What Are ERC-20 Tokens

Ivan Skladchikov
May 20, 2020

By now, there are over 200,000 ERC-20 tokens in existence and they keep mushrooming. You must have heard this term many times, most probably in connection with the recent ICO boom. Now, it’s time to answer the question “What are ERC-20 tokens?” Also, we are going to explore the role of these tokens in the blockchain ecosystem development and list the benefits they offer.

What Are ERC-20 Tokens: Basic Definition

An ERC-20 token is a cryptocurrency based on the Ethereum blockchain. The abbreviation stands for Ethereum Request for Comment. We will deal with this document a bit later in this article.

To put it simply, ERC-20 tokens are the Ethereum network’s kids. The names and functions may vary, but they all share the same “genes” and follow the rules the parent dictates.

ERC-20 tokens vs BTC

ERC-20 tokens and Bitcoin have a lot in common, but there are some important differences, too.

Like BTC and friends, ERC-20 tokens are fungible assets. It means they are interchangeable: one token is as good as any other of the same kind. This is digital money that has a certain value. You can trade, send, receive, and donate it. 

Unlike BTC, all ERC-20 tokens have no individual blockchains. Instead, they all belong to the Ethereum network family. You create these tokens following the established standard and transfer them using ETH transactions. To execute these transactions, you need gas.

ERCs: distinctive features and functions. Image source: 101 Blockchains

Ethereum Requests For Comments (ERCs) Explained

ERCs are technical guides for smart contract developers. These documents provide sets of rules (standards) for implementing tokens on the ETH platform. Normally, such docs are written by developers themselves. First, they submit their improvement proposals to the ETH community. Then, if the community approves this proposal, it becomes a new ERC.

ERC-20 is the most widespread (but not the only) technical standard for fungible tokens, where 20 is the ID number of the proposal. It consists of three optional and six mandatory parameters. You must comply with these rules if you decide to create an ERC-20 token.

The relationship between Ethereum, DApps, smart contracts, and ERC-20 tokens. Image source: Medium

ERC-20 Tokens, Smart Contracts, and Dapps

As you know, Ethereum is a blockchain platform that runs decentralized applications (DApps) based on smart contracts. For a user, DApps don’t look very different from a ‘traditional’ app, but they rely on the underlying blockchain for their work. It defines the way the data is processed, transferred, and stored.

Smart contracts are self-executing P2P agreements in the form of computer code. Basically, smart contracts are the link between DApps and blockchain technology. However, people often use the terms “smart contracts” and “DApps” interchangeably. It’s not correct because decentralized apps don’t always stand on a blockchain. A good example is BitTorrent, a popular protocol for P2P file-sharing.

ERC-20 is the standard smart contracts apply to create tokens, handle token transactions, and keep a record of the token holders’ balances.

The popular hardware wallet Ledger supports more than 1,200 ERC-20 tokens. Image source: Ledger

What You Can Do With ERC-20 Tokens

As we have already said, these tokens can act as a cryptocurrency. In this sense, they are functionally similar to BTC, BCH, LTC, etc., and can serve the same purpose.

Also, ERC-20 tokens can represent digital shares. Depending on how many tokens they possess, shareholders can take part in the project management, define its road map, and so on. Besides, they can receive dividends. 

Finally, it’s possible to apply ERC-20 tokens as loyalty points. Some DApps reward their users for contributing to the project, creating and sharing quality content, or complying with the platform rules. For example, a medical Dapp can encourage you to lead a healthy lifestyle by monitoring your vitals and offering a small token reward for doing exercises, giving up bad habits, and other heroic deeds.

To buy an ERC20 token, place a market or limit order on a crypto exchange where this token is available. Image source: Exscudo

How to Buy ERC-20 Tokens

The first option is to purchase the token you want on a well-reputed exchange (check if it is available there). Some big exchanges with high liquidity are Binance, Coinbase, and Bittrex. You can join this or any other suitable platform to buy or sell ERC-20 tokens using fiat and cryptocurrencies.

To manage your ETH and ERC-20 tokens, get yourself a compatible wallet like Mist, MEW, or Metamask. For super-safe storing, invest in a good hardware wallet by one of the leading manufacturers.

Binance coin and CRO ranked #8 and #14 on the list of the biggest cryptos. Image source: CoinmarketCap

The Biggest ERC-20 Tokens 

The list of the most popular and biggest (in terms of market cap) ERC-20 tokens include:

  • BNB (Binance Coin, originally based on ERC-20)
    Market cap: $2 668 377 499
  • CRO (Crypto.com Coin)
    Market cap: $1 193 825 927
  • USDC (USD Coin)
    Market cap: $706 171 087
  • MKR (Maker)
    Market cap: $329 518 641
  • BAT (Basic Attention Token)
    Market cap: $306 581 32
  • OMG (Omise)
    Market cap: $161 545 232
  • TUSD (TrueUSD)
    Market cap: $137 291 403

ERC-20 Tokens Benefits

There are a few important benefits ERC-20 standard offers to the world.

  • It establishes clear and easy-to-follow rules for developers who seek to create fungible tokens. Complying with these rules guarantees that no tokens have “special rights” or feature specific behaviors.
  • ERC-20 is essential for smart contracts that have the potential to revolutionize many industries.
  • This standard makes the implementation of fungible tokens easier for developers, as it provides them with a pattern.
  • Increased uniformity = decreased complexity.
  • ERC-20 enhances the liquidity of tokens. The compliant tokens are welcome on many exchanges all over the world.
  • It solves the problem of interoperability between ETH-based tokens.
  • ERC-20 standard makes fundraising easier (though this benefit has a darker side, too). Over 95% of the ICOs use these tokens.
ERC-721 is another popular token standard that regulates the creation of non-fungible tokens for managing game assets, collectibles, pieces of art, and other unique objects. Image source: Happy Coin News

ERC-20 vs Other ETH Token Standards

As we said, ERC-20 is not the only token standard in the Ethereum network. Other common standards include:

  • ERC-721 for implementing non-fungible (unique, non-interchangeable) tokens.
  • ERC-223, an improved version of ERC-20 that correct some of its flaws. Also, ERC-223 transactions are much cheaper.
  • ERC-1155 allowing to deal with tokens of different types (fungible, semi-fungible and non-fungible).

Conclusion

ERC-20 token standard is still the most common and important one, though it features some flaws and limitations other ETH protocols address. 

The introduction of ERC-20 was a huge breakthrough that greatly contributed to wider adoption of blockchain assets.

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