An ERC-20 Token stands for “Ethereum Request for Comments,” which is a standard built on top of Ethereum to enable other tokens to be issued. Based on a smart contract that determines its rules, the ERC-20 enables anyone to issue tokens on top of Ethereum. As they are using a standard, those are interoperable. ERC-20 Tokens are critical to understanding the development of Ethereum as a business platform.
|Definition||An ERC-20 token is a standard for fungible tokens on the Ethereum blockchain. It defines a set of rules and functions that allow developers to create and manage digital assets that are interchangeable with each other. ERC-20 tokens have become a foundational element in the world of blockchain and are widely used for various purposes, including crowdfunding through Initial Coin Offerings (ICOs), creating digital assets, and powering decentralized applications (DApps). The ERC-20 standard ensures compatibility and interoperability among different Ethereum-based tokens.|
|Key Concepts||– Fungibility: ERC-20 tokens are fungible, meaning one token is interchangeable with another of the same type and value. – Token Standards: ERC-20 is one of several Ethereum token standards; others include ERC-721 (non-fungible tokens) and ERC-1155 (multi-fungible tokens). – Token Properties: ERC-20 tokens have properties like name, symbol, decimals, total supply, and balances. – Functions: They include functions for transferring tokens, checking balances, and approving token spending. – Interoperability: ERC-20 tokens can be used in various DApps, exchanges, and wallets that support the standard.|
|Characteristics||– Interchangeability: ERC-20 tokens are interchangeable and have the same value within the same standard. – Widespread Usage: They are widely used in the Ethereum ecosystem for fundraising, trading, and utility within DApps. – Standardized Interface: ERC-20 tokens adhere to a standard interface, ensuring compatibility with wallets and exchanges. – Smart Contracts: Most ICOs and token projects are implemented as smart contracts following the ERC-20 standard. – Decentralization: ERC-20 tokens operate on the decentralized Ethereum blockchain.|
|Implications||– Token Creation: ERC-20 simplifies the process of creating and managing tokens, enabling various projects and businesses to issue their own tokens. – Compatibility: Tokens conforming to ERC-20 can be easily integrated into wallets, exchanges, and DApps that support the standard. – Crowdfunding: Many ICOs and token sales use ERC-20 tokens as a means of raising capital. – Ecosystem Growth: ERC-20 has contributed to the rapid expansion of the Ethereum ecosystem. – Liquidity: ERC-20 tokens are commonly traded on cryptocurrency exchanges, enhancing liquidity.|
|Advantages||– Interoperability: ERC-20 tokens can be seamlessly integrated into a wide range of Ethereum-based applications and services. – Standardization: The ERC-20 standard provides clear guidelines, making it easier for developers to create and users to interact with tokens. – Compatibility: Wallets, exchanges, and DApps that support ERC-20 tokens can work with a variety of tokens using the same interface. – Accessibility: ERC-20 tokens have enabled a global audience to participate in token sales and access blockchain-based assets. – Liquidity: The standardization of ERC-20 tokens has facilitated their trading and exchange on numerous cryptocurrency platforms.|
|Drawbacks||– Lack of Uniqueness: ERC-20 tokens are fungible and lack uniqueness, which limits their use in cases requiring non-fungible assets. – Smart Contract Risks: Vulnerabilities or bugs in the smart contracts of ERC-20 tokens can lead to security issues or loss of funds. – Gas Fees: Transferring ERC-20 tokens on the Ethereum network incurs gas fees, which can be expensive during periods of network congestion. – Regulatory Scrutiny: Some jurisdictions regulate ERC-20 token offerings, potentially leading to legal complexities. – Scams: The popularity of ERC-20 tokens has attracted fraudulent projects and scams in the past.|
|Applications||ERC-20 tokens are used in a wide range of applications, including ICOs, tokenized assets, utility tokens for DApps, governance tokens for decentralized autonomous organizations (DAOs), and as a means of transferring value within the Ethereum ecosystem.|
|Use Cases||– Initial Coin Offerings (ICOs): ERC-20 tokens are commonly used to raise capital through token sales. – Tokenized Assets: Real-world assets like real estate or art can be represented as ERC-20 tokens for easier trade and ownership. – Utility Tokens: Many DApps use ERC-20 tokens to grant access to their services or features. – Governance Tokens: Some projects issue ERC-20 tokens for community governance and decision-making. – Trading: ERC-20 tokens are actively traded on cryptocurrency exchanges. – Wallets and Exchanges: ERC-20 tokens can be stored in Ethereum-compatible wallets and traded on exchanges.|
Deep dive into the ERC-20 Token
Building up a protocol from scratch and making it work seamlessly is not a simple feat. That makes other blockchain-based projects leverage on existing protocols rather than building them from scratch. Ethereum is one of the most picked up protocols by new projects coming along, and for instance as of April 2021 more than three hundred thousand ethereum token contracts had been built by leveraging the Ethereum’s blockchain.
Indeed, one of the main use cases of Ethereum is the ability to build decentralized applications (dApps). As Ethereum highlights “A dapp has its backend code running on a decentralized peer-to-peer network. Contrast this with an app where the backend code is running on centralized servers.”
Thus, dApps leverage smart contract (as highlighted by the Ethereum foundation “a smart contract is code that lives on the Ethereum blockchain and runs exactly as programmed. Once they are deployed on the network you can’t change them. Dapps can be decentralized because they are controlled by the logic written into the contract, not an individual or company. This also means you need to design your contracts very carefully and test them thoroughly.”).
Another key application of Ethereum, as we saw, is the DAO or the ability to run autonomous organizations, where there is no single person in charge, but rather pieces of code run on top of the blockchain to execute commands based on consensus algorithms, usings tokens as a voting mechanism.
Let’s explore now another case, which will interest us in the next section. Building up a viable and scalable protocol from scratch isn’t a simple feat, and Ethereum was among the first to build a protocol with the sole purpose of “hosting” other applications and networks. Thus, a real “Blockchain Platform.”
Ethereum has two specific protocols to enable tokens to be created out of the network: ERC-20 (for issuing fungible tokens – thus interchangeable – on Ethereum) and ERC-721 (for issuing non-fungible – thus non-interchangeable tokens).
ERC stands for “Ethereum Request for Comments” which is the standard to create your own token on top of Ethereum.
To gain a bit of context, as of May 2021, most of the tokens out there are Ethereum-based. In short, those are the ERC-20 type (representing a fungible, exchangeable note). Indeed, as of May 2021 almost four hundred thousand ERC-20 tokens exist on top of Ethereum. Many of those tokens have reached a market cap of dozens of billions.
It’s important to note that anything on Ethereum is expressed on a token. Indeed, a token doesn’t just represent an exchange of currency, a token can be used to assign reputation points on a platform, assign lottery tickets, as attribution/ownership in a financial asset (just like shares), a fiat currency and much more.
Therefore, the ERC-20 enabling the “tokenization” on top of Ethereum represents a “standard – which – allows developers to build token applications that are interoperable with other products and services” or in short a standard for fundible tokens.
This is critical, as otherwise, and before the ERC-20 standard was born, anyone that wanted to create a token had to do it from scratch (which means they had to code an entire blockchain protocol in the first place) and with custom built code. Thus, lacking interoperability at all.
Instead, with the ERC-20, thousands of tokens have been created on top of Ethereum and going forward those are interoperable, giving space to powerful network effects on top of the main blockchain.
Simply put, a token can be created as part of a smart contract which contains the rules to create tokens, manage these tokens and therefore anything that happens within.
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