Token Standards Explained as a DeFi Library Primer

In the world of decentralized finance, every contract that moves value is built on top of a set of rules that define how digital assets behave. These rules are called token standards. Understanding them is the first step in building or interacting with any DeFi library because they dictate how assets are stored, transferred, and leveraged across protocols.

Below we walk through the most important token standards, how they fit into a DeFi ecosystem, and what makes perpetual swaps a unique case study for advanced asset manipulation.

Token Standards: The Building Blocks

Token standards are essentially protocols that specify the interface a smart contract must expose. By following a standard, developers ensure that any wallet, exchange, or library can interact with the token without needing custom code.

The most common families are:

• ERC standards on Ethereum and Ethereum‑compatible chains (EVM)
• SPL on Solana
• BEP on Binance Smart Chain
• FT/FTS on NEAR, and others

ERC20 – The Classic Fungible Token

ERC20 is the baseline for fungible tokens. It defines functions for transferring tokens, approving third‑party spending, and querying balances. Almost every stablecoin, utility token, and wrapped asset uses ERC20.

Key properties:

Because ERC20 is so ubiquitous, DeFi libraries such as ethers.js or web3.js already include helpers for these calls.

ERC721 – Non‑Fungible Tokens

ERC721 describes unique, indivisible assets. Each token ID is distinct, making them perfect for collectibles, real‑estate NFTs, or ownership certificates.

Important functions:

• ownerOf(tokenId) – who owns a specific token
• safeTransferFrom(from,to,tokenId) – secure transfer that checks contract compatibility
• approve(to,tokenId) – allow another address to manage a token

Libraries must handle the event logs from ERC721 transfers, especially when building dApps that track ownership or enable marketplace listings.

ERC1155 – Multi‑Token Standard

ERC1155 merges fungible and non‑fungible tokens into a single contract, enabling batch operations and efficient storage. It is ideal for gaming assets where a player might hold many copies of a particular item and a few unique artifacts.

Batch functions such as safeBatchTransferFrom allow sending multiple token IDs in one transaction, saving gas and simplifying library logic.

Beyond Ethereum: SPL, BEP20, and Others

Solana’s SPL tokens use a similar interface to ERC20 but are designed for high throughput and low cost. Binance Smart Chain’s BEP20 is a clone of ERC20, so libraries built for EVM chains work seamlessly.

When creating a DeFi library that supports multiple chains, it is common to abstract token interfaces so that the same high‑level API can operate on any standard with minimal changes.

Assets in DeFi: From Simple Holdings to Complex Derivatives

DeFi libraries are not only about moving tokens; they are about creating and managing assets that can represent positions, stakes, or derivatives. Understanding how token standards translate into these higher‑level constructs is crucial.

Liquidity Pools and LP Tokens

When users add funds to a pool, they receive LP (liquidity provider) tokens, typically ERC20, that represent their share of the pool. Libraries need to understand how to:

• Calculate a user’s proportion of the pool
• Handle pool rebalancing and fee accrual
• Convert LP tokens back into underlying assets

Because LP tokens are fungible, most libraries treat them like any other ERC20, but special attention is required for tracking reserve balances and pool state changes.

Yield‑Bearing Tokens

Stablecoins and wrapped tokens often offer yield by re‑minting tokens when interest is paid. For example, a savings token may mint itself at a variable rate. Libraries must account for supply changes that happen outside of direct user actions.

Perpetual Swaps: A Special Case of Derivatives

Perpetual swaps are exchange‑style contracts that allow traders to go long or short on an underlying asset without an expiry date. They are a cornerstone of many DeFi protocols and illustrate how token standards can be extended to support sophisticated financial products.

Key components of a perpetual swap contract:

• Position token – a representation of a trader’s net long or short exposure
• Funding rate mechanism – periodic exchange of funds between longs and shorts
• Margin and liquidation logic – ensuring solvency of the system

In practice, a perpetual swap contract often issues a separate ERC20 token that represents a trader’s position. This token can be transferred, lent, or used as collateral in other protocols, showcasing the versatility of token standards.

Funding Rates and Interest Mechanisms

Unlike simple loans, perpetual swaps involve a dynamic funding rate that reflects market sentiment. The contract periodically transfers funds from the short side to the long side (or vice versa) to keep the swap price aligned with the underlying index.

Libraries that expose perpetual swap functionality must provide:

• Real‑time funding rate queries
• Position size calculations that incorporate funding
• Exposure to margin balances and liquidation triggers

Building a DeFi Library Around Token Standards

A robust DeFi library abstracts away the intricacies of interacting with various token standards while offering a unified developer experience. Below are key design patterns and best practices.

1. Standardized Token Wrappers

Create a wrapper class that accepts any token address and automatically determines the standard (ERC20, ERC721, ERC1155, SPL). The wrapper exposes a consistent set of methods like transfer, balanceOf, and approve.

