What Exactly is an ERC20 token?

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The ERC20 standard for Ethereum enabled hundreds of businesses to develop their own tokens, resulting in an explosion in the ways blockchain technology may be employed. We show how this has resulted in the creation of hundreds of different currencies.

Ethereum, like Bitcoin, is a platform as well as a blockchain. This implies that other coins can operate on it, as well as decentralised applications (dapps).

Ethereum features a set of standards known as ERC20 that allow developers to design their own tokens that can be used inside the Ethereum network. It has made it easier for businesses to establish blockchain goods rather than creating their own currencies.

Some tokens, such as Uniswap’s UNI token, will continue to be ERC20 tokens; however, other cryptocurrencies, such as Binance Coin, have subsequently switched to their own blockchains.

What exactly are ERC20 tokens?

On the Ethereum network, ERC20 tokens are the most widely utilised tokens. They are known as utility tokens because they are intended to be used to pay for services. They can also be used to make purchases of products and services.
These are the tokens:

  • ? – Fungible – The code of each token is the same as any other although transactions histories can be used to identify and segregate tokens.
  • ? – Transferable – They can be sent from one address to another.
  • ⛏️Fixed supply – A fixed number of tokens must be created so that developers cannot issue more tokens and raise the supply.

EOS, Tron, and VeChain were all first released as ERC20 tokens and have since been converted to their own mainnets.

What ERC20 has done for blockchain

Ethereum’s developers observed that dozens of users were developing their own tokens within their ecosystem. But there was a problem: interacting with those tokens was getting increasingly difficult.

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ERC20 was formed when Ethereum decided to develop a standard, a set of rules that every token on the network had to follow.

 

Find out more about ERC20 in our article on Ether, Gas and ERC20.

That has led to some tokens becoming so valuable they are now among the biggest 20 cryptocurrencies being traded currently.

How to buy and store ERC20 Tokens

Many ERC20 tokens are available for purchase on cryptocurrency exchanges like Coinbase and Binance. You’ll also need a cryptocurrency wallet that can hold Ethereum tokens, such as MetaMask, or a hardware wallet.

What coins use the ERC20 protocol?

More than 300 coins operate on the Ethereum network and are based on the ERC20 standard. Here are a few examples:

  • ? – OmiseGO – A decentralized network offering a payments solution targeted at banks and other financial institutions. Based on Ethereum, it uses the plasma protocol to make the network run quickly. The Thailand-based company raised more than $25 million for its ICO.
  • ? – 0x – An open protocol for decentralized exchanges. Trades are made by a system of smart contracts which Dapps can connect to. This provides them with liquidity.
  • ? – Augur – Augur wants to allow anyone to speculate on derivatives, but combines that with a mechanic that rewards the ‘wisdom of the crowd’.
  • ? – Wrapped Bitcoin (WBTC) – An ERC20 token that’s backed 1:1 by Bitcoin, which can then be used as collateral, boosting liquidity in decentralized finance (DeFi) applications.

Did you know?

OmiseGO and Vitalik Buterin, co-founder of Ethereum, donated $1 million to a refugee scheme in Uganda in March, 2018.

What are the disadvantages of ERC20 tokens?

  • ⚠️Low-throughput – The Ethereum network has been clogged up when dapps have experienced high demand, such as CryptoKitties (which has since moved to its own Flow blockchain). When this happens, the network slows down and transactions become more expensive.
  • ? – Slow transactions – The block time is around 14 seconds, so transactions can take up to a minute to process. This may be adequate for some uses or too slow for others.
  • ⏲️Ether – When transactions are made, a second cryptocurrency, called Ether, is needed to pay for transaction fees. This can add both time and cost, as it can result in dust on different platforms.
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It is a well-known fact that 90% of startups fail. And it should go without saying that 90 percent of these ERC20s on CoinMarketCap will fall to zero.

Vitalik Buterin

What other Ethereum standards are there?

Other Ethereum standards have been created for different reasons. Here are some, in various stages of development:

  • ERC-721 – These tokens are non-fungible. Each token is unique and has its own code, which has led to a burgeoning market for crypto collectibles including trading cards and digital artworks.
  • ERC-1400 – These are for security tokens so the tokens can be sold as securities. This requires more control over who can access the coins and introduces know-your-customer protocols.
  • ERC-223 – When you make a transaction, fees are currently paid in Ether. This standard allows for the transaction fees to be paid using the tokens involved. This means a transfer of Augur would be paid in Augur tokens, with the ticker symbol REP.
  • ERC-777 – It aims to be an improvement on the ERC20 standard by lowering overheads and adding new features. It is backwards-compatible which means it might be more widely adopted.
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The future of ERC20 tokens

Every blockchain platform is being hyped as the next “Ethereum Killer,” but Ethereum has managed to keep its place just behind Bitcoin.

ERC20 tokens are extensively utilised, and their popularity will remain as long as Ethereum exists. If anything, their greatest danger comes from within: new Ethereum standards. Natural selection will need them to be the fittest in order to live.

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