it was about owning one of fifty thousand digital cats.

Let’s zoom out to the feeling that this brought: excitement and a twinge of uncertainty. The market was still new, liquidity was thin, and for most investors it felt like a speculative playground. The point of this standard isn’t so much about cat breeding, but about proving ownership over anything that could be uniquely identified.

Practical Takeaway: Check the Metadata

When you look at an ERC‑721 token, always inspect its metadata URI. That is where the “story” of the asset lives. Some projects choose to store the data on the blockchain itself, making it more expensive but truly immutable. Most use IPFS or an off‑chain database for cost reasons. The choice of storage will determine how easy it is to retrieve the asset later. Make sure you understand that the asset might be stored on a different system entirely; a token is not the same as the underlying object.

ERC‑1155: A Mixed Bags Contract

ERC‑1155, introduced by the flow of the Year 20xx, builds on ERC‑721’s foundation but aims to be a more efficient, multi‑token standard. Think of it as a universal wallet that can hold any combination of fungible and non‑fungible assets in a single contract. This standard supports two new features:

• Batch operations: Transfer or mint multiple tokens in a single transaction, saving gas.
• Token type differentiation: A token may be fungible (like a shared treasury share) or non‑fungible (like a unique collectible), and the contract can handle all in one.

That makes sense for projects that want to run games or marketplaces where users own a mixture of items—some identical, some unique. The most visible example has been Axie Infinity, which uses ERC‑1155 to represent both the creatures (mostly non‑fungible) and their resources like “gems” (fungible). Because users store all their items in one contract, the fee structure is much lighter, especially when a player wants to swap multiple items during a marketplace visit.

Why It Matters

If you’re a portfolio manager or just a curious investor, the key insight is that the new standard removes the inefficiency of having separate contracts for each token type. In practical terms:

• Lower gas costs – fewer transactions to move assets.
• Simpler audits – a single contract to review.

If you imagine a garden, ERC‑1155 is a multi‑plant pot where each plant can be a different species (fungible or non‑fungible) but live together comfortably. That simplicity makes it easier to build ecosystems that scale.

Tokenization of Physical Assets: From Real Estate to Commodities

Tokens are not only for digital art and in‑game items. Every time you hear about a company tokenizing real estate or a token backed by gold, the underlying idea is the same: create a portable, divisible representation of the real asset.

For instance, a real estate token might divide a luxury apartment into 10,000 shares. Each share is an ERC‑1155 token. The token holders could receive rental income proportional to their share, just like a stock dividend. The advantage here: liquidity. Traditionally, owning a piece of real estate required expensive intermediaries, lengthy paperwork, and significant capital—tokenization lowers all that.

But tokens also introduce a new layer of risk. When you hold a token that claims a share of an apartment, you’re relying on the smart contract to enforce rental income distribution. If the smart contract code is flawed, the distribution mechanism could fail. In other words, the token is only as trustworthy as the contract that governs it.

Common Sentiment

Many investors are excited by the idea of “Fractional Ownership.” The feeling is bright, but it is often undercut by fear of regulatory uncertainty. Governments worldwide are still building frameworks for tokenized securities. Until the legal ground is settled, you must be honest with yourself—tokenized assets might be illiquid, or you might lose the whole investment if you’re not careful.

The Mechanics of Ownership: Balances and Permissions

Token contracts use a very simple math: balances and approvals. Regardless of whether the tokens are ERC‑20, ERC‑721, or ERC‑1155, the basic logic remains:

• balanceOf(address) tells how many of a certain token a person owns.
• approve(address) lets another address transfer your token on your behalf.
• transferFrom() executes the transfer.

Why note this? Because understanding the functions is vital to spotting a clever scam. In many NFT scams, the contract appears harmless but in its transferFrom() method the owner can be overwritten. You should trust only contracts that you’ve had a chance to audit or have an established reputation.

Bottom Line

• ERC‑721 gives you a unique token linked to a single asset.
• ERC‑1155 gives you a single contract that can mix unique and fungible tokens.
• Both share core mechanics but are built for different scales.

Risk Management: Governance, Liquidity, and Market Dynamics

A big misunderstanding that new buyers have is the belief that owning a token automatically gives you a stake in something of value. That is only sometimes the case. If you purchase a 1/10,000 of a tokenized apartment, you truly have an ownership stake. If you buy a random ERC‑721 from an unknown artist, you might simply own a piece of digital art with no underlying asset.

