ERC-20 Guide – What are ERC-20 Tokens?

Ethereum is the popular blockchain network that has been designed to allow any developer to code any decentralized application and launch it on the blockchain. Underlying the system is the use of tokens, also known as cryptocurrencies, which can be traded, bought and sold. The entire thing is powered by Ether, the native Ethereum token, and this token is used to pay for miner rewards, transaction fees and many other network services, such as powering smart contracts.

One of the over-reaching goals of the Ethereum foundation is to create an ecosystem that ties everything together seamlessly in the creation of their vision of a “world computer”. That’s not just the network, and blockchain, and applications, but also the tokens necessary to power the entire ecosystem. Since its beginnings in 2014 Ethereum has worked towards that goal and one of the major innovations it brought about are the ERC-20 tokens that can now be created as part of the Ethereum ecosystem. In fact, there are many other tokens that have already been added to the Ethereum ecosystem.

These tokens are nothing more or less than digital assets. They are created with the combination of several values and can be used to represent many different things from real physical items, like gold or real estate, to IOUs or vouchers, to loyalty points. These tokens that have been developed on the Ethereum blockchain are in essence smart contracts, and as such they require Ether to function.

In addition to allowing for the creation of tokens that work on the Ethereum blockchain, there is also a standard that has been created around Ethereum tokens, and this is called the ERC-20 standard. It defines the common rules or values that all tokens created on the Ethereum blockchain should contain, and let developers, exchanges and other smart contracts know exactly how the new token will behave.

ERC-20 Tokens Empower Developers

The ERC-20 standard was proposed in November 2015 by Fabian Vogelsteller. It defines common rules for all Ethereum tokens to follow, which allows developers and others, including other smart contracts on the Ethereum network, to know how tokens will behave. This makes it much easier to create projects that are able to interact with the entire scope of the Ethereum ecosystem. Without a standard, projects would need to be modified to accommodate the rules governing each new token released. When you consider that as of May 2018 there were 83,400 ERC-20 token contracts you can see that this standard is huge for developers.

The standard means that new tokens are created to be compatible with the existing network and new token must follow a set of rules for this to happen. The good news is that the rules do allow for a great deal of freedom and flexibility for developers. This makes the ERC-20 standard extremely adaptable and useful for making a nearly limitless variety of tokens with equally varied functionalities. Even though the ERC-20 standard has not been officially adopted and is not being enforced, developers of new tokens have pretty much followed the rules set out in the standard. This means most of the Ethereum tokens in existence today are ERC-20 compatible. Some of the most popular of these tokens are EOS, OmiseGo (OMG), Basic Attention Token (BAT), and Power Ledger (POWR).

The Six Functions Defined by ERC-20

There are six functions that have been defined for the ERC-20 standard, and these functions are all such that other smart contracts in the Ethereum ecosystem can recognize and understand them. These include the transfer of tokens, the total supply of tokens, and finding the balance of tokens at a given address. Roughly 99% of all the currently live ERC-20 tokens have implemented the six core functions laid out in the standard.

The standard also defines two signals (events) that each token can take, and which other tokens are attuned to. It was agreed by the Ethereum development community that these six functions and two signals are the minimum needed for a standard in order to standardize expected behaviors while communicating across the network. The ERC-20 standard makes it possible for developers to easily work with external smart contracts.

Another benefit of having all the ERC-20 tokens display the same behaviors across the entire Ethereum network is that nearly all the wallets that support Ether can also support all the ERC-20 compliant tokens. The most popular of these being MyEtherWallet, MetaMask, and Jaxx, although there are many others.

It is important to remember that ERC-20 remains a draft and is not enforced by the Ethereum community. It could also be changed very easily, although as more tokens are created this becomes increasingly troublesome to contemplate. It does seem that the community of Ethereum developers is committed to the standard given the current adoption, and it’s a good assumption that nearly all new tokens will also conform to the ERC-20 standard.

The standard is quite young, so it wouldn’t be surprising to see some challenges develop in the coming years as Ethereum continues to evolve and develop. One of those challenges has already been discovered. Any funds sent a smart contract will be destroyed since a smart contract only functions to track and allocate assets.

ERC-20 Token Issues

While the ERC-20 standard ensures a minimum compatibility it doesn’t specify everything needed to make a token valuable, useful, or even functional. Tokens can and are customized further, and the standard allows for this, as long as the token still meets the ERC-20 basic functions and signals.

One issue with the current standard is that it makes deploying a token far too simple on a technical level. This has allowed many teams and individuals to release tokens, when technically they wouldn’t have been able to if the standard were more rigorous. With over 83,000 tokens deployed you can be sure that there is a great deal of overlap and similar tokens. This simply muddies the water for investors, making it difficult to decide which token to invest in. It also discredits cryptocurrencies in general as many of these projects are unnecessary and seen as little more than cash grabs.

Another issue has been the idiosyncratic way in which some teams have implemented the standard, which has only made it more confusing to determine how their tokens operate on the network. One example is when tokens are sent to the smart contract of other ICOs. If the smart contract has been programmed to accept tokens these are burnt or lost forever. As 2018 began there were already $3 million worth of tokens that had been lost in this way. The new proposed ERC-223 token standard plans on correcting this flaw.

In Conclusion

One of the huge benefits of the creation of the ERC-20 standard has been the acceleration in the growth of the cryptocurrency sphere thanks to standardized functions, which have made it easier for projects to develop and release tokens. It has also increased the synergy in the Ethereum network, aligning ICOs, exchanges and wallets. Because the protocol has been so beneficial already, it is likely we will see it enhanced in the future to deal with common issues and problems.

ERC-20 tokens have quickly become a critical part of the Ethereum network, and of the cryptocurrency world. 2018 has seen an increase in the number of tokens and ICOs and this growth will benefit the entire Ethereum ecosystem. This means Ethereum should continue to increase in popularity as well.