You've likely come across the term "ERC-20" in your crypto endeavours, with plenty of these token standards currently ranked in the top 10 (even top 100) cryptocurrencies. But what does ERC-20 actually mean, and what is a token standard? In this piece, we're uncovering everything you need to know about these popular crypto terms.
To start things off, ERC stands for Ethereum request for comment.
What is a token standard?
Let's start at the beginning. When Ethereum was created to provide developers with a platform on which to build decentralized apps (Dapps), the team incorporated several token standards.
These token standards allow new projects to create, issue and deploy various functioning tokens on the blockchain. Each token standard is a smart contract that holds a set of particular "rules" that must be followed in order to be created.
In recent years a number of blockchain platforms that provide Dapp creation functionality have created their own token standards, however, for the sake of this article we are only looking at Ethereum.
The most popular token standards on Ethereum are the ERC-20, ERC-721, ERC-777, and ERC-1155 tokens. Each holds its own functionality and would be utilized depending on what the Dapp intends to use it for, i.e. will it be a transferable asset or be used to hold ownership rights.
What is an ERC-20 token?
By far the most popular token standard utilized on the Ethereum network, the ERC-20 token is a fungible token that can be bought, sold and traded in the blockchain ecosystem. To date over 350,000 ERC-20 tokens have been created.
Similar to the functioning of other cryptocurrencies like Bitcoin and Litecoin, ERC-20 tokens also hold value and are able to be bought and sold, however, they operate solely on the Ethereum blockchain. This means that all ERC-20 transactions conducted are executed on the Ethereum blockchain network.
The rules associated with this particular token ensure that it can function optimally on the Ethereum blockchain, and must be submitted to the community leadership for approval prior to its launch. While some rules are mandatory and others optional, the required ERC-20 rules are as follows:
- total supply: defines the total supply of the token
- balance of: indicates how many tokens are in a wallet address
- transfer To, Transfer From: must be able to be transferred from one user to another
- allowance: ensures that wallets have a sufficient amount before making a transaction
- approve: checks total supply against transactions
The optional elements are centred around the token's name, its ticker symbol and how many decimal places it would have %u200BFor instance, Ethereum's token name is Ether, its ticker symbol is ETH and it is divisible by up to 18 decimal places.
Examples of ERC-20 tokens are Augur (REP), Basic Attention Token (BAT), Maker (MKR), USD Coin (USDC) and OmiseGO (OMG).
Can you mine ERC-20 tokens?
ERC-20 tokens, unlike Ethereum and its native coins (ether), cannot be mined. That is, new tokens are 'minted' when a planned initial token offering (ICO) or security token offering (STO) event takes place. Usually, these events involve users sending ether to a smart contract address and in return receiving the newly minted ERC-20 token.
An ERC-20 token is technically a smart contract so it's possible for the developer team behind an ERC-20 token to issue new tokens at will. However, this isn't recommended because users would be less likely to trust these tokens if they could be minted at will. There must be a measure of scarcity in order for tokens to be valuable.
The pros & cons of ERC-20 tokens:
Some of the main benefits of ERC-20 tokens include:
Fungible
Fungible ERC20 tokens are interchangeable, just like cash. Although the coins are technically distinct, they function in exactly the same way. You can trade one for another and they will be functionally equivalent, just like cash or gold.
Fungible tokens are fantastic, and there's a lot of value in the technical aspect. On a technical level, it's worth noting that fungible tokens don't add extra value to goods. They're typically beneficial in a variety of commercial scenarios.
Broad adoption
The popularity of ERC-20 tokens is quite apparent in the cryptocurrency industry. The number of exchanges, wallets, and smart contracts that already support newly-launched tokens has made it easy for new projects to integrate with them. There is plenty of developer support and documentation to go around.
Flexibility
The first thing to note about ERC-20 tokens is that they are highly flexible and may be used in a variety of circumstances and applications. This is due to the fact that these tokens are very customizable. They can be used in a lot of different scenarios such as Loyalty points programs, in-game currencies, or digital collectibles such as NFT's.
Some of the main cons of ERC-20 tokens include:
Mainstream
The popularity of ERC-20 tokens is also their greatest weakness. There are so many projects using the same standard that it's difficult to stand out from the crowd without differentiating your token in some way. Moreover, since they're essentially all the same on a technical level.
Fraud and Scams
It takes minimal effort to create a simple ERC-20 token, meaning that anyone could do it for good or bad purposes. As such you want to be careful with what you're investing in when considering blockchains projects because there are some Pyramid schemes masquerading as legitimate projects out there and trying to get unsuspecting investors involved in their scams. As a result, when looking at blockchain projects, you need to be cautious with what you invest in.
Other ERC Token Standards
While there is a large range of ERC tokens available, below we've outlined the most popular ones (excluding the ERC-20 one as it is listed above).
ERC-721
This token standard is for a non-fungible token (NFT) which gained huge popularity in the last year across the gaming and digital art worlds. These tokens represent ownership of something, and cannot be used interchangeably.
ERC-777
An evolution of the ERC-20 token, the ERC-777 provides more usability, particularly pertaining to its ability to mint or burn tokens. It also holds improved transaction privacy and an emergency recovery function.
ERC-1155
This token standard allows for the creation of both utility tokens and non-fungible tokens. Making trading more efficient, the token standard allows for bundling of transactions which in turn saves costs.
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