The Essentials of DeFi Tokens: From ERC-721 to ERC-1155

When I first heard someone talk about NFTs, I was sipping coffee in a Lisbon café, the sea fog still hugging the harbor, and the conversation felt like a quick glance at a new, shiny coin. “It’s just a fancy collectible,” someone said. “Who actually cares about a digital picture?” That question still lingers in my mind because it captures the core of what most people feel when they first step into the world of tokenized assets. The moment is familiar: curiosity, a pinch of skepticism, and a hope that somewhere in the digital ether lies a way to own something unique, maybe even something that can be traded for value.

What is a token, really?

In the simplest terms, a token is a digital representation of something that can be transferred on a blockchain. Think of it like a certificate of ownership that lives in the cloud, immutable and verifiable. The value comes from the rules set around that certificate – who can issue it, how many copies exist, what rights come with it.

In traditional finance, we’re used to physical certificates, bank accounts, or a ledger that a bank keeps. With blockchain, the ledger is distributed, and the certificates are often called tokens. These tokens fall into two broad families: fungible and non‑fungible. The former means each unit is interchangeable – like dollars or shares of a company. The latter means each unit is unique – like a painting or a concert ticket.

ERC‑721: the first standard for uniqueness

When the Ethereum community decided to formalize how to create unique digital items, they published the ERC‑721 standard in 2018. The goal was simple: give developers a common language so that any token they create could be recognized by wallets, exchanges, and marketplaces.

The mechanics

• Single token ID – Each ERC‑721 token has a unique identifier, usually a number.
• Owner mapping – The contract keeps track of who owns each ID.
• Transfer functions – Methods like transferFrom or safeTransferFrom move ownership.
• Metadata URI – A link (often to IPFS) that points to a JSON file containing information such as name, description, and image.

Because each token is distinct, the standard doesn’t allow a token to be subdivided or have multiple copies. If you own one, that’s all you have. This is why NFTs – non‑fungible tokens – can represent digital art, collectibles, or even land in a virtual world.

A real‑world example

Take the popular “CryptoPunks” collection. There are only 10,000 distinct punk characters, each with its own DNA encoded in the smart contract. If you own one, you’re the sole owner. No other punk can claim it, and you can trade it freely on platforms like OpenSea. The contract’s logic ensures that once a punk is transferred, the new owner becomes the only legitimate holder.

Why people still find it confusing

• Metadata changes – The standard allows metadata to be updated, which can cause trust issues. Some projects lock the metadata to prevent tampering.
• Fees – Minting an ERC‑721 token requires a gas fee that can be steep during network congestion.
• Interoperability – While ERC‑721 is widely supported, some wallets don’t display all properties (e.g., animation or 3D models).

ERC‑1155: multi‑token efficiency

Fast forward to 2019, when the Ethereum community realized that the world of tokenized assets was diversifying. Developers wanted a single contract that could manage both fungible and non‑fungible items. That’s where ERC‑1155 comes in.

The mechanics

• Batch operations – You can transfer multiple token types in one transaction, saving gas.
• Token IDs and supply – Each ID can have a supply that’s either fixed or variable. A supply of one means non‑fungible; a supply of thousands makes it fungible.
• Metadata flexibility – The contract can reference a base URI, so you don’t need to store separate metadata for each token.

Because it supports both kinds of assets, ERC‑1155 is ideal for games. A single contract can house game currency, rare items, and even land plots, all under one roof.

A real‑world example

The popular game “Axie Infinity” uses ERC‑1155 for most of its in‑world tokens. Each Axie (a creature you collect) is an ERC‑1155 token with a unique ID. Its attributes, rarity, and even its DNA are encoded in the metadata. The game’s currency, Smooth Love Potion (SLP), is also an ERC‑1155 token but with a supply that can be minted or burned during gameplay.

Why it matters for DeFi

• Lower costs – Batch transfers reduce transaction fees, making it more feasible to issue many tokens at once.
• Unified marketplaces – A single marketplace can list both fungible and non‑fungible items, simplifying the user experience.
• Interoperability – Many DeFi protocols now accept ERC‑1155, enabling cross‑platform gameplay, trading, and staking.