The more you engage, the more apparent a few truths surface:

• Governance: Some tokens come with voting rights. Usually, governance tokens are fungible (ERC‑20), but in certain projects, ERC‑1155 tokens might carry voting power for specific asset classes.
• Liquidity: Some tokens trade thousands of times per day, others trade once a year. The liquidity layer directly influences how much you can exit at a fair price.
• Market sentiment: Token price is often heavily influenced by hype. In a bull market, price can be driven by emotion, not fundamentals. In a bear market, sentiment may cause a quick drop. Remember the “great crash” of early 2021—many tokens lost more than 90% of their value in a few weeks.

The Human Lens: When Numbers Meet Emotion

Investing in tokens isn’t just a numbers game. It’s a human game. I have a client who invested in a tokenized vineyard because she loves wine and wanted to feel part of the wine‑production process. She wasn’t looking for returns; she wanted the experience and the sense that her money contributed to something tangible. In contrast, a teenager might buy a rare NFT for $10, hoping the price doubles in a month.

When exploring token standards, always bring back the question: What feeling does this asset evoke? Does it give me confidence or anxiety? In DeFi, as in every investment, that feeling informs whether you will stay invested or sell half your holdings at the first sign of trouble.

Market test patience before rewarding it.

This reminds me of my days on Wall Street, where the slow compounding of a diversified portfolio outstripped the short peaks of a single stock or hot NFT. That doesn’t mean you’re left out of the conversation; it just means you’re using a different lens: a lens that balances risk, time, and sentiment.

Practical Steps for the Aspiring Token Investor

1. Understand the Standard
   Know whether the token you’re looking at is ERC‑721 (unique) or ERC‑1155 (mixed). This tells you about gas usage, potential for batching, and the nature of the underlying asset.

2. Check the Metadata
   If you’re buying an NFT, ensure the metadata is on a reputable platform like IPFS or a permanent external source. Some projects point to a website that may change or disappear.

3. Evaluate Governance and Liquid Supply
   Look at the number of circulating tokens. A high supply can dilute each holder’s voting power or potential profit. In contracts that promise fractional ownership of higher-value assets, the amount of shares issued relative to the actual asset value matters.

4. Assess Legal Status
   If the token is backed by a real asset, check whether it is registered as a security or a commodity. Regulatory risk is real, especially for tokenized securities. In some jurisdictions, a “security token offering” needs a compliance layer involving Know‑Your‑Customer (KYC) and anti‑money‑laundering checks.

5. Read the Smart Contract
   At least skim the token’s source code. Look for functions like mint, burn, pause, and how governance tokens interact. There are open‑source code bases that you can review, or you can hire an auditor for bigger projects.

6. Join the Community
   Many projects have active Discord or Telegram groups where you can ask questions and gauge sentiment. A healthy community can be a sign that the project is not a one‑off hype.

7. Consider the Use Case
   Do you want to own a collectible, invest in a tokenized asset, or simply practice trading? Tailor your decisions accordingly.

The Bottom Line: Think Long Term, Stay Grounded

Tokens are a powerful tool, but they require the same discipline you’d apply to any investment. The promise of liquidity, fractional ownership, and transparency can’t replace a solid understanding of risk and human behaviour.

Let’s zoom out. Think of the market as a garden. Each token is a seed. Some are unique plants (ERC‑721), others are trees that bear fruit and can be split into many smaller stems (ERC‑1155). You must learn which seed fits the soil, when to water it, and when to prune. A well‑maintained garden will yield a steady harvest over time, rather than a sudden sprout that blooms and then withers.

The next time you’re tempted to buy a new NFT or a tokenized asset, pause. Check the contract, read the metadata, ask: “Is this what I want, or is this just a passing trend?” Ask: “Will I still care about this after a year or five?” Those questions cut through the noise better than any hype‑filled tweet.

You’ve read about ERC‑721, ERC‑1155, and the practical implications. That’s enough for an overview. The next step is hands‑on testing. Start with a small portion of your portfolio—one token or a fraction of a tokenized real estate piece. Treat it like a laboratory sample: observe its behavior over months, note the gas costs, the trading volume, the governance outcomes.

You might end up holding a unique digital art piece that you love, or you might discover a token that’s simply a paper trail with no backing. Either way, you’ll have learned a valuable lesson: ownership on a blockchain is a new frontier, but it still respects the fundamentals of trust, transparency, and, above all, patience.