ERC-20 is the technical standard for fungible tokens created using the Ethereum blockchain. Fungible tokens, in essence, are interchangeable units of value, where each token has the same value as every other token of the same type. This article undertakes a comprehensive exploration of ERC-20 tokens, offering a clear understanding of their definition, functionality, and the profound impact they have had on the broader blockchain space.
Meaning of the Term ERC-20
In the word ERC-20, “ERC” stands for “Ethereum Request for Comment”. This is Ethereum’s version of a Request for Comments (RFC), a concept created by the Internet Engineering Task Force in 1969 to organize the working notes of the ARPAnet research program (from which the Internet we know today was born). Memos within an RFC contain technical and organizational notes. For ERCs, this includes some technical guidelines for building the Ethereum networkNetwork The set of computers connected to each other, called nodes, on which the blockchain of a specific cryptocurrency is based.. In particular, ERC number 20 establishes the guidelines for the creation of fungible tokens on the Ethereum blockchain.
Genesis of ERC-20 Tokens
The ERC-20 standard was proposed by Fabian Vogelsteller and Vitalik Buterin in 2015 with the aim of establishing a method for identifying tokens within smart contracts. This standard indeed introduced a series of rules and conventions that Ethereum-based tokens could follow, ensuring perfect interoperability between different applications and exchanges. Developers can establish their own tokens on the Ethereum blockchain by adhering to the ERC-20 standard. Adherence to the ERC-20 standard ensures interoperability between different tokens and compatibility with various platforms, including exchanges and wallets that support ERC-20 tokens.
ERC-20: Standard or Simple Guidelines?
While following the ERC-20 guidelines is highly recommended to create tokens that work seamlessly within the Ethereum ecosystem, it is not enforced by any central authority. Developers have some flexibility in how they implement certain features, but sticking to the ERC-20 standard improves the token’s compatibility and usability in the broader Ethereum community.
Please notice that if a token smart contract deviates significantly from the ERC-20 standard, it might not be recognized as an ERC-20 token by wallets, exchanges, and other Ethereum-related services. As a result, it could face compatibility issues and may not be usable in the broader Ethereum community.
So, while there is some flexibility in the implementation of certain features, deviating too far from the ERC-20 standard can lead to practical limitations and reduced interoperability. Developers are strongly encouraged to follow the ERC-20 standard closely to ensure their tokens can seamlessly interact with various platforms and applications built on Ethereum.
In short: ERC-20 simply represents guidelines; however, adherence to these guidelines is practically mandatory for the token to function effectively within the Ethereum ecosystem.
Features of ERC-20 Tokens
The introduction of ERC-20 was a game changer, enabling the creation of a wide range of tokens beyond the native cryptocurrency, ether (ETH), and contributing to the explosive growth of initial coin offerings (ICOs). But what should these ERC-20 tokens look like? What are their main characteristics? Let’s see them in detail.
- FungibilityFungibility It is the property of means of payment to be divisible into equal parts to facilitate the exchange of goods.: One of the defining characteristics of ERC-20 tokens is their fungibility. Each token is interchangeable with every other token of the same type, fostering uniformity and liquidity within the Ethereum ecosystem. This fungibility is essential for tokens to serve as reliable units of value, akin to traditional currencies.
- Smart Contract Compatibility: ERC-20 tokens are programmable assetsAsset An economic resource with value that an individual or organization owns, controls, or expects future benefits from. Examples of assets: gold, stocks, cryptocurrencies, etc. that run on the Ethereum blockchain as smart contracts. This programmability allows developers to define specific functionalities, such as token issuance, distribution, and transfer rules, creating a customizable foundation for a variety of applications (we will see these functionalities more in detail in the next section “Standard ERC-20 functions”).
- Interoperability: ERC-20 tokens adhere to a common set of standards, facilitating seamless integration with various decentralized applications (DApps) and exchanges. This interoperability ensures that tokens following the ERC-20 standard can be effortlessly traded and utilized within the Ethereum ecosystem.