Comparing ERC‑721 and ERC‑1155

The choice between them is not a matter of one being superior; it’s about matching the contract design to the asset’s nature. If you’re creating a single, one‑of‑one artwork, ERC‑721 is straightforward. If you’re building a game economy, ERC‑1155 is likely the better fit.

How do these standards fit into the DeFi ecosystem?

In DeFi, tokens are more than just collectibles; they’re often used for collateral, governance, or liquidity provision. Let’s walk through a few scenarios:

1. Collateral for lending

Suppose you own an ERC‑1155 token that represents a fractional share of a real estate property. A DeFi lending platform could allow you to lock that token as collateral and borrow ETH or stablecoins. Because the token can be transferred in bulk, you can quickly liquidate multiple shares if needed.

2. Governance participation

Some projects use ERC‑1155 tokens as voting rights. The token’s supply can be minted or burned based on community actions, allowing dynamic governance models that evolve with the protocol.

3. Liquidity mining

A platform might reward users with a combination of fungible and non‑fungible tokens for providing liquidity. For example, a liquidity pool could issue both a standard LP token (fungible) and a special “badge” NFT that grants future airdrops. ERC‑1155 makes bundling these rewards efficient.

Risks and pitfalls to watch out for

While the standards are robust, the ecosystem still has blind spots. Here’s what I look for when evaluating a token project:

• Contract transparency – Is the source code audited? Look for third‑party audits, especially for ERC‑1155 where batch operations can hide malicious logic.
• Metadata immutability – If the metadata URI can be changed after minting, the value of the token might fluctuate unexpectedly. Locking metadata is a good practice for collectibles.
• Supply manipulation – Some projects allow the contract owner to mint additional tokens after launch. This can dilute value or trigger a price crash.
• Gas price volatility – Minting new tokens or transferring them can become expensive when the network is congested. Plan for gas price windows, especially if you’re building a marketplace.

Practical steps for investors and developers

For investors

1. Do your homework – Check the contract address, read the documentation, and review any audits.
2. Understand the token’s role – Is it a pure collectible, or does it have utility (staking, governance)?
3. Watch the market dynamics – Some collections have tight supply, while others can inflate rapidly. Watch the volume and average sale price trends.
4. Diversify – Just like a portfolio of stocks, diversify across different types of tokens to spread risk.

For developers

1. Start with the right standard – If your project is purely unique items, ERC‑721 is fine. If you need both fungible and non‑fungible, choose ERC‑1155.
2. Implement batch operations – Save gas and make your platform more attractive to users who trade many items.
3. Secure metadata – Use IPFS or other immutable storage. Pin your JSON files to ensure they’re always accessible.
4. Test on testnets – Before deploying, run through all edge cases, especially with minting, burning, and transfers.

A broader perspective: Tokens as tools, not toys

Tokens, whether ERC‑721 or ERC‑1155, are tools designed to give people ownership and control over digital assets. Think of them like seeds in a garden. Some seeds grow into a single tree (an ERC‑721 NFT), while others form a field of crops (ERC‑1155 fungible tokens). The goal is to cultivate a flourishing ecosystem where people can grow, trade, and nurture value.

The excitement that surrounds NFTs and multi‑token standards often feels like a bubble. But beneath the hype is a genuine shift toward a world where ownership can be fractionalized, tradable, and programmable. That shift has practical applications: real estate tokens, tokenized art, and even intellectual property rights.

Final takeaway

Let’s zoom out. Whether you’re a casual collector or a serious portfolio builder, the essential thing to remember is that the standards—ERC‑721 and ERC‑1155—are the building blocks that give us flexibility. ERC‑721 is for pure uniqueness, while ERC‑1155 lets you combine multiple types of assets under one roof. Both come with their own trade‑offs, and both are governed by the same rules of transparency, immutability, and decentralization that underpin DeFi.

If you’re just starting out, my single actionable step is to pick one token that you find genuinely interesting and trace its entire journey: from contract deployment, through minting, to the marketplace, and finally to its real‑world use. That process will demystify the technology and give you a clearer sense of risk and reward.

Remember: markets test patience before rewarding it. By staying informed, questioning assumptions, and building a diverse set of digital assets, you give yourself a better chance to thrive in this new landscape.