This approach lets the rest of the library call the same methods regardless of the underlying protocol.

2. Event Handling

Token standards emit events for transfers, approvals, and other state changes. A library should provide event listeners that can be attached to any token.

• For ERC20, listen to Transfer(address,address,uint256)
• For ERC721, listen to Transfer(address,address,uint256) and Approval(address,address,uint256)
• For ERC1155, listen to TransferSingle and TransferBatch

By normalizing event handling, dApps can react to changes in real time, whether it’s updating a user interface or triggering a smart contract call.

3. Batch Operations and Gas Efficiency

ERC1155’s batch functions and Solana’s native instruction batching are powerful tools. Libraries should expose batch helpers that group multiple token operations into a single transaction.

Benefits include:

• Reduced gas fees
• Simplified developer logic
• Lower risk of partial failures

4. Cross‑Chain Compatibility

When a library targets multiple chains, token identification must include chain ID and contract address. Many DeFi projects use a mapping structure that stores metadata for each token.

This mapping should include:

• Standard type (ERC20, ERC721, etc.)
• Symbol and name for UI display
• Decimals (for ERC20)
• Chain‑specific quirks (e.g., Solana’s PDA accounts)

By centralizing this information, developers can write code that works on any chain with minimal conditional logic.

5. Position and Derivative Abstractions

Perpetual swaps, futures, and options introduce concepts like margin, leverage, and liquidation. Libraries can offer high‑level abstractions:

• Position object that encapsulates amount, side (long/short), entry price, and funding credits
• Margin helper that calculates required collateral and maintenance margin
• Liquidation function that triggers on‑chain settlement

These abstractions let developers focus on strategy logic rather than the low‑level arithmetic that can be error‑prone.

Practical Example: Interacting with a Perpetual Swap

Below is a simplified walkthrough of how a developer might use a DeFi library to trade a perpetual swap on a popular protocol.

1. Connect to the Provider

   const provider = new ethers.providers.Web3Provider(window.ethereum);
   const signer = provider.getSigner();
   

2. Instantiate the Swap Contract

   const swap = new SwapLibrary(signer, '0xSwapContractAddress');
   

3. Check Funding Rate

   const fundingRate = await swap.getFundingRate(); // returns number in basis points
   console.log(`Current funding rate: ${fundingRate}`);
   

4. Open a Position

   const amount = ethers.utils.parseUnits('10', 18); // 10 units of the underlying
   const side = 'long';
   const position = await swap.openPosition(amount, side, {
     collateral: ethers.utils.parseUnits('5', 18), // 5 units of collateral
     leverage: 2,
   });
   console.log(`Opened position ${position.id}`);
   

5. Monitor Position Health

   const health = await swap.getPositionHealth(position.id);
   if (health < 1) {
     await swap.closePosition(position.id);
   }
   

6. Collect Funding Payments

   await swap.collectFunding(position.id);
   

This flow demonstrates how the library hides the contract’s complexity, handles token transfers, margin calculations, and funding logic.

Risks and Considerations

Token standards are not without pitfalls.

• Security Audits – Even standard contracts can have bugs or vulnerabilities. Libraries must keep a versioned list of audited token addresses.
• Upgradeability – Some tokens use proxy patterns that allow the logic to change. Libraries should detect and warn about upgradeable tokens.
• Token Wrappers – Wraps like WETH or wUSDC expose an ERC20 interface but add reentrancy risks if not properly implemented.
• Cross‑Chain Nuances – For example, Solana’s SPL uses 64‑bit integers, whereas Ethereum uses 256‑bit. Libraries must handle these differences to avoid overflow errors.

The Future of Token Standards

While ERC20 and ERC721 dominate today, newer standards are emerging to address scalability, privacy, and composability.

• ERC777 – Adds hooks for token reception and sending, making token transfers more flexible.
• ERC3525 – Introduces semi‑fungible tokens that combine features of ERC20 and ERC1155.
• Token Bound Accounts (TBA) – Proposed by the Ethereum Foundation to create account abstraction at the token level.

For DeFi libraries, staying ahead of these developments means designing interfaces that can plug in new token types with minimal refactoring.

Conclusion

Token standards form the backbone of any DeFi library. By mastering ERC20, ERC721, ERC1155, and cross‑chain equivalents, developers can build tools that interact seamlessly with a wide array of assets.

Perpetual swaps, as a complex derivative, show how these standards can be leveraged to create powerful financial products that are composable and tradable. Libraries that abstract the mechanics of these contracts empower developers to focus on strategy and user experience rather than the plumbing of token interactions.

The world of decentralized finance continues to grow, and as new token standards appear, a solid grasp of the existing foundations will remain essential for anyone looking to build reliable, secure, and interoperable DeFi solutions.