At the beginning of cryptocurrency, there was Bitcoin. After that came an army of Bitcoin clones, promising cheaper and quicker transactions. At that point, the cryptocurrency industry largely revolved around payment coins. Ethereum and ERC-20 tokens revolutionised the entire industry. Without ERC-20 tokens, the crypto space would not be as vast or innovative. This article will briefly cover what Ethereum is and then explain how ERC-20 tokens fit in and why they are so revolutionary.
A background on Ethereum
Origins and the birth of ERC-20 tokens
The Ethereum network is the second-largest cryptocurrency in terms of total market cap, and for very good reason. Ethereum is a powerful and versatile platform where smart contracts, decentralized applications (dApps), and ERC-20 tokens can be created. In this way, the Ethereum blockchain is a bit like YouTube but instead of users uploading videos they can create their own ERC-20 tokens that can be used globally.
But why do we need to create ERC-20 tokens in the first place? Well, before Ethereum, creating a blockchain network and your own tokens was extremely hard. Things were clunky and you had to develop everything from the ground up. Imagine if everyone who wanted to upload videos to the internet needed to create their own website, set up their own servers to host the videos, and have to worry about all the foundations.
The introduction of the Ethereum blockchain meant that developers did not need to worry about the security, speed, and foundations of the underlying network. The result of this was that developers could focus solely on writing the code for their projects and they could bring them to life through the Ethereum blockchain. Without much setup, developers could immediately send and receive the cryptocurrency like any other. In exchange for this service, developers and users pay gas fees in order to make transfers or execute smart contracts.
Using the Ethereum network, ERC-20 tokens are essentially a plug-and-play system for creating and using decentralized applications (dApps).
ERC-20 token use cases
ERC-20 tokens have a number of use cases. We have outlined the most common use cases below.
- Currency. Tokens can be used to provide an economic system for a project’s ecosystem.
- Governance. Tokens can be used to enable a democratic voting system where all token holders can vote on network updates and community proposals.
- Staking. Tokens can be used for staking to help secure a specific blockchain and earn staking rewards in return.
Initial coin offerings (ICOs)
This gave rise to the infamous initial coin offering (ICO) craze back in 2017. Similar to initial public offerings (IPO) in the traditional finance world, companies used ICOs to issue their ERC-20 tokens in exchange for crowdsourced funds to help realise their vision.
ICO has become a dirty word these days. This is because although there were many legitimate projects that were funded through ICOs, there were also a lot of scams where after the money had been raised, the team behind the project withdrew the funds and disappeared.
Did You Know?
EOS is a legitimate project that raised a whopping $4.2 billion USD through an ICO in June, 2017. Once EOS launched, they moved their ERC-20 tokens off the Ethereum network and onto their own blockchain. This is because they are a direct competitor of Ethereum!
What are ERC-20 tokens?
ERC stands for “Ethereum Request for Comment” and the “20” is the number attached to that unique standard. In addition to ERC-20, there are other ERC standards like ERC-721 or ERC-777 that serve slightly different functions.
ERC-20 tokens are essentially tokens that are made to be compatible with the Ethereum blockchain. ERC-20 tokens have a simple list of rules in code to define how these tokens function on the Ethereum blockchain. But why is it important to have rules on how to create these ERC-20 tokens? Well, there’s a number of reasons.
Wallets that support the ERC-20 token standard are programmed in a way to understand the predefined code. But if everyone made their own token with different instructions, wallets and exchanges would need to update every time it needs to support a new ERC-20 token. Because all ERC-20 tokens have the same predefined standard, if someone creates a new ERC-20 token, the Ethereum wallets can already send and receive it without having to do any updates. This makes the interoperability between all Ethereum tokens simple and convenient, resulting in a much better user experience.
Imagine Ethereum is a token-dispensing vending machine. If every token had a different shape or size, it would be very difficult to dispense each token in an efficient way. The ERC-20 standard helps ensure that there is uniformity between tokens so that the vending machine doesn’t need to be updated every time a new token is released.
ERC-20 is a standard for fungible (interchangeable) tokens, like virtual currencies, staking tokens, and governance tokens. ERC-721 is a standard for non-fungible tokens (NFTs), which proves ownership of unique digital assets. ERC-777 allows people to build extra functionality on top of tokens such as an emergency recovery function to help you out if you lose your private keys or a contract for improved transaction privacy.
In order to create ERC-20 token cryptocurrencies, there are six rules developers must follow and three rules which are optional.
These are called functions in programming languages. It is essentially a ‘block’ of code that performs a set of instructions. These code functions are essential for user/token implementation, specifically in relation to making transfer and withdrawal requests, determining the amount of tokens in circulation, storing and returning balances, and giving approval, and agreeing to automated transfers. There are also three optional functions, which developers can incorporate if they wish.
- Token Name
- Decimal (up to 18 places)
These are what differentiates the thousands of digital assets and cryptocurrencies we have today. The company can name their ERC-20 cryptocurrency tokens anything they like. And with these rules, the token will work on day one on all Ethereum-based crypto wallets.
ERC-20 tokens have played a huge part in revolutionising the cryptocurrency industry. The Ethereum network and the ERC-20 protocol provide the infrastructure for developers to create and distribute their own decentralized applications (dApps) quickly and easily. This article has delved into what ERC-20 tokens are and explained why they have had such a significant effect on the crypto world. To learn more about Ethereum, smart contracts, and dApps, check out all of the great resources on Swyftx Learn.