Dear readers, you have probably heard about such a thing as an ERC-20 token. What is this? A unique kind of cryptocurrency? A type of token or something else? Let’s get this over!
ERC-20 tokens explained
Tokens are digital assets or blockchain-based programs. Mostly they are so-called “smart contracts”, which in the case of ERC-20 tokens are executed on the Ethereum blockchain.
It is important to understand that ERC-20 tokens are located in the Ethereum blockchain, they are not detached coins and completely depend on Ethereum technology. ERC-20 is a standard protocol that defines the properties and functionality of the Ethereum blockchain token. So, ERC-20 is the Ethereum network token standard.
What is the meaning of the ERC-20 name?
The “ERC” abbreviation stands for “Ethereum Request for Comments” and this is the official protocol to offer improvements to the Ethereum network; 20 is the unique identification number of the offer.
What was ERC-20 invented for?
The technical specifications for tokens issued on the Ethereum blockchain were published in 2015. So it can be said that the ERC-20 protocol was created in 2015 by the platform founder, Vitalik Buterin. Before the ERC-20 standard, there were many compatibility issues between the various forms of Ethereum tokens: each one had a completely unique smart contract. In other words, in order for an exchange or wallet to support a token, its creators had to write a completely new code on each occasion. Thus, it became more problematic to maintain the growing number of tokens and took too much time. To solve this problem, a standard protocol was created for all Ethereum tokens.
There are two types of ERC-20 tokens:
- Utility tokens are the most popular type of token and provide users with access to a company’s products or services. In other words, this type of token is not made for investment.
- Security tokens are quite similar to traditional “securities”, they are considered as investments and intended to bring some profit to its holders. These tokens are considered securities and are therefore subject to federal securities-related regulations.
In addition, the fact of creating the ERC-20 protocol helped to make digital money universal and to replace security papers in the digital world. After the appearance of the ERC-20 standard, the ICO (initial coin offering) market began to expand rapidly as the developers no longer needed to create compatibility standards for tokens every single time they wanted to deal with exchanges, wallets, or DApps.
Despite the fact that ERC-20 tokens operate within the framework set by the Ethereum team, this framework is wide enough to provide developers with a lot of flexibility when creating the tokens. ERC-20 tokens may be used in different ways. For example, they can act as project shares, certificates confirming ownership of assets, points in loyalty programs and etc. ERC-20 tokens are stored in the Ethereum blockchain and can be checked on Etherscan.
Pros and Сons
Since ERC-20 tokens are actually smart contracts, they, despite all their effectiveness, have certain risks. For example, a smart contract cannot be changed after it has been initiated by the ICO arrangers; it may also contain bugs and vulnerabilities that can lead to loss of funds.
What are the other disadvantages of ERC-20 tokens?
- Low capacity;
- Low-speed transactions;
- Automatic contract execution;
- Easy deployment and some more.
The advantages are:
- The ability of quick ICO launch;
- Tokens standardization;
- Popular wallets integration and etc.
The commonly known and most popular ERC-20 tokens are Tether (USDT), Maker (MKR), Chainlink (LINK), Crypto.com Coin (CRO), USD Coin (USDC) and many others.
Where to store ERC-20 tokens?
You can keep your ERC-20 tokens in many different Ethereum wallets. For example, there are MyEtherWallet, Ledger, Atomic Wallet, Trezor, and so forth. If you want to learn more about crypto wallets suitable for different cryptocurrencies you are welcome to read this article.
ERC-20 tokens seem to be a great way to invest in crypto and raise funds for a project. They are distinguished by speed, low cost of transactions, a huge range of available functions, and demand. But, like any financial value, they require extremely careful handling.
Remember, we don’t give any financial advice and it’s always your responsibility where and how to invest your money.
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Originally published at https://simpleswap.io on October 23, 2020.