- Token Transfer Functions: ERC-20 tokens must implement standard functions like transfer and balanceOf to enable basic operations such as transferring tokens between addresses and checking token balances. This standardized structure simplifies the development of wallets, exchanges, and other applications that interact with ERC-20 tokens.
- Decimals: ERC-20 tokens can be divided into smaller units, known as decimals. This feature provides flexibility in representing token values, allowing developers to choose an appropriate level of granularity for their specific use case.
Functions of the ERC20 Standard
The ERC-20 standard defines a set of mandatory and optional features that a smart contract must implement to be considered ERC-20 compliant. These features enable the core functionality of ERC-20 tokens within the Ethereum ecosystem.
Total supply: This function returns the total supply of ERC-20 tokens.
Purpose: Provides users and applications with a way to query the total number of tokens in circulation.
Balance of: This function takes an Ethereum address as a parameter and returns the balance of that address.
Purpose: Allows users and applications to check the token balance of a specific Ethereum address.
Transfer: This function allows you to transfer a certain amount of tokens from the sender’s address to another address.
Purpose: Facilitates the primary function of transferring tokens between Ethereum addresses.
Transferred from: This feature allows the designated spender address to transfer tokens on behalf of the token owner.
Purpose: Useful for scenarios where users want to delegate the ability to transfer tokens to third parties.
To approve: This feature allows the token owner to give permission to the spender to transfer a certain number of tokens from their account.
Purpose: Forms the basis of the allowance system, where token owners can specify trusted addresses that are allowed to transfer tokens on their behalf.
Allowance: This function returns the remaining number of tokens that a spender can transfer on behalf of the token owner.
Purpose: Provides transparency into the approved spending limit for a designated spender.
Optional functions:
First name: Returns the name of the token.
Purpose: Provides a human-readable name for the ERC-20 token.
Symbol: Returns the symbol or ticker of the token.
Purpose: Provides a shortened symbol for the ERC-20 token.
Decimals: Returns the number of decimal places used by the token.
Purpose: Defines the granularity of the token, allowing fractional units.
Impact on Tokenomics
The ERC-20 standard has significantly influenced the concept of tokenomics (the economic model governing the creation, distribution, and utilization of tokens within a blockchain ecosystem). By providing a common framework for creating tokens, ERC-20 has democratized the token issuance process, enabling projects of varying sizes to fundraise and engage with a global audience.
ICO Boom and Token Crowdfunding: The introduction of ERC-20 tokens played a pivotal role in the ICO boom of 2017. ICOs leveraged the ERC-20 standard to issue and distribute tokens to investors, allowing them to participate in the project’s success. This democratization of fundraising marked a departure from traditional investment models and opened new avenues for project financing.
Diverse Use Cases: Beyond ICOs, ERC-20 tokens have found utility in various use cases, including decentralized finance (DeFi), non-fungible tokens (NFTs), governance tokens, and more. The versatility of ERC-20 tokens has fueled innovation, enabling developers to create a broad spectrum of decentralized applications that leverage tokenized assets.
Liquidity and Exchange ListingsListings The insertion of a cryptocurrency or token into an exchange.: The standardized nature of ERC-20 tokens simplifies the process of listing tokens on cryptocurrency exchanges. Exchanges, wallets, and other platforms can integrate support for ERC-20 tokens more efficiently due to their adherence to a common set of rules. This has contributed to increased liquidity and accessibility for ERC-20 tokens.
Challenges and Considerations
While ERC-20 tokens have undeniably transformed the blockchain landscape, challenges and considerations persist. Issues such as smart contract vulnerabilities, token standards fragmentation, and the need for gas fees to perform transactionsTransaction Exchange of value, property, or data between two parties. on the Ethereum network are factors that developers and users must navigate.
In conclusion, ERC-20 tokens stand as a cornerstone of Ethereum’s success, embodying the principles of fungibility, interoperability, and programmability. Their impact extends beyond the technical realm, influencing how projects raise capital, users interact with decentralized applications, and assets are represented in the digital space. As blockchain technology continues to evolve, ERC-20 tokens remain a testament to the power of standardization in fostering innovation and driving the widespread adoption of decentralized systems.