The popularity of cryptocurrencies has grown enormously in recent years and, considering that Bitcoin reached its highest value, it is no surprise that alternative cryptocurrencies want to enter this very competitive industry. Many of these coins are generated on the Ethereum blockchain . Therefore, they are compatible with tokens and the ERC-20 standard.
ERC-20 stands for Ethereum Request For Comments and the number 20 represents the unique identification number to distinguish the standard from others. ERC tokens are digital assets designed, issued and used just like bitcoin, except that they work only on the Ethereum blockchain. These tokens mainly depend on a smart contract that records transactions for that token.
On the other hand, ERC20 token development company has a set of rules that help developers simplify and improve the process of creating a standard Ethereum-based token.
So, when you trade USDT or DAI, the probability that you will come across the concept of ERC or ERC-20 tokens is inevitable. But what is ERC-20 and how does it work?
Why should cryptocurrency users know the ERC-20 standard?
Cryptocurrency traders and investors may or may not have technical knowledge of blockchain or smart contracts. But the ERC-20 token standard developed the foundation for creating new tokens that no one should ignore. When looking at cryptocurrencies from a blockchain perspective, new tokens always had difficulty interacting with each other. Therefore, Ethereum created a standard so that every new token created on Ethereum follows the rules, the protocol of the ERC standard. From then on, a new coin must provide detailed information to the Ethereum Improvement Proposal . These parameters of the ERC-20 standard include the name, symbol (an abbreviation used when displaying balances), decimals (determine the number of decimal places after the point), and the total supply of issued tokens.
Difference between standard cryptocurrencies and ERC-20 tokens
ERC-20 tokens work like a regular cryptocurrency, but the concept is different. In fact, the terms cryptocurrencies and tokens have different meanings and should not be used interchangeably.
First, a cryptocurrency is a form of digital asset that is encrypted by cryptography. That means that these cryptocurrencies run on their own blockchains and the records are distributed on decentralized blockchains.
Tokens, on the other hand, are a utility that exists on top of a blockchain. Ethereum’s ERC-20 tokens and some alternatives, including ERC-223 and ERC-721, are the most popular.
Basically, what differentiates ERC-20 tokens from standard cryptocurrencies is that they are completely dependent on the Ethereum blockchain instead of having their individual blockchain. Therefore, there is a gas fee to make a transaction. A miner uses these fees to execute transactions on the network. And the gas commission varies depending on the activities on the network. In conclusion, the more congested the network is, the higher the gas commissions will be.
Correlation between ERC-20 and smart contracts
In 2015, Fabian Vogelsteller, a well-known figure in the blockchain industry with experience in web development, proposed ERC-20, the technical standard behind smart contracts that implements the token on the Ethereum blockchain.
A smart contract is code that is executed upon receiving a request from an end user or another program. Smart contracts are also responsible for managing transactions, confirming costs, and keeping track of the balance of each token holder. Typically, these contracts may have a specific name, provision, and behavior. But as long as they implement the basic ERC-20 rules, they are all ERC-20 compatible.
The purpose of ERC-20 tokens
Apart from USDT, major cryptocurrencies like LINK are among the best ERC tokens that depend on the ERC-20 standard.
ERC-20 tokens are also called utility tokens, and aim to provide an alternative to Bitcoin, in which sending or trading the tokens requires a gas fee.
As ERC-20 tokens rely on smart contracts, their functions may vary. They can function as currency, reputation points on an online platform, a lottery ticket, a financial asset such as a share in a company or a property title.
Here are some of the features of ERC-20 tokens:
They can be used for payment transactions, and are transferable . create ERC20 token work like any other crypto. They are transferable from one address to another, as long as they meet the requirements.
They are fungible.That means that all transaction history can be traced even if the code of each token is identical.
There must be a set total supply of ERC-20 tokens created. Some ERC-20 tokens may or may not have a fixed supply of coins. The purpose is to have a full provision to ensure that the environment is aware of the total amount of tokens in circulation.
Generally, ERC-20 tokens are bought, sold, exchanged or traded on cryptocurrency exchanges. They can be stored in any Ethereum-compatible wallet such as MetaMask and MyEtherWallet, paper wallet, wallet app, or even a hardware wallet like Trezor or Ledger Nano S.
What cryptocurrencies are based on the ERC-20 standard?
There are a multitude of token standards on the Ethereum blockchain. However, ERC-20 tokens are the most popular. According to Etherscan , there are over 200,000 ERC-20 compatible tokens on the Ethereum mainnet. Among them, many of the major digital currencies according to their market capitalization have different purposes.
ChainLink Token (LINK), Chainlink is an ERC-677 token that inherits its functionality from the ERC-20 token standard. This token works with exchange logic on the blockchain that is like a bridge between cryptocurrency smart contracts, data feeds, APIs and payments in traditional bank accounts.
Maker (MKR) is a decentralized autonomous organization (DAO)-based utility token that creates the DAI stablecoin on the Ethereum blockchain.
Tether (USDT), a stable cryptocurrency that runs on the ERC20 token development protocol. That means that the deposit address is an ETH address, and that deposits and withdrawals happen on the ETH network.
Conclusions
ERC-20 tokens have undoubtedly had a major influence on the cryptocurrency industry. Not only are they responsible for the multi-billion dollar ICO industry, but they have also popularized digital assets.Newly created tokens can be added to exchanges when they are launched without any communication between the cryptocurrency and the exchange developers. But only if they comply with the ERC-20 standard. This will result in lower risk, lower complexity, more uniformity and greater liquidity of the tokens, which will generate more trust among users.Some enthusiasts have already experimented with newer standards like ERC-223 or ERC-777, but ERC-20 remains the favorite. There is a high possibility that the ERC-20 protocol will improve very soon, when features are added to resolve current vulnerabilities and issues with the tokens.
Author Bio:
Ragunath.T is a Digital Marketing Executive at ERC20 Token development company .He designs marketing strategies with the intention of using high-quality content to educate and engage audiences. His specialties include social media marketing specialist, SEO, and he works closely with B2B and B2C businesses, providing digital marketing strategies that gain social media attention and increase your search engine.
