update 30 August 2021

A Beginner’s Guide to Ethereum (ETH) ERC-20 Tokens

If you’re new in the crypto space, the concept of Ethereum and ERC20 tokens can be quite mind-boggling. Despite being a blockchain such as Bitcoin, Ethereum has numerous capabilities such as supporting the creation of other tokens and enabling decentralized applications (dApps) to be run on it. Ethereum provides the necessary infrastructure required to create tokens, meaning developers don’t have to build an entirely new blockchain. 

In creating tokens on the Ethereum blockchain, developers may comply with the ERC-20 smart contract technical standard. ERC stands for Ethereum Request for Comment, and 20 is the number that represents the unique proposal ID. In recent years, the ERC20 token standard has become the defacto token specification for Ethereum tokens. Today, most Ethereum tokens are ERC20-compliant. 

A Quick Intro to Ethereum and Smart Contracts

If you’re not familiar with Ethereum, it’s a blockchain network composed of a giant mass of nodes interconnected to one another. From its website, Ethereum claims to be a “decentralized platform that runs smart contracts.”  Ethereum leverages smart contracts to implement several functions executed on the Ethereum Virtual Machine (EVM) in a decentralized manner. 

Smart contracts are a series of instructions written using Solidity and works based on the IFTTT logic, i.e., IF-THIS-THEN-THAT. On the Ethereum platform, smart contracts are used to create ERC-20 tokens. It also facilitates the transactions of tokens and records token balance updates in the users’ accounts.   

Overview of ERC20 Token

What is ERC20 Token Standard?

In simple terms, the ERC20 tokens standard is a set of functions to be implemented by all ERC20 tokens on the Ethereum blockchain to allow for seamless integration with other contracts, marketplaces, or wallets. The Ethereum blockchain comprises several token standards broadly categorized as fungible (one unit is equal to another) and non-fungible (one unit is not equal to another). ERC20 is an example of such a standard and dictates what a token developer needs to comply with when creating a token on the Ethereum blockchain. 

Consider the ERC20 token standard as a set of rules that must be followed for a token to be created and transacted on the Ethereum network. While DAPP developers can follow other standards on the Ethereum network, they are encouraged to follow the ERC20 standard to enable their tokens to leverage smart contracts and seamlessly interact with another platform in the crypto ecosystem, notably wallets and exchanges. To be ERC20 compliant, a token needs to have a set of 6 functions that can be recognized by other smart contracts. The ERC token standard enables ERC20 tokens to: 

  • Get the account balance. 
  • Transfer the token from one party to another.
  • Get the total token supply. 
  • Transfer the token from one party to another.

ERC20 Tokens

Cryptocurrency tokens are value counters in a contract. ERC20 tokens are, therefore, crypto-tokens built on the Ethereum blockchain adhering to the ERC20 token standard. ERC20 tokens are the most popular type of tokens on the Ethereum blockchain and represent fungible assets such as virtual currencies, vouchers, shares, and physical assets such as gold. 

ERC20 tokens are usually categorized into broad groups: usage tokens and work tokens. Usage ERC20 tokens attract utility, meaning that users can pay for goods and services using the token. On the other hand, work tokens don’t have utility but give you a sense of share ownership in the network ecosystem. 

ERC20 tokens have specific characteristics as below:

  • Fungible-The code of each token is similar to the rest, although transaction histories can be used to identify and differentiate tokens. 
  • Fixed Supply– ERC20 tokens usually have a fixed supply to keep the inflation constant. 
  • Transferable– ERC20 tokens can be transferred from one crypto wallet to another as long as it’s supported by the wallet/exchange. 

ERC20 Tokens Use Cases

Today, the most common use case for ERC-20 tokens is in ICOs. In Initial Coin Offering (ICO), a new blockchain project develops an ERC-20 token to crowdfund investors. When the project is complete, the tokens are released, and investors can make gains before the project moves to its Mainnet- own blockchain network. ICOs have significantly revolutionized the crypto space by providing the simplest path by which DAPP developers can obtain the required funding for their projects. 

Other use cases of ERC20 tokens include: 

  • Collateral deals 
  • Token-based voting systems 
  • Staking platforms 
  • Tokenized assets, i.e., silver, arts, gold
  • Native currencies for decentralized apps
  • Securities dividends 

These are just a few use cases. There are currently more than 80,000 ERC-20 tokens in existence on the Ethereum blockchain, serving different purposes. Their prospects are seemingly endless.

Benefits of ERC20 Standard in the Crypto Space

In traditional programming, apps can interact with each other using APIs. However, in the Ethereum ecosystem, developers realized that everyone was creating their tokens using different means, creating interoperability problems. It was almost impossible for the Daaps and tokens to interact with each other. For instance, if a wallet wanted to communicate with multiple tokens, it had to create an interface such as an API for every token. This will be not only cumbersome but also very costly. Therefore, Ethereum needed to develop a standard to enable each contract token to communicate with each other.  

Some of the benefits of the ERC20 standard include: 

  • It allows for easy token implementation by developers. 
  • Enhances liquidity of ERC20 tokens.
  • ERC20 standard ensures that the transactions are risk-free. 
  • The protocol streamlines the entire process of creating tokens on the Ethereum blockchain.
  • Reduces risk of breaking smart contracts.
  • Reduced difficulty of understanding each type of token implementation.

How to buy and store ERC20 Tokens

There are numerous ERC20 tokens with notable ones, including ICON (ICX), Basic Attention Token (BAT), Golem (GNT), Augur (REP), Populous (PPT), etc. Some such as TRON (TRX) and VeChain (VET) have also moved from being ERC20 tokens to launching their blockchain networks.  

ERC20 tokens can be bought or traded on a majority of crypto exchanges, including Binance and Coinbase. To store these tokens, you’ll need an ERC-20 compatible crypto wallet. There are numerous wallets, both hardware and online wallets, including; MetaMask, Trezor, Ledger, Sugi, BitBox, etc. 

Conclusion

“ERC” stands for “Ethereum Request for Comments,” an official protocol used to propose improvements to the Ethereum network. The “20” is the unique ID number used to identify the proposal. ERC20 standard offers many benefits to the Ethereum ecosystem, allowing anybody to create and deploy tokens seamlessly. ERC20 tokens have found numerous use cases, mostly enabling investors to raise money for their projects through ICOs. However, when dealing with ERC20 tokens, please don’t confuse them with cryptocurrencies.

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Unlike cryptos such as Litecoin and Bitcoin, ERC20 tokens don’t have their own blockchain and only attract utility in their respective Daaps. Therefore, you may want to be cautious when investing in any token, especially ICOs, as there is a high possibility of an exit scam that can leave you counting losses.    

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