In this Infoblock, we will explore how native custom tokens are represented on the Cardano blockchain and the advantages of having them defined in this way.

posted on May 3, 2021

Native custom tokens on Cardano: the anatomy and why it’s better than ERC tokens

The latest update on Cardano blockchain — which occurred on March 1, 2021 — brought support for the long-awaited native custom tokens. Shortly after the release, we saw hundreds of tokens being launched quickly by the community. In this Infoblock, we will explore how native tokens are represented on the blockchain and what all those terms mean.

The term token is a short form for “asset token”. An asset is an object that represents value on the blockchain. On Cardano, an asset is represented by a unique identifier (ID), forming a kind of “fingerprint” composed of two pieces of information: the minting policy ID and the asset name.

EBScoin created as an example of native token

Minting is a term that refers to the process used to stamp physical coins with a mark on one or both sides. In the digital context, minting policy is a set of rules that defines who and under what circumstances can create new tokens (minting) or destroy existing tokens (burning). Minting policy, therefore, determines the monetary policy of a token. For example, the monetary policy of ada is that new ada will never be minted or burned.

The minting policy ID is used to permanently associate the asset with the set of rules governing its creation or destruction, which prevents token issuers from either changing the policy after it is created or associating the token with a new policy.

The asset name, on the other hand, is an immutable property to identify different assets within the same minting policy. The name is not associated with some rule or code and can be composed of common words, such as EBScoin that EveryBlock Studio recently created. However, if we create another token under the same minting policy and name it EBSgovernance, they will be different assets and cannot be exchanged directly.

Only tokens with identical policy IDs and asset names are fungible with each other. That is, even though two assets with the same name may exist, they will belong to different minting policies and will not be fungible with each other. For example, if another group creates another EBScoin, they will have a different minting policy and therefore be distinct assets. The existence of different asset names under the same minting policy is a feature that can be used to create non-fungible tokens in Cardano, the so-called NFTs, but that is a subject for another Infoblock.

But what is the advantage of having tokens defined this way? On Cardano, custom tokens are native, which means that there is no need to use smart contracts to create all the transaction logic, as it is done on the Ethereum network. So there is no need to create standards like ERC-20 to define how an asset should be transacted, and any native token created by a third party is automatically supported by the official wallets and can be sent and received more easily.

Native token transactions are controlled by the same rules embedded in ada transactions, the primary token of the Cardano ecosystem, ensuring the same level of security for transactions while removing the complexity of token creation. This greatly decreases the potential for mistakes by token issuers and, importantly, reduces the transaction costs, as there is no need to execute a smart contract just to send an asset from one wallet to another.

See you next epoch!