What Is The ERC-20 Ethereum Token Standard

March 30, 2022

The ERC-20 Ethereum standard is the fundamental design involved in the creation of fungible tokens compatible with the Ethereum network across the board.

Ethereum is a cryptocurrency network that allows creators to develop various applications without the need for a centralized authority acting as an intermediary. Among these applications are tokens.

The ERC-20 standard has become prevalent in all areas of the cryptocurrency ecosystem.

Essentially, ERC-20 tokens can be created by anyone, but major tech companies and organizations are primarily responsible for their existence. These tokens are digital assets, each with its own function, such as serving as a reward for a particular performance or allowing users voter rights in influential decisions.

ERC-20 tokens are commonly used to raise capital for underlying projects. However, many critics have argued that tokens allow for scams and sour investments to take hold of the crypto space. This statement is supported by the example of the hype surrounding initial coin offerings in 2017. Much of the raised money failed to yield returns on investments.

When tokens are created using the framework of ERC-20, they are interoperable with many other tokens as well as a variety of services like MetaMask and MyEtherWallet.

How Is ERC-20 Useful?

To understand the practical applications of ERC-20, let's consider some common issues that developers encounter when creating a project from scratch:

Smart contract creation

Smart contracts are essential in determining a token's total supply, what the issuance schedule is, and how supply is distributed and circulated. Moreover, smart contracts facilitate token transfers and inquiring holder balances.

A team of expert developers is usually required to write the complicated codes that constitute a smart contract. This is an expensive and time-consuming process that must be faultlessly executed or the consequences may be severe.

Support From Wallets And Exchanges

Creating tokens is a complicated process and takes a lot of time and resources to ensure its compatibility with external services like exchange platforms. Integrating a standard like the ERC-20 framework greatly facilitates and eases these proceedings.

ERC-20 provides a list of rules that all tokens on the Ethereum network must follow. In some respects, ERC-20 is similar to Litecoin, bitcoin, and various other cryptocurrencies in that they are based on a blockchain and exist as an asset with a value that can be transferred between users.

ERC-20 Provides A Common List Of Rules

ERC-20 defines a set of rules for all Ethereum tokens to follow. These rules relate to various factors such as how transactions are approved, the total supply of tokens, how users can access data without holding a token, and how tokens are transferred.

As a result of ERC-20 integration, developers can predict the function of new tokens in the broader Ethereum network.

Consequently, developers' job is simplified in that they can rest assured they won't have to redo an entire project every time a new token is introduced into the system, given that this token adheres to the rules set forth by ERC-20.

The compliance of each new token is essential in ensuring its compatibility with other tokens issued in the Ethereum network.

Today, the majority of developers have acted in accordance with the ERC-20 rules.

Many renowned digital currencies use the ERC-20 standard. If you intend to buy any digital currency that Ethereum issued, you must ensure that your wallet is compatible with ERC-20 tokens, which will likely be given the widespread implementation of this standard.

Coding Functions Of ERC-20

Six coding functions are defined by ERC-20 that will benefit other tokens in the Ethereum system.

These six fundamental coding functions include:

  1. Balance of
  2. Total supply
  3. Allowance
  4. Approve
  5. Transfer from
  6. Transfer

These code functions allow for successful determination of the number of circulating tokens, returning and storing balances, making a withdrawal and transfer requests, agreeing to automated transfers, and granting approval to requests.

When all these functions are applied in conjunction with one another, all tokens of various types on the Ethereum network can all consistently perform in any area of the system.


What Can Users Do With Tokens?

Crowdfunding

App builders occasionally raise money to find their projects using crowdfunding. Investors then receive new tokens at wholesale prices before the project is launched.

Representations Of Physical Objects

A token can represent the value of physical objects and authenticate their ownership.

Voting Rights

Tokens can bestow users with voting rights, so they have influence in the decision-making process of proposals concerning the direction of the network.

New Features

Sometimes the native token of a network is not sufficient in paying for specific functions of projects. Users can then create a token possessing the functionality they require.

Transaction Fees

Transaction fees, also known as gas fees, are required for any transaction to occur successfully. These fees are subtracted from a user's total tokens.

Coins That Are ERC-20 Tokens

  • Chainlink
  • Tether
  • USD Coin
  • Dai
  • Wrapped bitcoin
  • Binance coin

Problems And Complications

Being the first of its kind, ERC-20 is sure to present some issues courtesy of its infancy. An experienced blockchain developer, Dexaran, ties together the chief issue, which is the loss of money due to a bug in the system.

This developer reckons that the main issue is embedded in smart contracts. A transaction can only be completed once funds are transferred successfully. In the case of an error, the transfer must be rejected immediately.

On the Ethereum network, a transaction is halted and rejected when a sender transfers ETH to a contract incompatible with ETH. The smart contract will reject the transfer on the sender's part, and the receiver will fail to receive any currency.

When ERC-20 is sent, and a smart contract doesn't support its standard, the transaction is not rejected, but the tokens instead get "stuck", frozen in the smart contract, and unable to be retrieved.

One of two functions is activated when ERC-20 is transferred, the first of which is the transfer function that allows a sender to transfer tokens to a given address. The next function includes depositing the tokens into a smart contract by a function + transferForm combination. Because the function is approved, a receiver can withdraw their funds by means of the transferForm function.

Consider now what will happen when a user mistakenly deposits tokens instead of Ether into a smart contract using the first transfer function. The transaction itself will be deemed successful and recognized by the network, but the smart contract will not credit the transaction because it will not "see" it.

If a user transfers tokens to a decentralized exchange contract by this route, the smart contract receives these funds, but the balance does not reflect its existence. If the said contract cannot apply an emergency token withdrawal function, the funds cannot be retrieved and thus is lost.

This shortcoming has led to the loss of millions of dollars, and it is essential to resolve this issue for ERC-20 to be trusted and successful.

Why Entrepreneurs Prefer ERC-20 Tokens

  1. Creating an ERC-20 token is a very cost-effective option.
  2. It is not complicated to create such a token, making ERC-20 an easier route to go.
  3. Startup companies and entrepreneurs can utilize the expertise of professional developers to create a token in little time.
  4. ERC-20 tokens are easily usable.
  5. Ethereum smart contracts ensure high security.
  6. Users can store their tokens in a blockchain-based crypto wallet, further promoting security.
  7. Assets are automatically transferred to a user's wallet because contracts are built into the token.
  8. It would be a hard task to break a smart contract, reducing the risk of theft.
  9. International transactions occur fast and effectively.


How To Create AN ERC-20 Token

Firstly identify how your token will be helpful to your project and which functionalities it should hold. Create a roadmap accordingly.

After the outline of occurrences is established, start generating blockchain Codes. Then, reevaluate and verify your chosen codes and create a smart contract for your token.

Once your verification has occurred, do a test transaction to ensure efficiency. If your token presents any challenges or errors, recheck your design and correct any shortcomings.

Once your token does what it should, deploy your codes on the Ethereum Blockchain.

If you run into any complications, you can easily contact an ERX-20 token development company.