ERC20 is a protocol developers can use to propose improvements to the Ethereum network. ERC stands for Ethereum Request For Commitment. The proposal identifier 20 is also used.
What is a token?
Tokens are a way to represent anything in Ethereum:
- Reputation points to the online world of a platform
- abilities of a character in games
- Financial assets such as shares in a company
- a fiat currency like USD
- An ounce of gold
- and much more…
What’s the Difference Between a Coin and a Token?
The coins were first. The story begins with Bitcoin, the first blockchain network. Bitcoin, also known as Bitcoin or BTC, enabled people to make peer-to-peer global payments using its native currency. Then, similar blockchains like Litecoin or Dogecoin provided a similar use case.
Coins are all cryptocurrencies that reside on their blockchain networks.
Then, Ethereum was born, and it introduced the concept of blockchain-based decentralized protocols and applications. Although Ethereum has its cryptocurrency called ETH, it can also be used in the same way as Bitcoin. However, Ethereum’s primary purpose is to provide gas for transactions and operations on protocols and apps built on the network.
Developers of these apps can create in-app currencies stored on Ethereum instead of a dedicated blockchain. Ethereum allows users to create additional digital assets stored immutably on Ethereum. Tokens are digital assets or in-app currencies that are created on Ethereum.
A crypto-asset with a dedicated blockchain is technically called a coin, while tokens are all assets created on a third-party blockchain.
Brief History of Ethereum
Before the creation of Ethereum, every cryptocurrency had to have its blockchain. Developers were under pressure to create a blockchain to support their coins or fork existing blockchains.
This was changed by the launch of Ethereum, which was the first project to act as a development platform. This opened up many new opportunities for digital currency and blockchain technology.
Ethereum was a platform that allowed the creation of smart contracts and decentralized applications (dApps), and new tokens. Many different token models emerged quickly, with ERC20 the most prominent and dominant.
This protocol was a new standard for creating new tokens that would run on Ethereum’s Blockchain.
Developers could launch their cryptocurrency with ease, without spending time or money developing a blockchain. Instead, they would create a token and pitch their idea. The token sale would then be followed by creating the blockchain using the money raised through ICOs.
Understanding the ERC Token Standard
ERC20 – The Fungible Token Standard
ERC20 was first implemented in 2015. It allows developers to create tokens that can be used for Ethereum-based protocols or applications. What are you waiting for?
You can think of ‘fungible tokens’ as any regular currency based on blockchain technology. A token can be exchanged with another token because they have the same value. Take, for example, crypto-assets such as UNI and LINK — ERC20 tokens that are part of Ethereum-based protocols Uniswap and Chainlink. Each token is fungible as one UNI token, or LINK token can always be equal to another UNI token or LINK token.
This means that you can exchange these tokens one-to-one. You don’t need to know which UNI token you have because the underlying value of all UNI tokens will be the same.
ERC721 – The Non-Fungible Token Standard
The Blockchain’s use cases expanded, and it became necessary to tokenize and represent the unique data stored on the blockchain. This was the time that ERC721 token standards were created. The ERC721 standard permits you to create non-fungible tokens. Each token has a unique value and acts as a verifiable digital object that cannot be exchanged like ERC20 tokens.
Let’s say you want to represent a piece of digital art on the blockchain. To do this, you can’t use an ERC20 token. To create an NFT artwork, an ERC721 standard token can be used. The NFT of the digital piece can be used to verify the authenticity and ownership of the work quickly.
It is nearly impossible to forge any artist’s original work because the NFT artwork records and identity are immutable. They are stored on a blockchain.
ERC1155 – The Multi Token Standard
ERC20 and ERC721 are two different standards that allow one smart contract only to support one type of token. You will need to create a new smart contract every time you deploy a token. The above standards don’t allow you to create semi-fungible tokens.
The ERC1155 token standards were established. This allows Ethereum developers to create non-fungible, semi-fungible, and fungible tokens by using the same standard. ERC1155 allows you to create one contract that can support multiple types of tokens. This reduces complexity. It was a little too complicated. Let’s simplify this.
Imagine a developer is planning to develop an NFT-based game. They plan to create one token that can be used as in-game currency and multiple tokens that can be used for unique in-game assets like skins, guns, and merchandise. They would need to create new smart contracts for every asset they create if they used ERC20 or ERC721 standards. They could use ERC1155 to create one contract that supports all types of tokens they wish to have in the game.
This does not suggest that any of these standards is superior; they have different applications.
Benefits of ERC20 Tokens
- Transaction: speed, effectiveness, and globalized.
- Creation: It is straightforward to make.
- Interaction: Make it easier to manage interaction with tokens.
- Contract: The possibility of contract breach is very low.
- Liquidity: Greater liquidity of tokens.
The ERC20 token doesn’t have its blockchain and does not require it. It’s launched on Ethereum’s network and uses the same technology differently. These tokens can be used to create tokens and not currencies.
Their role is in their ecosystems, not the “real” world. They have many benefits for both developers and users.
ERC20 is Developer Friendly
ERC20 tokens, for example, empower developers and are one of the essential tokens in the crypto industry. Because they are developed around the ERC20 Token Standard, they are simple to launch and use. ERC20 is important as it establishes standard rules that all Ethereum-based tokens must adhere to. Developers can also use it to predict how their token will work within the more extensive Ethereum system.
According to Etherscan, there are currently 523,099 ERC20 tokens available on Ethereum’s network as of April 2022.
The fact that ERC20 tokens all use the same technology helps simplify understanding of how token implementation works. However, each coin created on its blockchain requires a greater technical understanding. ERC20 tokens have the advantage of increased liquidity, are supported by many exchanges, and come with a lower risk of contract breaking.
ERC-20 Tokens Can be Exchanged and Stored
ERC-20 tokens can also be exchanged because they are built on Ethereum’s blockchain. To store them in your Ethereum wallet, you can also send them to other Ethereum wallets. Exchange addresses are something you should avoid.
Without too many details about why this is so, it’s essential to understand that each coin has its unique address on exchanges. Your Ethereum address will differ from your ERC-20 token addresses. You will not receive the ERC-20 tokens if you send them to an Ethereum address. You can still hold any Ethereum-based currencies in your wallet.
ERC-20 tokens are very popular in the cryptocurrency industry. New projects can easily integrate with tokens already supported by several intelligent contracts, wallets, exchanges, etc. There are many resources for developers and documentation.
Endless Possibilities with Ethereum
Blockchain has been more than a technology for cryptocurrencies. Ethereum has made blockchain a much more helpful tool. The Ethereum network has more potential uses than ever before because it can propose new standards for tokens and allow them to be established.
This innovation has made it possible for artists to create unique tokens representing their artwork. It is also possible for creators today to monetize their work and reflect the scarcity of their creations. Game developers can use in-game items to give real-world value and create a new user-governed economy online.