Tokenbrief #7: Standardisation

Although blockchain technology (and its application) is in its infancy, a number of standards already exist and more are in progress. Standardisation is introduced through community efforts such as ISO, the Ethereum community which approves ERCs (which are more akin to standard templates for smart contracts), and industry collaborations or organisations.

Tokenbridge aims both to follow and to influence standardisation in the industry.

Benefits of Standardisation

Standards are important in any industry, but they are vital in the world of technology and finance, where they ensure that processes can be relied upon to deliver consistent results. If two organisations operate different software applications that need to perform specific functions (whether to validate or to process data), its critical that each application can rely on the data input to or output by the other.

Standards in the financial world have evolved over decades, and adoption levels are very high. Messaging standards such as ISO 20022 enable organisations’ applications to talk to each other reliably, while information security standards such as ISO 27001 ensure that each organisation manages its (and its clients’) data responsibly.

The same is very much true of blockchain technology.

However, it’s worth noting that standards and innovation are often not comfortable bedfellows. If the technology evolves beyond the scope of the standard, a lot of effort and collaboration can boil down to nothing much.

The video cassette “format war” of the late 1970s and 1980s is a classic case in point. Betamax had first-mover advantage and by some measures could be considered the superior standard, but VHS provided a longer recording length and achieved wider adoption by targeting manufacturers more successfully. Ultimately, however, their rivalry proved to be merely a blip on the technological roadmap, as video cassettes were swiftly supplanted by DVDs and eventually by streaming and downloading.

For blockchain, it may be some years yet before the final panoply of internationally adopted standards is mature, complete, and representative of best practice.

ISO Standards

ISO (the International Organisation for Standardisation) is based in Geneva, and operates through a series of technical committees, which typically draw on global industry expertise provided on a pro bono basis by industry players.

The technical committee for “blockchain and distributed ledger technologies” is TC307, and it is chaired by the Australian standards body, Standards Australia.

Technical committees usually work through a number of working groups. The working groups relevant to TC307 are as follows:

ISO/TC 307/AG 1 – SBP Review Advisory Group
ISO/TC 307/AG 2 – Liaison Advisory Group
ISO/TC 307/AG 3 – Digital currencies
ISO/TC 307/AHG 4 – DLT and carbon markets
ISO/TC 307/CAG 1 – Chair’s Advisory Group
ISO/TC 307/JWG 4 – Security, privacy and identity for Blockchain and DLT
ISO/TC 307/WG 1 – Foundations
ISO/TC 307/WG 3 – Smart contracts and their applications
ISO/TC 307/WG 5 – Governance
ISO/TC 307/WG 6 – Use cases
ISO/TC 307/WG 7 – Interoperability
ISO/TC 307/WG 8 – Non-Fungible Tokens.

The technical committee has published a number of documents, only some of which are official standards (the rest are technically “reports” or “specifications” in ISO terminology). More standards are in the process of being defined.

Published standards:

ISO 22739 Vocabulary – fundamental terminology for blockchain and distributed ledger technologies.
ISO 23257 Reference architecture – concepts, cross-cutting aspects, architectural considerations, and architecture views, including functional components, roles, activities, and their relationships for blockchain.

Published technical reports (TR):

ISO/TR 3242 Use cases – summarises use cases reflecting a range of industry sectors, processes and specific applications to aid standardisation
ISO/TR 6039 Identifiers of subjects and objects for the design of blockchain systems – an overview of identifiers relevant for the design of blockchain systems and the interoperability of those systems with non-blockchain systems
ISO/TR 23244 Privacy and personally identifiable information protection considerations – an overview of privacy and personally identifiable information (PII) protection as applied to blockchain systems
ISO/TR 23249 Overview of existing DLT systems for identity management – an overview of existing DLT systems for identity management, i.e. the mechanisms by which one or more entities can create, receive, modify, use and revoke a set of identity attributes
ISO/TR 23455 Overview of and interactions between smart contracts in blockchain and distributed ledger technology systems – an overview of smart contracts describing what they are and how they work, as well as methods of interaction between multiple smart contracts
ISO/TR 23576 Security management of digital asset custodians – discusses the threats, risks, and controls related to systems that provide digital asset custodian services
ISO/TR 23644 Overview of trust anchors for DLT-based identity management – concepts and considerations on the use of trust anchors for identity management.

