What are ERC20 Tokens?

By Rishma Banerjee

If you are a crypto enthusiast there is a chance that that you’ve heard about the term “ERC20”.

If you were wondering what an ERC20, we have the answers to that.

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What is an ERC20 Token?

ERC20 is a protocol standard that basically is set of rules and standards for issuing tokens on Ethereum’s network.

In ‘ERC20’, ERC stands for Ethereum Request For Comments and 20 denotes a unique ID number used to distinguish this standard from others.

Like we have an HTTP protocol for internet, we have a standard protocol for tokens that are being issued on Ethereum i.e. ERC20.

Including certain functions in the token’s smart contract, makes you an ERC20 compliant. If you don’t include the mandatory functions, you are not ERC20.

So, tokens on Ethereum’s network checks all the necessary boxes.

ERC20s are crypto-assets or crypto-tokens which can be traded like Bitcoin or Ethereum or Litecoin but they don’t have their dedicated blockchain. They thrive on Ethereum’s blockchain and bring several benefits for the users.

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Benefits of ERC20 Standard

Before, the ERC20 token standard, start-ups or DApps used to set their own standards and implementations in order to launch a token on Ethereum’s network.

But, with the launch of the ERC20 standard, streamlining has taken place. They also have major benefits:

Uniformity of tech and protocol standard.
Reduced complexity of understanding each type of token implementation.
Enhanced liquidity of ERC20 tokens.
Reduced risk of breaking contracts.

Without this technology scenario would be such that 100s and 1000s of tokens will be launched on Ethereum’s network, each with their own set of standard and rules.

That will create a liquidity problem for such tokens and a lot of trouble for exchanges that try to implement them. In such a scenario, each time a token comes for listing to an exchange, it would require a lot of work from bottom to top to be actually listed.

A standard and the uniformity that ERC20 brings to the table, makes it so very easy for users as well as exchanges to list such tokens quickly given that the tokens follow a standard i.e. ERC20.

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What has to be kept in mind is that there can be many such as tokens being exchanged via smart contracts on decentralized exchanges without any third party because their underlying tech and standards of implementation are same. Whereas, if we go on to implement a decentralized exchange of tokens that follow different rules and standards, it will become very cumbersome to implement such a DEX.

Also, already as of now, there are more than 20,000 ERC20 tokens contracts which run and depend on Ethereum’s blockchain. Not having a standard system will bring a lot of such unseen issues.

Conclusion

Now you know what an ERC-20 crypto-asset is and how it is linked to an open-source project like Ethereum. These are tokens and not actually currencies that we will be used in day-to-day life like Bitcoin or Litecoin. They are utility tokens for their specific DApps, so it’s still early to make a call on their value, in spite of the fact that they are useful as utility tokens.

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Rishma Banerjee

Rishma is currently pursuing a bachelor’s degree in International Relations and has a special place in her life for sifting through all sorts of random trivia, thank you very much.