Token Standards Explained: ERC-20, ERC-721 and How They Shape the Crypto Ecosystem
ERC-20, ERC-721, ERC-1155 — token standards are the invisible rules behind every crypto token. Here’s what they are and why UK investors need to understand them
If you’ve ever bought Chainlink, held Tether, or owned an NFT, you’ve already interacted with Ethereum token standards. You just didn’t know it. Most UK crypto investors hold ERC-20 tokens every single day — but if you asked them what that means, you’d get a blank stare.
That gap matters. Token standards aren’t just technical footnotes. They determine how a token behaves, what it can do, and — critically for UK investors — how HMRC is likely to treat it. Understanding the difference between ERC-20 and ERC-721 could literally affect your tax return.
This article breaks down the major Ethereum token standards in plain English: what they are, what they’re used for, and what they mean for anyone holding or trading crypto in the UK.
What Is a Token Standard and Why Does It Matter?
A token standard is a set of rules that every smart contract on Ethereum must follow if it wants to be recognised as a particular type of token. Think of it like a plug socket. In the UK, we use a Type G plug. Every device built to that standard will work in every UK socket. Token standards work the same way.
Without standards, every token would be its own bespoke creation. Wallets wouldn’t know how to display it. Exchanges couldn’t list it. DeFi protocols couldn’t interact with it. Standards are what make the whole ecosystem interoperable.
The “ERC” stands for Ethereum Request for Comment. It’s the process by which the Ethereum developer community proposes, debates, and adopts new technical standards. Once an ERC gains enough support, it becomes part of the Ethereum improvement process. There are now hundreds of ERCs, but a handful dominate the market.
ERC-20: The Standard That Built the Token Economy
ERC-20, proposed in 2015 and formalised in 2017, is the most important token standard ever created. It’s the backbone of the entire fungible token economy.
Fungible means interchangeable. One ERC-20 token is exactly equal to another of the same type — just like one £10 note is worth the same as any other £10 note. There are over 500,000 ERC-20 tokens in existence as of 2026.
You almost certainly own some. Tether (USDT), USD Coin (USDC), Chainlink (LINK), Uniswap (UNI), Aave (AAVE), Shiba Inu (SHIB) — they’re all ERC-20 tokens. Any token you can swap on a DEX like Uniswap is almost certainly ERC-20.
The standard defines six core functions: how to check a balance, how to transfer tokens, how to approve a third party to spend tokens on your behalf, and how to check the total supply. Six functions. That’s it. The simplicity is exactly what made it so powerful — any wallet or protocol that supports ERC-20 automatically works with every ERC-20 token ever created.
For UK investors, ERC-20 tokens are treated as cryptoassets under HMRC’s guidance. Disposal events — sales, swaps, gifting — trigger Capital Gains Tax. The £3,000 annual CGT exemption for the 2026-27 tax year applies.
ERC-721: The Standard That Made NFTs Real
ERC-721, finalised in 2018, introduced something the crypto world hadn’t seen before: non-fungibility. Each ERC-721 token has a unique ID that makes it distinct from every other token in the same contract.
That’s what makes NFTs possible. A Bored Ape Yacht Club NFT isn’t the same as any other BAYC NFT — each has a different ape, different traits, different rarity. The ERC-721 standard enforces that uniqueness at the protocol level.
The standard defines functions for tracking ownership of individual token IDs, transferring specific tokens, and checking who owns what. It also introduced the concept of metadata — a pointer to a JSON file that describes the token (name, image, attributes).
NFT collections that launched on ERC-721 include CryptoPunks (migrated retroactively), Bored Apes, Azuki, and thousands of others. The standard was a clean solution to a real problem, but it came with a flaw: every transfer of every token requires a separate transaction. If you want to send 100 NFTs to 100 different people, that’s 100 separate transactions and 100 sets of gas fees.
HMRC’s position on NFTs is that they’re cryptoassets too — but the non-fungibility matters. When I looked into this during the 2021-22 NFT boom, HMRC had not yet released specific guidance. Their 2023 update clarified that NFTs are subject to CGT on disposal, but they may also attract Income Tax if received as part of an employment arrangement or airdrop. The unique nature of each NFT means valuations can be contested. Keep records of the floor price at acquisition.
ERC-1155: One Contract, Many Token Types
ERC-1155, proposed by Enjin in 2018, solved a specific problem: gaming. Traditional game items include both fungible assets (gold coins — all identical) and non-fungible ones (a legendary sword — unique). ERC-20 handles the first, ERC-721 handles the second. You’d need two separate contracts, doubling deployment costs and complexity.
ERC-1155 handles both in a single contract. One contract can define token ID 1 as a fungible gold coin (supply: 10,000,000), token ID 2 as a semi-fungible sword (supply: 500), and token ID 3 as a unique legendary artefact (supply: 1). The same contract manages all of them.
The practical upside is batch transfers. You can send multiple different token types in a single transaction — something neither ERC-20 nor ERC-721 supports natively. Enjin estimated this reduces gas costs by up to 90% for multi-token transfers. For game developers deploying thousands of item types, that’s the difference between viable and not.
OpenSea supports ERC-1155, and you’ll often see fractionalised NFTs or gaming items using this standard. For UK investors, ERC-1155 tokens that are unique (supply of 1) would likely be treated similarly to ERC-721 NFTs by HMRC — non-fungible cryptoassets. High-supply fungible ones would likely follow ERC-20 treatment. The line is blurry. If you hold significant ERC-1155 positions, talk to a crypto-aware accountant.
ERC-4626: The Yield Standard Powering DeFi
ERC-4626 is newer — finalised in 2022 — and most retail investors have never heard of it. But if you’ve ever deposited into Aave, Compound, or a yield aggregator like Yearn Finance, you’ve used it.
