ERC-20 Tokens: Everything You Need To Know

June 18, 2019

FrederikNielsen
55

What are ERC-20 tokens?

Understanding how Bitcoin works is not easy for most people, and Ethereum is much more difficult. Even if you are with technologies on “you”, it will take a lot of time to understand how this system works. So, Ethereum is a decentralized platform on which smart contracts written in the Solidity programming language can work. It can also run hundreds of decentralized applications.

For any new application that uses blockchain or smart contracts, a new Ethereum token can be created – several standards have been developed for such tokens, and tokens of different standards are suitable for different types of applications. Standards facilitate the interaction between tokens and smart contracts, and therefore Ethereum is a popular platform for developing decentralized applications. Ethereum can be likened to iOS or Android operating systems for decentralized applications – it simplifies their creation and supports operation.

Ethereum ERC-20 Token This is the current industry standard that is used by thousands of different cryptocurrency projects. The ERC-20 token standard has six required parameters for each smart contract and three additional (but recommended!) Options. For example, the permissible number of decimal places is additional. For comparison, Bitcoin supports eight decimal places, a symbol (usually a 3-4-digit code) and a name. The six required parameters determine the number and transfer of tokens.

Advantages and features of the standard

The main advantages of the ERC20 standard tokens include the following:

Free entry to the market

Most cryptocurrency exchanges have long been working with the standard ERC20. They do not have to make changes to their program code to accept new tokens.

This makes life much easier for ICO developers. They simply take the ERC20 code on GitHub, create their own tokens based on it, and after bidding submit an application for adding a coin to the listings of the required exchanges. If the cryptocurrency meets the requirements of the exchange, it is added in a few days.

Technical simplicity

ERC20 is such a simple standard that even a novice programmer can create tokens based on it. All technical information is freely available on GitHub, and ERC20 token generation tutorials can be found even on YouTube.

Multifunctionality

Most tokens perform one given function. For example, they confirm ownership of certain assets (as in the case of the purchase of tokens during the ICO), act as a cryptocurrency asset or stock.

The disadvantages and risks of the standard

The main problem with the ERC20 is the lack of transaction processing tools. They start automatically, even if they should not be started in principle. Consider a clear example.

Suppose an investor who wants to accept an asset in ICO sends funds to the specified address. But developers only accept BTC, and the investor wants to send them ETH. In this case, he will not be able to start a transaction – it will be rejected by the system.

But if he sends the ERC20 standard tokens to the same ICO, the transaction will be accepted. Funds from his balance will be debited and sent to the recipient’s address. But in our case, the address accepts only BTC. He does not know what to do with ERC20 tokens, and he cannot accept the transaction. As a result, the coins are simply “lost” somewhere in the blockchain. Moreover, it will be impossible to return them.

Summary

The ERC20 is a universal standard that most modern ICOs use. Its advantages are the simplicity and convenience of working with smart contracts. To verify the execution of a smart contract and move funds, the nodes do not need to contact the database and follow protocols. It is enough to check whether the conditions of the contract are fulfilled correctly.

However, simplicity was also a disadvantage of the ERC20. The ease of creating your own tokens attracts scammers who organize scam-ico and disappear with collected funds.

 

Frederik Nielsen
Frederik Nielsen

I’m a freelance writer and full-time curious person. My main interests are philosophy, politics, art, culture, science, and how they’re all interlinked. When I’m not writing, I’m fronting a band, producing records, and making videos. I’m also currently working on launching a YouTube channel that will focus on culture and politics. I think blockchain technology is fascinating because of the huge potential it has to revolutionise not only the financial sector, but society as a whole.

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