What Is ERC-20?

Have you ever heard ๐Ÿ‘‚ of the ERC-20 Ethereum token standard? No? Well, you’re hardly alone. If you’re curious ๐Ÿค” about crypto, you might be wondering, โ€œwhat exactly is this, and how does it work?โ€ “Are there transaction fees?” “is it like buying real estate or a physical object?”

If you want to know more about these Ethereum-based tokens and their standard protocol, weโ€™re here to help ๐Ÿ˜. Sit back as we discover the whats and whys of ERC-20.

What Exactly Is ERC-20?

ERC-20 is actually an acronym that stands for Ethereum request for comment. Simply put, it’s the standard for tokens created using the valuable cryptocurrency Ethereum ๐Ÿ˜ฑ.

ERC-20 defines a common list of rules ๐Ÿ“œ that all Ethereum tokens must follow, such as how the transfer of tokens works and how data within each basic attention token is accessed. This helps developers program new tokens that meet the token contract’s technical standards within the Ethereum ecosystem.

ERC-20 isn’t really an item of code or software; instead, it might be referred to as a technological standard or spec ๐Ÿ“ฒ. The ERC-20 standard was created by blockchain developer Fabian Vogelsteller in November 2015. Fabien wanted to create a means to systematize the tokens within smart contracts on the Ethereum blockchain exchange platforms. (No idea what a smart contract is? More on that in a minute.)

Fabien sent the proposal using the project’s GitHub web page as an Ethereum Request for Comment (ERC). As it was the twentieth comment, it was appointed the classification ERC-20 ๐Ÿ‘Œ.

What’s an ERC-20 Token?

ERC-20 tokens are digital assets ๐Ÿ‘ฉโ€๐Ÿ’ป that have been built using the Ethereum blockchain networks using the ERC-20 standard. They are often used to fundraise for new projects through an Initial Coin Offering (ICO). 

How Do ERC-20 Tokens Work?

ERC-20 tokens are built on the Ethereum blockchain and use this popular cryptocurrency’s smart contracts. These smart contracts are nifty self-executing contracts based on blockchain โ›“programming. 

In a smart contract, the terms of the agreement between buyer and seller ๐Ÿค are written into code based on the Ethereum foundation. This code is stored on the blockchain and executed automatically via consensus protocols when certain conditions are met.

ERC-20 tokens use the same smart contract functions as Ethereum’s native currency, Ether. These functions include:

  • Transferring tokens from one address to another
  • Checking the balance of an address
  • Approving another address to spend tokens on your behalf

ERC-20 Rules

The ERC-20 token standard has an important role. It specifies a typical checklist of optional rules that Ethereum tokens using smart contracts must follow. A few of these rules include ๐Ÿ˜‰:

  • Basic functions
  • How tokens can be exchanged
  • How deals are accepted
  • How customers can access data regarding a token
  • The overall supply of tokens, including the issuance rate

Pros of the ERC-20 Tokens

These standards for token implementation have a couple โœŒ๏ธ of great benefits for ERC-20 tokens:

  • Compatibility with all Ethereum wallets. This means that you can store all of your ERC-20 tokens in a single Ethereum wallet.
  • As fungible tokens, ERC-20 compliant tokens are interchangeable. They can easily be traded or exchanged for another token supply. This is because all ERC-20 tokens use the same smart contract functions.
  • No transaction fees or network fees ๐Ÿ’ธ. It’s all part of the benefits that come with decentralized finance.
  • Added improvements with time. This includes protocol upgrades on the decentralized exchange, better user interfaces, API (application program interface) for digital tokens, and network upgrades allowing hundreds of transactions of valuable cryptocurrency to take place in the cryptocurrency industry.

Cons of ERC-20 Tokens

Of course, every system has its drawbacks. Here are the ones you need to watch out for when it comes to ERC-20 tokens.

  • ERC-20 tokens are not compatible with non-Ethereum wallets. This means that if you want to store your ERC-20 tokens in a different type of digital wallet ๐Ÿ“ฒ, you will need to use a different cryptocurrency wallet for each type of native token.
  • ERC-20 is not as secure as Ethereum 1.0 and Ethereum 2.0’s native currency, Ether. This is because ERC20 tokens are stored on the Ethereum blockchain, which is not as secure as other blockchains in the cryptocurrency space ๐Ÿ‘จโ€๐Ÿ’ป. You can store your ETH balance in any crypto wallet, on the other hand.

What Is the Future of the ERC-20 Protocol?

The future of ERC-20 transactions and tokens is uncertain. Most ICOs use other types of tokens, such as ERC-721 tokens. However, at this point, the ERC-20 protocol itself seems to be an accepted part of the Ethereum network.

More folks might start including ERC-20 tokens in their token balance if the Ethereum blockchain addresses some issues, such as security ๐Ÿ”. More people would be confident in using the tokens as a financial asset if they knew that the currency was more secure within the permissionless network.

There’s a lot to keep track of in the crypto space! Stay tuned to the latest blockchain news in the cryptocurrency space by signing up โœ๏ธ for Ian Corzineโ€™s newsletter.