What are ERC-20 Tokens?

As you dive deeper into the world of blockchain, the term “ERC-20 tokens” are hard to miss. In fact, you learn about the use and versatility of ERC-20 tokens, which are built on the Ethereum blockchain, each time that you read about the leading decentralized finance and decentralized application projects that are revolutionizing blockchain technology. 

In this article, we explore everything you need know about ERC-20 tokens, and how they are creating the foundation for the future of blockchain technology and cryptocurrencies:

What is Ethereum?

Ethereum is a blockchain-based decentralized platform with several functions. Like other blockchain networks, it can record transactions. Unlike other blockchain networks, it allows developers to build and deploy Decentralized applications (dApps).

Launched in 2015, Ethereum has grown to become the second-largest cryptocurrency platform by market capitalization. It is second to Bitcoin, the pioneer of cryptocurrencies.

What Are ERC-20 Tokens?

ERC-20 tokens, which are sometimes written as “ERC 20 tokens” or “ERC20 tokens,” are blockchain-based assets that are built on the Ethereum platform. Similar to other crypto assets, they hold monetary value; however, they do not have their own blockchain. 

Top 10 ERC-20 Tokens by Market Cap
Source: ETH Explorer (as of 10/28/20)

ERC-20 tokens reside on top of the Ethereum blockchain. They are designed to work solely on the Ethereum platform. They are stored on Ethereum addresses and sent using Ethereum transactions.

Upon its conception, Ethereum developers were looking for a tool that would allow them to create a multi-capacity system. To do so, they would need a standard interface to continue adding new functions to the network. This is where ERC-20 tokens entered the game. 

ERC20 on Ethereum
Source: Data Towards Science

How Do ERC-20 Tokens Work?

ERC-20 tokens work within a programmatic framework that the Ethereum developers set. All this is done without interrupting the blockchain. Its main use is to standardize the interface for creating and issuing new tokens on the network. 

The ERC-20 command defines a standard list of rules that each Ethereum token needs to follow. This way, developers do not need to worry about changes in the network when a new token project is released. 

They will predict the behavior of the new token and continue their work. Also, they offer transparency and security to the user throughout the transaction.

ERC-20 Tokens: Optional and Mandatory Rules

ERC-20 tokens follow a list of rules to ensure smooth transactions. The rules are nine, three are optional, and six are mandatory.

The three optional rules, which are used to identify each token, are:

  1. Token name
  2. Symbol
  3. Decimal (up to 18)

The six Mandatory rules include;

1. Total Supply:

This function identifies the total number of ERC-20 tokens created. It helps developers know how many tokens are in the network.

2. Balance

This function counts the number of tokens that the contract owner has in their account.

3. Approve:

This function enables the contract owner to give the user their approval to collect the required number of tokens from the contract’s address. The function also makes sure counterfeiting is impossible.

4. Transfer To:

This function lets the contract owner send the total tokens to the party’s address in the contract. It works like a conventional cryptocurrency transaction.

5. Transfer From:

This function lets the contract owner automate the payment and send it to a specific address. It serves to avoid problems during the transaction.

6. Allowance:

This function evaluates if the user has enough tokens to perform the transaction. If the user does not have the least required number of tokens, the transaction is canceled.

Benefits of ERC-20 Tokens

1. Fungible:

ERC-20 tokens are fungible. This means each unit is interchangeable with another. All ERC-20 tokens have the same quality and functionality. You can trade the tokens with some else’s, and they will still be functionally identical.

2. Flexible:

ERC-20 tokens are highly customizable. They can be tailored to many applications. They can be used to represent property rights or fine arts. Game developers can also use them as in-game currency.

3. Popular:

ERC-20 tokens have become quite popular in the crypto space. One major reason for their popularity is their regulations. The tokens’ regulations make it easy for developers to create tokens on the Ethereum.

Flaws of ERC-20 Tokens

1. Bugs:

ERC-20 tokens are not perfect and it’s important to understand that this is an emerging technology. In April 2018, multiple exchanges, including Poloniex and HitBTC, suspended ERC-20 Token trading due to the BatchOverflow bug. The vulnerability could allow attackers to possess a huge amount of tokens.

2. Scams:

Given the success of ERC-20 tokens, driven by notable DeFi and dAPP projects, the attention has drawn in individuals who are looking to take advantage of investors. In 2017, there was an abundance of initial coin offerings for projects that had no intention of being developed. For this reason, extensive research into the technology and its team is vital before jumping into any crypto project.

In Summary

ERC-20 tokens have played a huge role in the growth of the crypto ecosystem. The tokens ushered in a new and much faster way of conducting business in the crypto space. Thanks to ERC-20 regulations, making and deploying tokens became easier and accessible to everyone.