What are Ethereum ERC-20 tokens and why are they so useful?
What are Ethereum ERC-20 tokens and why are they so useful?
Ethereum is not just a type of cryptocurrency. It is the most popular engine that enables token creation. This development platform allows users to, for example, create DApps (decentralized applications) using smart contracts. It is also possible to devise tokens through smart contracts.

Currently, Ethereum tokens have an implementation standard known as ERC-20 token (from Ethereum Request for Comments). Extensions to the standard are also developed, which improve the operation of the tokens: ERC-223 and ERC-721.

Anyone who has been working on the topic of cryptocurrencies for some time has probably heard of the ERC-20 token. The ERC-20 implementation standard allows for uniform implementation of the functionality. Among other things, it offers advantages such as easier implementation by developers or the possibility of using tokens with third-party software. This is possible because the nomenclature is fixed and the developers simply know what to expect.

What is ERC-20 Token?

To put it in specialized terms, and in its simplest formulation, ERC-20 is a protocol that consists of a set of individual guidelines. With ERC-20 tokens are created on the Ethereum blockchain and use its technology. The main cryptocurrency based on the Ethereum network is Ether, but this does not mean that other tokens cannot exist in it. Thus, in simpler terms, ERC-20s are tokens that have been built on and use the Ethereum network.

For this, a smart contract is essential. It is not only used to create tokens, but also to manage or monitor transactions. To receive the tokens in question, you have to spend a certain amount of ETH to the Smart Contract, in exchange for which the Smart Contract will send you these tokens. Thus, an ERC-20 token development can be done by any of us without having to be a programmer. You don't need specialized knowledge. You just have to use a smart contract to become the creator of your own token.

It is important that you know that there are many more tokens than cryptocurrencies. A token is not always a cryptocurrency. These represent some fact, value, or quality. A token is often used, for example, in a casino as gift cards or vouchers. Why was such a unit of value created? Because the developers wanted to be able to manage the business model themselves. As a result, users on a given network are directly connected to its products.

How do ERC-20 tokens work?

ERC-20 tokens operate within the Ethereum blockchain. The ERC-20 token implementation is famous for the ability to independently create your own digital asset, as well as a smart contract. The process of bringing them to life is equipped with the ability to independently determine the maximum supply value, the possibility of divisibility of the new token, and basic information about the name or abbreviation of the newly created token.

ERC-20 is a protocol that allows you to authorize the execution and execution of token transactions based on these principles, with the participation of third parties. An ERC-20 based token must define multiple functions. These include:

  • Name.

  • Symbol.

  • Decimal places that determine the token's divisibility.

  • The total amount of available tokens.

  • The status in the indicated account and the function that allows you to make transactions.

  • The ability to transfer tokens to other accounts through third parties, being able to consult and establish a maximum limit to the amount that a third party can manage.

Of course, it should be noted that implementations of the ERC-20 interface may vary in detail. They can also be more elaborate, providing additional functionality (for example, such as freezing some funds, managing ETH transfers, or automatically granting tokens in exchange for cryptocurrencies). Depending on the goals of the creators, tokens created with the ERC-20 protocol can support security or put a strong emphasis on saving the gas consumption of the contract.

Why were ERC-20 tokens created?

There were many compatibility issues between the various forms of Ethereum tokens before the advent of the ERC-20 standard. Each token had only one smart contract. The platform had to write completely new code for every transaction and wallet in order to add a new token to its network. Maintaining a growing pool of tokens was becoming too troublesome and time-consuming. As a solution, the platform proposed a standard protocol for all the following tokens: ERC-20.

The ERC-20 was created to make it easier for developers to create new tokens without having to start over every time. The ERC-20 protocol has functions that show how tokens can be transferred and how to access data related to tokens. The events, on the other hand, contain formatting guidelines for transfers and approvals. The ERC-20 token standard was introduced mainly due to the increased interest in ICOs.

Advantages of ERC-20 tokens

Among the advantages of the development of ERC-20 tokens is the saving of time and resources. ERC-20 tokens take advantage of the existing Ethereum infrastructure rather than creating a completely new blockchain for them. In addition, they have greater security, since the creation of new tokens increases the demand for Ether, which makes the entire network even more secure, that is, less susceptible to a potential attack by hackers.

Another of its advantages is interoperability with other compatible tokens and decentralized applications on Ethereum. If all the tokens created on the Ethereum network use the same standard, these tokens will be easily interchangeable and can easily work with other applications in the same ecosystem. We cannot fail to mention among their advantages the great liquidity they provide since ERC-20 tokens are used as a work base for most projects in blockchains.

Disadvantages of ERC-20 tokens

The most important thing to remember about ERC-20 tokens is that they can be created very easily, but that does not mean that they are completely secure. The basic data of the smart contract does not guarantee that the token works correctly. As a result of the ease of creating tokens with ERC-20, the market is flooded with ICOs and unnecessary tokens, and worse, fraudulent ones. Additionally, if someone wants to send an ERC-20 token to a wallet address that does not have a smart contract, these tokens can be lost.

ERC-20 tokens are underperforming, as the Ethereum network has bogged down when DApps have been in 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. Also, transactions are slow where the lock time is around 14 seconds, so transactions can take up to a minute to process.