ERC 721 tokens are tokens built on Ethereum. Ethereum is a general-purpose blockchain; unlike Bitcoin’s single-purpose blockchain, built to run the BTC coin and nothing more, Ethereum works like a distributed, encrypted operating system. Tokens built inside it are smart contracts that meet certain criteria and follow certain rules; ERC 20 is another, more popular (at the time of writing) example.
A smart contract is a self-executing contract that performs actions when certain criteria are fulfilled; a bit of if-this-then-that code with a distributed ledger attached, wrapped up in cryptography.
ERC 721 tokens are different from most tokens you’ve met up to this point. However those tokens work, they almost all have this in common: they’re fungible. They can each be exchanged for any other. Think dollar bills: they have serial numbers, but for all intents and purposes, one is the same as another.
Fungible vs non-fungible tokens
A non-fungible token might be something like a baseball card: it’s the same size, shape and material as all the others, but the difference in meaning and appearance can be significant. One isn’t interchangeable with any other, and their value can vary wildly too. New baseball cards are cheap: the full 2020 set from Topps is $50. On the other hand, Mike Trout’s rookie card from 2009 sold this year for $3.9 million. It’s very much not interchangeable with a random selection from this year’s Topps box.
ERC 721 is the token protocol for tokenizing non-fungible items with non-fungible tokens. Each ERC 721 token is unique and cannot be interchanged with any other (of course, it can be exchanged; it just can’t be substituted).
At first glance this might seem to defeat the point of tokenization. It certainly cancels one of the procedure’s big selling points, the ability to turn one large, immobile, illiquid, non-fungible asset (like a building or an artwork) into multiple more affordable fungible tokens that can be rapidly bought or sold.
However, there are many assets that are similar, and can be categorized, but are not the same and cannot be interchanged. If two people have pet dogs, they may even have the same breed of dog; but they would not regard one golden retriever as basically the same as another.
This is true in the home, but it’s also true in business. ERC 721 tokens can be used to represent concert tickets, for instance, but also real estate deeds, artworks and other assets.
Non-fungible tokens: A brief history
Use cases for non-fungible tokens date back to 2013-14, as Andrew Steinwold explains. The earliest uses included “Colored Coins” — an attempt to invent greater scripting capabilities to Bitcoin by simply agreeing to new parameters. For instance a certain set of 100 BTC might be agreed by three parties to represent 100 shares in a company; this worked only as long as no participants disagreed. There was no way to oblige people to honor their commitments and thus a high degree of trust was required.
What was needed was a token protocol that would include this functionality, built-in and trustless, without requiring interpersonal trust or permissioned environments — the things digital assets are supposed to render largely redundant.
The first tokens to match this description were a technical experiment in 2019, Cryptopunks. With a nod to the “cypherpunks” who began experimenting with digital currencies in the 80s and 90s, Cryptopunks were algorithmically-generated computer-game characters, like a cryptographic, digital Garbage Pail Kids. No two were the same, and anyone with an ETH address could claim one free when they were released. They were soon snapped up and a thriving secondary market in Cryptopunks began almost immediately; the concept had been proven. Equally importantly, the technical basis had been prototyped; Cryptopunks were based on ERC 20 with some ERC 721-type code built onto the protocol, foreshadowing the modern ERC 721 protocol.
Why use ERC 721?
Currently the most popular uses for ERC 721 are consumer-level collectibles. However, that’s likely to change as the token protocol becomes better-known and more popular, and as asset tokenization continues to accelerate.
ERC 721’s creators say they envisage the token being used for:
- Physical property — houses, unique artwork
- Virtual collectables — unique pictures of kittens, collectable cards
- Negative value’ assets — loans, burdens and other responsibilities
If you have non-fungible assets whose ownership you would like to digitally tokenize, ERC 721 may be the ideal option. However, it’s best to go through the process with a partner able to consult and assist on token selection and strategy as well as the technical process of tokenization.