Published technical specifications (TS):

ISO/TS 23258 Taxonomy and Ontology – includes a taxonomy of concepts, a taxonomy of DLT systems and a taxonomy of application domains, purposes and economy activity sections for use cases. The ontology includes classes and attributes as well as relations between concepts
ISO/TS 23635 Guidelines for governance – guiding principles and a framework for the governance of blockchain systems.

Standards in progress (also referred to as “approved work items”) include additional use cases, data flow models, smart contract taxonomy, non-fungible tokens, auditing, interoperability framework, as well as sustainability and privacy aspects.

ERC Standards

An ERC (which stands for Ethereum Request for Comments) is a technical document that blockchain developers use to propose standards for the Ethereum platform for smart contracts, new types of token implementation, and other blockchain innovations.

Although they are strictly speaking intended just for the Ethereum network, in reality an ERC will tend to be adopted for all Ethereum-like networks.

ERCs can be proposed by anyone and are then reviewed and discussed by the community. There is no formal approval process for an ERC – acceptance is demonstrated by consensus and adoption. Compliance is also largely self-policed by the community.

In many cases, an ERC is not so much a standard as a template for future smart contracts, with a number of pre-defined functions and data components. It is worth remembering that a smart contract is essentially a set of software commands encoded into a transaction that is deployed on the blockchain network. The ERC simply outlines an example of the source code that can be used as a starting point for the token issuer. There is nothing to stop a token issuer from using a different model for their smart contract – essentially writing their own code from scratch. It’s not wrong but could impact interoperability with other smart contracts.

Here’s a short list of some of the more impactful ERCs.

ERC-20 (Fungible Tokens) – the granddaddy of them all, from the tokenizer’s viewpoint. ERC-20 sets out the source code for a smart contract to generate and manage fungible tokens – the sort of tokens used for asset tokenization.

The ERC-20 code (once deployed) implements a number of pre-defined functions, such as:

totalSupply – returns the total supply of the asset tokens available
transferFrom – transfers a number of tokens to a specified address from a specified address
allowance – an amount the spender is allowed to withdraw from the owner.

These functions and the events they spawn are universally adopted, allowing any ERC-20 compliant token to be held in all wallets and to interoperate with other smart contracts.

ERC-721 (Non-Fungible Tokens) – this ERC introduced the concept of NFTs on the Ethereum blockchain, where each token is unique and can represent ownership of a specific asset, whether digital or physical. The standard is widely used for digital art, collectibles, and other unique items.

The functions for an ERC-721 compatible token are similar to those for an ERC-20 token, but the transfer function, for example, can be used only to transfer a specified token (indicated by a token ID) rather than a value of fungible tokens as permitted by ERC-20.

ERC-777 (Advanced Fungible Tokens) – an improvement on ERC-20, introducing several new features aimed at increasing functionality, security, and usability, while remaining backward compatible with ERC-20.

Additional functions include the ability to authorize (and de-authorize) a third-party operator and the ability to mint (create) and burn (destroy) tokens as well as to transfer them.

A significant new concept introduced with ERC-777 is that of hooks, which react to tokens being either received (allowing the receiving contract to perform additional validation or processing) or sent (allowing pre-transfer checks at the sending contract).

Hooks facilitate more seamless interaction between different contracts and decentralized applications (DApps) by allowing for automatic notifications and actions upon token transfers.

ERC-1400 (Security Token Standard) – comprehensive standard designed for security tokens, which represent ownership of real-world assets (like funds, stocks, or bonds) and are subject to regulatory compliance. ERC-1400 builds on the foundations laid by existing standards (like ERC-20) to address the unique needs and legal requirements of security tokens, aiming to standardise their issuance, transfer, and management on the blockchain.

