Many people have heard about ERC-20 tokens, but few know what exactly they are. ERC stands for Ethereum Request for Comment, and 20 is an arbitrary number assigned to a proposal.

ERC-20 Basics

The native currency of the Ethereum blockchain is Ether (ETH), but the erc20 token generator also serves as coins on the Ethereum network. The blockchain processes transactions with them, and smart contracts run on the Ethereum virtual machine.

Ethereum.org describes the ICO mechanism as follows:

1. The buyer pays the smart contract (the money goes to the robot).
2. The robot redirects them to the contract owner.
3. The robot transfers tokens belonging to the ICO creator to the buyer.

Remember that these tokens are not independent. They run on the Ethereum blockchain and depend on the computing power of its network.

Risks of smart contracts

Although smart contracts are very efficient, they come with certain risks. For example, a smart contract cannot be changed after the developers launch an ICO. If the contract contains bugs or vulnerabilities, you could lose your money or tokens (or both).

Such troubles often happen in the cryptocurrency world. The most notable was the $55 million DAO hack. To cope with it, the developers carried out a hard fork of the Ethereum network (this is how Ethereum Classic appeared).

Why do we need the ERC-20 standard?

Before the advent of the ERC20 development standard, there were many interoperability issues between various Ethereum-based tokens. Each token had its own type of smart contracts.

In other words, in order to work with the new token on exchanges and wallets, it was necessary to write individual code. Maintaining an ever-increasing number of tokens was becoming too time-consuming and problematic.

As a result, a single protocol was developed for all tokens, known as ERC-20.

The ERC-20 token standard has six required parameters for each smart contract and three additional (but recommended!) ones. For example, additional ones include the allowed number of decimal places. By comparison, Bitcoin supports eight decimal places, a symbol (usually a 3–4 digit code) and a name.

Six mandatory parameters determine the number and transfer of tokens. The first two are used to set the initial distribution:

1. The totalSupply function determines the total number of tokens. After reaching the maximum, the smart contract stops issuing them.
2. The balance0f function assigns a primary number of tokens to any address (usually the address of ICO owners).

To distribute between users and transfer from one user to another, two transfer methods are needed. They are extremely important for the secondary market:

1. The transfer function transfers tokens from the primary address to individual users who purchased them during the ICO.
2. The transferFrom function is used to transfer tokens from one user to another.

Two more functions are needed to check the previous two:

1. The approve function checks whether the smart contract still has tokens.
2. The allowance function ensures that a certain address has enough tokens to send them to another address.

These six simple steps have enabled wallet developers and exchanges to create a single code base that can interoperate with any ERC-20 contract.

Using ERC-20 tokens

ERC-20 tokens have applications in many areas. For example, they can act as project shares, asset ownership certificates, loyalty points or pure cryptocurrencies. In addition, they can perform multiple roles simultaneously.

Creation of ERC-20 tokens

All tokens are created by smart contracts. These contracts conduct transactions and account for each owner’s balance. CoinCreator allows anyone to create their own ERC-20 tokens!

During the ICO, each participant receives tokens at an agreed rate by sending cryptocurrency and data (primarily an email address) to the smart contract.

Problems with ERC-20 tokens

The ERC-20 protocol is not always sufficient for token purposes. This is only a basis for creating Ethereum tokens, which does not guarantee their usefulness, value or performance.

The token can be complemented while maintaining compatibility with the ERC-20 standard. One of the downsides of ERC-20 is that it makes token deployment trivial on a technical level. As a result, many teams that were unable to conduct an ICO on their own did so.

The huge number (47454+) results in an abundance of very similar tokens, making the selection process more difficult for potential investors.

Another problem is that some projects implement the basic principles of the standard in very strange ways, which creates additional confusion when determining the specifics of how their tokens work. For example, sometimes tokens are sent to smart contracts in other ICOs. If the contract functionality does not provide for this, the tokens are lost. By the end of 2017, more than $3 million had been lost this way.

TOP 20 cryptocurrencies issued on the ERC-20 standard

The cryptocurrency community is represented by various groups of users who prefer specific cryptocurrencies or ecosystems.

Among them there are those who firmly believe that Ethereum will soon overtake the market leaders both in exchange rate value and in total capitalization.

Confidence is partly supported by the fact that Ethereum has ready-made solutions for future scaling, as well as a partial move away from PoW algorithms, which makes the ecosystem more environmentally friendly in terms of energy costs for mining, compared to Bitcoin.

The key point is Ethereum’s support for creating separate applications and new networks on its own, which makes it more promising than current alternatives. Given that Ethereum has been around for a little over 4 years, applications developed within its ecosystem become successful more often than others. The analysis showed that out of the 100 best cryptocurrencies in their entire history, 46 were implemented on Ethereum.

• EOS (EOS)
• Tron (TRX)
• VeChain Thor (VET and THOR)
• OmiseGo (OMG)
• ICON (ICX)
• Popular (PPT)
• Binance Coin (BNB)
• RChain (RHOC)
• Status (SNT)
• Maker (MKR)
• DigixDAO (DGD and DGX)
• Aeternity (AE)
• Waltonchain (WTC)
• August (REP)
• Veritaseum (VERI)
• 0x (ZRX)
• Revain (R)
• Kucoin Shares (KCS)
• Zilliqa (ZIL)
• Basic Attention Token (BAT)

Let’s sum it up

The emergence of the ERC20 token development standard has accelerated growth in the ICO space by unifying features that make token development easier. The protocol also increased the synergy between ICO startups, exchanges and wallet services. Most likely, in the future the ERC-20 protocol will be expanded and supplemented with functions to combat the main problems and vulnerabilities of tokens.