What Are ERC-20 Tokens? | The Beginner’s Guide



In brief

  • ERC20 is a set of standards that allow developers to create their own tokens built on the Ethereum network.
  • They are the most commonly used tokens on the Ethereum network.
  • A number of ERC20 tokens are among the top 20 biggest cryptocurrencies currently being traded.

Ethereum is not just a blockchain, like Bitcoin; it is a platform. This means that other tokens can run on it, and decentralized applications (dapps) can be built on it.

Ethereum has a set of standards called ERC20 that allows developers to create their own tokens inside the Ethereum network. It’s provided an easier route for companies to develop blockchain products instead of building their own cryptocurrency.

Some tokens, like Uniswap’s UNI token, are set to remain ERC20 tokens; other cryptocurrencies, such as Binance Coin, have since swapped to their own blockchains.

What are ERC20 tokens?

ERC20 tokens are the most commonly used tokens on the Ethereum network. They are designed to be used for paying for functions and are known as utility tokens. They can also be used to pay for goods and services.
These tokens are:

  • 💻 – 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.
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Did you know?

EOS, Tron and VeChain were all originally issued as ERC20 tokens and have now converted to their respective mainnets.

 

What ERC20 did for blockchain

Ethereum’s developers noticed that inside their ecosystem dozens of people were creating their own tokens. But there was a problem: it was becoming increasingly complicated for those tokens to interact with each other.

Ethereum decided to create a standard, a set of rules every token on the network had to abide by, and ERC20 was born.

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 tradeable on cryptocurrency exchanges such as Coinbase and Binance. You’ll also need a cryptocurrency wallet that can store Ethereum tokens; either a software wallet such as MetaMask, or a hardware wallet.

What cryptocurrencies are based on the ERC20 standard?

More than 300 cryptocurrencies are based on the ERC20 standard and run on the Ethereum network. Here are some:

  • 💳 – 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.
Read Also:   Bitcoin Market Cap Breaks $300 Billion—90% of All-time High

 

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.

 

It is an established fact that 90% of startups fail. And it should also be an established fact that 90% of these ERC20s on CoinMarketCap are going to go 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.

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 widely used and their traction will continue as long as Ethereum maintains its status. If anything, their biggest threat is from the enemy within: new Ethereum standards. When it comes to natural selection, they’ll need to be the fittest to survive.

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