What is an ERC20 Token?

ERC20 Token

If you are reading this, chances are you may have heard of the term ‘ERC20’ in last year’s ICO boom.

Every new start-up ICO last year was coming up with their whitepapers and ‘ERC20 tokens’ to collect millions from crowdfunding.

I know many of us also participated in such ICOs that were offering these tokens in exchange for ETH or BTC. (Clueless about ICOs? Check our extensive guide on it here.)

Some ICOs like Tezos and Filecoin went on to raise humongous amounts – $232 million and $252 million respectively!

However, did anyone pause and reflect on the value of these tokens they were collecting or what exactly these token were? Or where they come from? Is that the only thing one needs to raise millions of funds? I guess only a handful of us actually paid attention to these.

Hence, I am here to tell you about what these ERC tokens and to tell you if they really are worth in exchange for your ETH and BTC.

What is an ERC20 Token?

ERC20 is a protocol standard that defines certain rules and standards for issuing tokens on Ethereum’s network.

In ‘ERC20’, ERC stands for Ethereum Request For Comments and 20 stands for a unique ID number to distinguish this standard from others.

Similar to the fact that we have an HTTP protocol for internet, we have a standard protocol for tokens to be issued on Ethereum i.e. ERC20.

To put it in layman terms, if you include certain functions in the token’s smart contract, you are ERC20 compliant. If you don’t include the mandatory functions, you are not ERC20.

You can see those functions here.

Token-Standards-of-ERC20

So, those tokens on Ethereum’s network checks all the necessary boxes i.e. includes the necessary functions in their token implementation which are deemed as ERC20 tokens.

These are crypto-assets or crypto-tokens which can be traded like Bitcoin or Ethereum or Litecoin but unlike these cryptocurrencies, they don’t have their dedicated blockchain. Instead, they thrive on Ethereum’s blockchain and bring several benefits for the users which I will discuss further in this article.

Difference Between Standalone Cryptocurrencies & ERC20 Tokens

Like I stated earlier, ERC 20 tokens don’t have their dedicated blockchain and thrive on Ethereum’s blockchain instead. This is the reason why, when you send ERC20 tokens, you are required to have some Ethereum as GAS.

To make it is simpler to understand consider this example of an ERC20 token i.e. OmiseGo Token.

See this transaction ID-https://etherscan.io/tx/0x302b11fef665f23a197635699d7123790abc0456d40dc2275c326fb502ca04cc

If you look closely you will find that Ether transfer is ‘0’ and it will look like zero value was transacted (see the red box ). But on closer examination, you will find 162. 4 OMG tokens where transacted between two Ethereum addresses. (See the yellow box below)

OMG-Transaction

In the yellow box, you can also see the smart contract address of OMG starting with ‘0xd26…’. If you go ahead and check the smart contract’s source code, you will find all the functions that an ERC-20 token should have. Here is the link. And this smart contract is like an accountant that keeps track of total supply, distribution etc of an issued ERC20 token on Ethereum’s network.

Also, you can see in the image above that the transaction fee was paid in Ether, which is calculated from GAS price and Gas limit. That is why, to transact ERC20 tokens, you should have Ether prior on to the address from which you plan to initiate a transaction out.

Benefits of ERC20 Standard

Prior to the ERC20 token standard, different start-ups or DApps used to set their own standards and implementations for launching a token on Ethereum’s network.

However, with the launch of the ERC20 standard, things have changed and have become much more streamlined. Also, a standard like ERC20 have a lot of benefits:

  • Uniformity of tech and protocol standard.
  • Reduced complexity of understanding each type of token implementation.
  • Enhanced liquidity of ERC20 tokens.
  • Reduced risk of breaking contracts.

Imagine a scenario wherein 100s and 1000s of tokens are launched on Ethereum’s network, each with their own set of standard and rules. This will create a liquidity problem for such tokens and a lot of headache for exchanges that try to implement them. In this scenario, each time a token comes for listing to an exchange, it would require a lot of work from bottom to top to be actually listed.

Whereas, if you have a standard and uniformity that ERC20 brings to the table, it becomes very easy for users as well as exchanges to list such tokens quickly given that the tokens follow a standard i.e. ERC20.

This is only one practical scenario but there can be many such as tokens being exchanged via smart contracts on decentralized exchanges without any third party because their underlying tech and standards of implementation are same. Whereas, if we go on to implement a decentralized exchange of tokens that follow different rules and standards, it will become very cumbersome to implement such a DEX.

Also, already as of now, there are more than 20,000 ERC20 tokens contracts running on Ethereum’s blockchain. Not having a standard will bring a lot of such unseen issues. Some of the very well known and popular tokens are shown below.

ERC-20-Tokens

Conclusion

Now you know how easy it is to create an ERC-20 crypto-asset in an open-source project like Ethereum. This naturally calls you to be extra mindful that both technology enthusiasts and scammers are using this tech and will continue to use it to launch many such tokens to raise huge funds in ICOs.

Also, these are tokens and not actually currencies that we will be used in day-to-day life like Bitcoin or Litecoin. They are utility tokens for their specific DApps, so it is difficult to judge in these early days as to what their value should be despite the fact that they are useful as utility tokens.

So better be extra cautious while participating in ICOs and HODLing such crypto-tokens because some of them have already pulled out an exit scam like Confido ICO scam.

Stay safe, don’t get caught in trouble and keep learning about the blockchain revolution at CoinSutra.

Also, if you find this post informative, kindly share it with your friends and crypto enthusiasts!

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