The standard defines a “tokenised vault.” When you deposit an asset (say, USDC) into an ERC-4626 vault, you receive a share token representing your proportional claim on the vault’s assets plus any yield earned. The vault grows over time, and your share tokens increase in redemption value.
Before ERC-4626, every protocol implemented vaults differently. Aave’s aTokens, Compound’s cTokens, Yearn’s yvTokens — all worked on the same principle but with completely different interfaces. Any tool that wanted to work with all of them had to write custom code for each one. ERC-4626 standardised the interface, which means any protocol built to the standard automatically works with any ERC-4626 vault.
From a UK tax perspective, ERC-4626 vaults are particularly complex. When you receive share tokens on deposit, HMRC may view this as a disposal of the underlying asset — a taxable event even though you haven’t sold anything. The yield accruing within the vault may constitute income. When I researched this for readers asking about DeFi taxes, the consensus from UK crypto tax specialists in 2026 is to treat vault deposits as disposals unless you have clear advice otherwise. The HMRC cryptoassets manual hasn’t caught up with DeFi complexity yet.
ERC-2981: Royalties Built Into the Token
ERC-2981 is the royalty standard. Finalised in 2022, it lets NFT creators specify a royalty percentage directly in the smart contract — so that every secondary sale automatically triggers a royalty payment to the original creator.
Before ERC-2981, royalties were enforced at the marketplace level. OpenSea could enforce them. But a rival marketplace that chose not to enforce them had no technical obligation to do so. That’s exactly what happened in 2022 when competing platforms waived royalties to attract traders, causing significant loss of income for creators.
ERC-2981 doesn’t force marketplace compliance — it’s still a voluntary standard. But it provides a universal signal. Any marketplace that wants to honour creator royalties can read the ERC-2981 data directly from the contract without needing off-chain metadata.
For UK creators selling NFTs, royalty income is likely taxable as income rather than capital gains — important distinction given the higher tax rates. The fact that royalties are programmatic doesn’t change HMRC’s view: money received is money earned.
Emerging Standards: What’s Coming Next
The ERC process never stops. Two standards gaining traction in 2025-2026 are worth knowing about.
ERC-3525 introduces “semi-fungible” tokens. Unlike ERC-1155 which has discrete token IDs, ERC-3525 tokens have a slot system — tokens in the same slot are fungible with each other, but tokens in different slots aren’t. Think of it like different denominations of the same currency. This is being used for financial instruments like bonds and structured products that have common characteristics but different terms.
ERC-6551, adopted in 2023, is genuinely novel. It allows ERC-721 NFTs to own other tokens. An NFT becomes a wallet. Your Bored Ape can hold ETH, ERC-20 tokens, and other NFTs directly. The NFT and its contents travel together when the NFT is transferred. For gaming and complex on-chain identity use cases, this is a significant capability jump.
Neither is mainstream yet. But both are live on Ethereum mainnet and seeing early adoption. Worth watching over the next 12-24 months.
How Token Standards Affect UK Investors Practically
This isn’t just technical trivia. Token standards have direct practical implications.
Gas fees vary by standard. ERC-721 transfers tend to cost more than ERC-20 transfers. ERC-1155 batch transfers cost less per item than ERC-721 individual transfers. If you’re moving large volumes, the standard matters to your cost basis.
HMRC categorisation follows the token type. Fungible ERC-20s are pool-accounting assets under HMRC rules — you track average cost, not individual units. NFTs (ERC-721, unique ERC-1155) are individual assets — you track acquisition cost per token. Getting this wrong means your CGT calculations are wrong.
Red flags in due diligence. If a project claims to be “our own token standard” and doesn’t follow ERC-20 or another established standard, that’s a yellow flag. Non-standard tokens may not work with major wallets or exchanges, or may have unusual transfer logic baked in — including blacklist functions, transfer freezes, or fee-on-transfer mechanisms that can trap investors.
DeFi composability depends on standards. A token that doesn’t implement the full ERC-20 interface may not work in AMMs like Uniswap or lending platforms like Aave. Rebasing tokens (like old AMPL) and fee-on-transfer tokens famously break naive ERC-20 assumptions. Always check before depositing into DeFi protocols.
How to Check Which Standard a Token Uses
Etherscan makes this straightforward. Go to etherscan.io and search for any token contract address.
On the contract page, click “Contract” then “Read Contract.” Look for the function list. ERC-20 contracts have totalSupply, balanceOf, transfer, approve. ERC-721 contracts have ownerOf, tokenURI, safeTransferFrom. ERC-1155 contracts have balanceOfBatch and safeTransferFrom with a quantity parameter.
You can also check the “Token Tracker” page for major tokens — Etherscan labels them ERC-20, ERC-721, or ERC-1155 directly in the header. For newer standards like ERC-4626, look for the deposit, withdraw, totalAssets and convertToShares functions.
The blockchain is public. Anyone can check. UK investors should get into the habit of verifying the standard before significant purchases, particularly for tokens outside the top 100 by market cap.
What This Means for You
Token standards shape everything — from what your wallet can display to how HMRC categorises your holdings. ERC-20 is the foundation of the fungible token economy. ERC-721 is what makes NFTs distinct. ERC-1155 solves multi-token efficiency. ERC-4626 is standardising DeFi yield. ERC-2981 is protecting creator royalties. Emerging standards are expanding what tokens can do entirely.
Most UK investors don’t think about this layer. But understanding it — even at a high level — gives you a material edge in due diligence, tax planning, and spotting red flags before they cost you money.
This article is for educational purposes only and does not constitute financial advice. Cryptocurrency investments involve significant risk. Always do your own research.
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