A Brief Guide to ERC20 Tokens & why they are the Backbone of Ethereum

Written by Eddie Mitchell - Reviewed by Coin Review Team

Published: Nov 5, 2018 | Last Updated: Nov 13, 2018

Ethereum based tokens have become a mainstay in cryptocurrency markets and have gone on to prove themselves an industry favourite.

2020-01-22T11:03:42+00:00

The introduction of the Ethereum network to the blockchain industry ecosystem has resulted in unparalleled levels of adoption for the technology.

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Initially touted as the next Bitcoin, Ethereum has gone beyond the expectations of merely being a blockchain with its own valuable cryptocurrency.

This article will go on examine several facets that have been conducive the resilient success of the Ethereum network despite the volatile markets as well as strong industry competition, and it all begins with a versatile digital token protocol.

What is an ERC20 Protocol?

Ethereum owes its success to an innovation it provided known as the ERC20 protocol standard and smart contracts. It is likely that if you had been following the initial coin offering (ICO) boom that erupted in 2017, you’d have noticed the significant number of tokens being issued as ‘ERC20 compliant’.

If a token meets the ERC20 standard, it can then be launched on the Ethereum network and this protocol has become a staple for companies looking to issue an ICO.

The widespread use of ERC20 tokens boils down to three main aspects: Tokens can be accepted on to most cryptocurrency exchanges instantly, a majority of Ether wallets are able to store any new ERC20 tokens created and these tokens can be transacted by users seamlessly.

What are Smart Contracts?

Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. Image Credit: cryptosomniac.com

Each token created is a smart contract with rules that define its behavior; smart contracts are defined by Solidity documentation^[1] as “a collection of code (its functions) and data (its state) that resides at a specific address on the Ethereum blockchain.”

By supporting inheritance, smart contracts can be an instance of another contract, after which an abstract contract known as an interface contract is used specifically for inheritance, and can then be utilized as a failsafe by determining what contents a new contract must contain in order to compile.

Simply put, smart contracts facilitate all transactions on the Ethereum network and computing costs of smart contract execution, paid for by the network’s native cryptocurrency ether (ETH). The rules set in place are extremely valuable to developers as it grants them the full knowledge of what to expect when interacting with any ERC20 token.

Six Functions of Ethereum Blockchain

The Ethereum blockchain platform by design welcomes the creation of decentralized applications (Dapps) of all shapes and sizes on to its computing platform that executes off the back of smart contracts.

Dapps can create, manage, maintain and transfer digital assets as well as be used in many real-world cases^[2] such as video games, supply chains, financial purposes and many more^[3].

The ERC20 protocol is not to be confused with a technology, code or software, it’s a technical specification (much like the internet protocol ‘HTTP’^[4]) or template that defines the six core functions required for a token to be created on top of the Ethereum Blockchain.

The six will be listed in a logical order as one informs the next and vice versa.

The Transfer function is the core function of any ERC20 token; it defines & implements direct wallet-owner-to-peer token transferring. Image Credit: medium.com

Allowance – This function lets two addresses establish a repeated unidirectional transfer, the two are defined as wallet address token owner & wallet spender. The wallet spender can withdraw an amount from the token owner at a particular interval, which is determined by the ‘Approve’ function.
Approve – This simple function allows for wallet owners to “approve” a transaction that is about to occur in an on their behalf in an ‘Allowance’ context. This required two inputs: the address of spender and the number of tokens being sent.
TotalSupply – The clue is in the name but this function will happen only once, which is when the token is put on to the Ethereum network for the first time. For the rest of the smart contracts life, the function will return a public total supply unassigned integer (uint) which will act as the total supply of the token.
BalanceOf – This accepts the address of the token owner and returns a public constant, the uint balance. This will represent the number of tokens held in an address as well as recall transactions.
Transfer – This is at the very core of any ERC20 token, the function defines and implements direct ‘wallet owner-to-peer’ transfer of tokens. Only two inputs are required for this function, the receiver address and the amount being sent.
TransferFrom – Finally, this lets a smart contract execute transfers based on inputs made by the wallet owner. TransferFrom differs from Transfer as it lets smart contracts send the tokens on the wallet owners behalf. This function requires three input parameters, wallet owner address, a receiver address and the number of tokens sent.

These functions are found in practically every single live ERC20 token, there are tokens that have nuances but overall, this template can soothe the worries of developers who are concerned with how their potential tokens may behave.

What are the Benefits of ERC20 protocol?

ERC-20 is a technical standard used for smart contracts on the Ethereum blockchain for implementing tokens. Image Credit: cryptosomniac.com

With thanks to the ERC20 protocol, startups no longer have to develop their own standards for launching a token on the Ethereum network. Furthermore, the uniformed standard allows for a streamlined process, reduced complexities of token implementation and enhanced the liquidity of ERC20 tokens.

Additionally, with many exchanges being familiar with ERC20 it makes the process of getting listed on a cryptocurrency exchange far easier. Users of ERC20 tokens will notice how easy they are to store, exchange and acquire, bolstering their practicality during an ICO.

With all parties clued up on how the tokens will function, a self-reinforcing loop of supply and demand between developers and users has driven the protocol to mainstream popularity within the industry.

Etherscan Token Tracker provides an up-to-date list of all ERC20 tokens available^[5], with the number presently sitting at 779. Compared with the total number of cryptocurrencies as listed on CoinMarketCap which recently exceeded 2000^[6], it is evident the ERC20 protocol has proven its worth for the industry.

Due to the high-functionality and versatility of the platform and ERC20 tokens through smart contracts, Ethereum is touted as the network responsible for establishing a new era in blockchain, aptly named Gen 2.0^[7] which it has been dominating for the past two years.

Last Words

ERC20 tokens could be the backbone of the modern blockchain industry themselves, with widespread adoption, industry familiarity and a host of benefits, the protocol has given this nascent technology sector a launch pad, from which it has achieved higher heights ever since.

Image Credits
Feature Image: Shutterstock.com
In Post Image: Shutterstock.com, cdn-images-1.medium.com, cryptosomniac.com

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References

[1] https://solidity.readthedocs.io/en/v0.4.24/introduction-to-smart-contracts.html
[2] https://www.coindesk.com/7-cool-decentralized-apps-built-ethereum/
[3] https://dappradar.com/
[4] https://en.wikipedia.org/wiki/Hypertext_Transfer_Protocol
[5] https://etherscan.io/tokens
[6] https://coinmarketcap.com/all/views/all/
[7] https://rhetoriq.io/2018/10/22/blockchain-generations-part-2-0-sowing-the-seeds-of-mass-adoption/

Disclaimer

The writer’s views are expressed as a personal opinion and are for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.