The Ethereum blockchain can be utilized as a peer-to-peer money system with its native currency (ETH), but it can also run decentralized applications, or dapps. They are new specialized applications designed to tap into the power of the Ethereum supercomputer, where everyone building on the Ethereum network can build off of one another’s application. So, if someone develops a great dapp, another can then build off from their success. This process should create an ever-increasing capability for these d-apps as time goes on.
Tokenization on the Ethereum blockchain is the process of digitally representing a real asset on the distributed ledger. This is one of the key features of Ethereum. The blockchain records who owns what and how many of every token are on the blockchain.
The blockchain also records all transfer data. For example, if I own 10 ETH and I transfer you 1 ETH, the blockchain will immediately record that I now only own 9 ETH and you now own 1 ETH. This means duplicated transactions don’t occur!
Tokens on the Ethereum blockchain have three main standards (blueprints for creating a token):
- ERC-20: for creating fungible tokens that have similar properties to bitcoin.
- ERC-721: for creating non-fungible, unique tokens called NFTs
- ERC-1155: a multi-token standard which uses one single smart contract that can create fungible, non-fungible and even semi-fungible tokens
These three standards all have the same base properties that makes ERC-20, ERC-721 and ERC-1155 interoperable.
*Interesting to note*: Ethereum’s native cryptocurrency, ether, was created prior to the ERC-20 token standard developed, so ironically, ETH isn’t directly interchangeable with the very tokens created on its own network. This why sometimes you’ll see something called WETH, which is “wrapped ether” – meaning it’s been converted into a form of eth that can transact directly with ERC-20 tokens.
Now that you have the gist of how the Ethereum blockchain works and how it’s constructed, let’s talk about how one connects to the Ethereum network.