ERC-1400 introduces the concept of partitioning, which allows tokens to be grouped into partitions within a single contract, representing different classes of shares (such as voting rights). It also allows for the integration of compliance checks (e.g. KYC/AML) directly into the token’s transfer function, ensuring that tokens can only be transferred between addresses that have passed the necessary verifications. It supports conditional transfers, incorporating a system of checks that must be passed for a transfer to be executed. These can include time-based restrictions (e.g., lock-up periods), jurisdictional restrictions, and investor eligibility. Where an asset has requirements for legal documentation, the standard enables these to be attached to the token contract, ensuring that token holders have access to all necessary legal information.

Finally, ERC-1400 allows for the creation of mechanisms to recover tokens in case of accidental loss or transfer to an incorrect address, which is a significant concern for valuable security tokens.

In December 2023, the Ethereum community adopted a new standard, ERC-3643, for real-world asset (RWA) tokenization. Initially proposed by Tokeny as its own T-REX protocol but now backed by an entity called the ERC3643 Association, the standard was proposed through a Tokeny white paper published in May 2023.

ERC-3643 proposes an automated, on-chain exchange protocol based on four pillars:

A blockchain based identity management system, ONCHAINID
A set of validation certificates linked to the identity
An on-chain Eligibility Verification System (EVS)
A set of Compliance rules for each tokenized offering.

Other ERC standards exist, and more are being added all the time as use cases develop and innovators make improvements to distributed ledger capabilities.

You may ask, if these ERC templates are not standards, what benefit do they bring? First, knowing that a given smart contract is based on a particular template gives the user confidence in the outcome of an operation, which also encourages interoperability. Secondly, it’s worth remembering that a smart contract, once deployed, is immutable and cannot be changed. If there is a bug in the smart contract’s coded logic, that bug will remain forever. One way to reduce the incidence of such bugs is through testing, but another is to use an established template such as ERC-20 as a starting point, adding any specific logic as needed.

Industry Initiatives

It’s possibly too early to say whether any of the various industry initiatives could yet be considered a standard. Many are simply proposals (quite often theoretical in nature), whereas some initiatives are in direct competition with each other, and only time (and adoption) will determine the victor.

Most of the initiatives relate to interoperability, both between tokens of different types and across different blockchain networks (“cross chain interoperability”).

The following are provided as a snapshot, and will need to be continually refreshed.

The Bank for International Settlements (BIS) has issued a paper setting out one approach to cross-chain interoperability: having just one chain, what it calls a unified ledger. In time, all token issuance (in the financial markets) would take place directly onto the single blockchain, enabling all participants to have equal access and certainty of value.

The Internet Engineering Task Force is working on a Secure Asset Transfer Protocol (SATP) to enable to transfer of digital assets between an origin network and a destination network. The essence of the protocol is to ensure that the digital asset is valid in one network only at any given time.

A report on a recent proof of concept by Onyx (J.P. Morgan) and Apollo outlines a design for token interoperability using cross-chain messaging protocols.

Chainlink have proposed a standardised approach to oracles (that allow communication between on-chain and off-chain applications), outlined in their white paper.

Role of Tokenbridge

In many ways, Tokenbridge is a beneficiary of standardisation, rather than a developer of standards. It is not our goal to issue tokens in any way, instead ensuring that token issuers and token consumers/distributors are able to communicate as effectively as possible (and with as few layers as possible between them).

We need to be aware of the latest tokenization standards and will contribute to the debate on any new standards, bringing a practical and pragmatic “practitioner” voice to the discussions.

The core of our proposition is to be the glue between tokenizers and distributors, across a range of networks. As such, we seek to safeguard players from the fluidity in the interoperability space. Initiatives such as the unified ledger or cross-chain interoperability protocols will be managed by Tokenbridge so that our clients do not need to.

In supporting token issuers, it is most likely that the ERCs referenced in this paper will be most helpful, while we will naturally ensure we follow agreed standards and industry best practice at all times.

Benefits of Standardisation

ISO Standards

ERC Standards

Industry Initiatives

Role of Tokenbridge

Further Reading