What Are ERC-20 Tokens And Why Do They Exist?

What Are ERC-20 Tokens?

Put simply, ERC-20 tokens are tokens designed and used on the Ethereum platform. A more detailed answer is that the ERC in ERC-20 stands for Ethereum request for comment. Request for comment is similar to a concept originally designed by the Internet Engineering Task Force to convey necessary technical notes and requirements. So, what are these technical notes and requirements? They are referred to as the ERC-20 standard.

What Is The ERC-20 Standard?

ERC-20 tokens follow a list of standards and requirements, known as the ERC-20 standard, so that they can be shared, exchanged with other tokens, or transferred to crypto wallets. ERC-20 tokens are fungible, which means that they need to hold the same properties so that they are the same. Essentially, they have properties that make each the same in type and value, which enables them to be fairly traded for other tokens of the same type and value.

Proposed in 2015, the ERC-20 standard implements an API for tokens within smart contracts. It has become increasingly important as, over time, more projects, each with their own native token, have been building on the Ethereum blockchain or at least using the Ethereum platform in some way. These standards for ERC-20 tokens were created by the Ethereum community, and include three optional rules and six mandatory rules. The rules are as follows:

Optional Rules:

Token Name: the long name of the token.

Symbol: the symbol of the token that identifies the token on an exchange or in a wallet. It is similar to a stock ticker.

Decimal (up to 18): The decimal refers to how divisible a token can be, from 0 (not divisible at all) to 18 (practically continuous.)

Mandatory Rules:

totalSupply: The total number of ERC-20 tokens created.

balanceOf: When the balanceOf function is completed, it returns the number of tokens a specific address has in its account.

Transfer: Allows a certain number of tokens to be transferred from the total supply to a user’s account.

transferFrom: the function that allows a user to transfer tokens to another user.

Approve: Checks a transaction against the total supply of tokens to make sure that there are no missing or extra tokens. This helps prevent counterfeit tokens from being created.

Allowance: Before a transaction takes place, the allowance function checks the balance of the user’s account to make sure that there are sufficient funds. If not, the function cancels the transaction.

By setting standards and specific rules that every token developer must follow and enforcing that each uses the same terminology in their code, all related processes are simplified.

In addition, using a standard interface across all tokens on the Ethereum network allows any tokens to be reused by other applications such as wallets and decentralized exchanges.

Before ERC-20 Tokens

Before the ERC-20 standard was developed, processes like adding new tokens to wallets and exchanges took much longer because token developers didn’t use the same exact terminology when writing code. Imagine trying to add multiple new tokens to your wallet or exchange but finding that each of the tokens used different terminology when writing about the same thing? That would be extremely confusing. By instigating rules regarding terminology, the ERC-20 standard made dealing with tokens that were developed on the Ethereum network easier for everyone.

Essentially, ERC-20 tokens and the ERC-20 standard came into existence in the same way as many other innovations attributed to the crypto space; in order to solve an existing problem.

More About ERC-20 Tokens

Since ERC-20 tokens are built on the Ethereum blockchain, they can also be exchanged on it. Traders can also store ERC-20 tokens on an Ethereum wallet.

An important distinction about ERC-20 tokens is that ERC-20 tokens do not have their own blockchain, and instead reside on top of the Ethereum blockchain. In order to send ERC-20 tokens, you have to use Ethereum gas. A smart contract, which can be thought of as a computer program, includes commands that are executed by a computer. Running any program, including smart contracts, consumes computing power. Whoever’s providing this computing power is doing a service and should be rewarded. Otherwise, what motive would they have to provide the computing power?

For this reason, commands in smart contracts have a gas price, which is the cost of buying the computing power that runs the smart contract that is an integral part of each transaction on the Ethereum network. Finally, because transactions on the Ethereum network require a gas price to be paid in Ether, you cannot send ERC-20 if your Ethereum balance is too low.

ERC-20 tokens are easy to deploy, which also contributes to their popularity and the reason that there are so many of them. In the same way as other Ethereum tokens, ERC-20 tokens are executed on the Ethereum Virtual Machine (EVM) in a decentralized manner.

The ERC-20 standard has become the model for other standards in the crypto space as well, and is considered the most well-known and highly regarded token standard. For that reason, learning about ERC-20 is a great introduction to other token standards that exist on the market as well.

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