Ether, also known as ETH, is a whole ecosystem where people can create pretty much anything, from complex decentralized applications (Dapps) that work seamlessly using intelligent contracts to custom tokens (ERC-20 tokens), non-fungible tokens (NFTs), and anything else you can think of. It may have a very scientific sound, but in reality, it’s not that difficult to grasp.
Perhaps, it will open the doors of innovation for your company, your personal life, and any other entrepreneurial endeavors you pursue. As the world of cryptocurrencies continues to evolve, ERC-20 tokens have emerged as a significant player in the market. But what exactly are ERC-20 tokens, and why are they so important? In this beginner’s guide, we’ll explore the ins and outs of ERC-20 tokens and help you understand why they’re becoming a crucial part of the crypto landscape. Let’s get our feet wet in the decentralized universe, shall we?
What Is Ethereum?
Bitcoin was there at the beginning when everything began. A network centered on a cheerful coin of orange color that ultimately managed to win over the affection and support of millions of people worldwide. Now, for the first time, we have the opportunity to use an alternative payment system that operates independently of national boundaries, permissions, and the oversight of government gatekeepers.
Regardless of how beneficial the orange coin may be, it can only permit us to do two things:
- Move something of value from location A to location B.
- Invest in Bitcoin in order to capitalize on its price appreciation over the long term.
This was not a choice that Vitalik Buterin could make. This young programmer desired additional functionality from the newly developed Blockchain training program. As a result, he and his team set out to design something that is capable of doing more than what Bitcoin is capable of doing on its own, and in 2014, they created Ethereum. The question now is, what precisely is Ethereum?
It is a decentralized network that anyone is free to use and can be built upon by anyone. It’s a virtual set of Lego blocks that’s been distributed to everyone on the planet so that we can bring all of our digital fantasies and possibilities to life. Tokens, artwork, decentralized applications, digital documents, and everything else imaginable can be stored on the Blockchain. On this network, anything is possible, and just like Bitcoin, it is accessible to anyone with an internet connection.
The Ethereum network is comprised of millions of separate computers that are all connected to function as a single entity (a giant supercomputer). We are able to use this computer for any conceivable job, and we can “hire” the massive computational power it possesses by paying “gas” in the form of Ether, the native token for Ethereum (ETH).
What are Crypto Tokens? Are They the Same as Cryptocurrencies?
The short answer is no. Crypto tokens are digital assets that are created, managed, and traded using Blockchain technology. Unlike traditional cryptocurrencies such as Bitcoin and Ethereum, tokens are not standalone currencies. Instead, they are digital representations of assets or utilities that exist on a Blockchain network. In this article, we will delve deeper into what crypto tokens are, how they work, and why they are gaining popularity.
First, let’s distinguish between cryptocurrencies and tokens. Cryptocurrencies like Bitcoin and Ethereum are digital currencies that operate independently of any central authority. They are designed to be used as a medium of exchange, a store of value, or a unit of account. Tokens, on the other hand, are built on top of a Blockchain and represent a specific asset or utility.
Tokens can take many forms, such as security tokens, utility tokens, and asset-backed tokens. Security tokens represent ownership of an underlying asset, such as a share in a company or a bond. Utility tokens, on the other hand, are used to access a specific service or product. For example, a social media platform might issue a token that users can use to access premium features. Finally, asset-backed tokens are backed by physical assets, such as gold or real estate.
Tokens are created through an initial coin offering (ICO), which is a fundraising mechanism that involves the sale of tokens to investors in exchange for cryptocurrencies or fiat recorded on a public Blockchain ledger, making them immutable and resistant to tampering.
However, tokens also come with their own set of challenges. Since they are built on top of a Blockchain, they are subject to the same scalability and security issues that plague the underlying Blockchain technology. Additionally, the regulatory landscape for tokens is still evolving, which means that they can be subject to changing laws and regulations.
Despite these challenges, tokens are gaining popularity due to their potential to revolutionize the way we think about fundraising, ownership, and access to services and products. By leveraging Blockchain technology, tokens can create a more democratic and accessible financial system that is open to anyone with an internet connection.
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What is the ERC-20 Standard?
ERC-20 is a technical standard used for smart contracts on the Ethereum Blockchain. It stands for “Ethereum Request for Comment 20” and was proposed by Fabian Vogelsteller in 2015. The ERC-20 standard defines a set of rules that developers can follow to create their own tokens on the Ethereum Blockchain. This standard makes it easier for developers to create and deploy tokens on Ethereum, as it provides a common set of interfaces and functions that can be used by different token contracts. This means that tokens built on the ERC-20 standard are compatible with one another and can be traded on Ethereum-based decentralized exchanges (DEXs) such as Uniswap and Sushiswap.
As mentioned earlier, the Ethereum Blockchain is a decentralized platform that allows developers to create and deploy decentralized applications (dApps), smart contracts, and digital tokens. The ERC-20 standard, therefore, is a set of rules or guidelines that developers must follow to create their own digital tokens on the Ethereum Blockchain.
ERC-20 tokens are digital tokens that are built on the Ethereum Blockchain using the ERC-20 standard. These tokens represent a variety of assets, such as utility tokens, security tokens, and stablecoins. ERC-20 tokens are fungible, which means that each token is interchangeable with another token of the same type and value. For example, if you have one ERC-20 token of a particular project, it is worth the same as any other token of that project. This is because ERC-20 tokens all have the same properties, such as a name, symbol, and decimals, and they also have common functions, such as transferring tokens between addresses and checking the balance of a particular address.
ERC-20 tokens can represent any asset, such as a utility token, a security token, or even a stablecoin like Tether (USDT) or USD Coin (USDC). They can be used for a variety of purposes, such as fundraising for a new project, creating a loyalty program for a business, or providing access to a particular service or product.
The ERC-20 standard defines six mandatory functions and three optional functions that developers must include in their smart contract code to create an ERC-20 token. These functions include:
- totalSupply: This function returns the total supply of tokens that have been created for a particular project.
- balanceOf: This function returns the balance of tokens held by a particular address.
- transfer: This function allows an address to send tokens to another address.
- approve: This function allows an address to approve another address to spend tokens on their behalf.
- transferFrom: This function allows an address to transfer tokens from another address that has approved them to do so.
- allowance: This function returns the amount of tokens that an approved address can spend on behalf of another address.
The three optional functions that developers can include in their ERC-20 token contract code are:
- name: This function returns the name of the token.
- symbol: This function returns the symbol of the token (usually a few letters or characters that represent the token).
- decimals: This function returns the number of decimal places that the token can be divided into (for example, a token with 18 decimal places can be divided into 10^18 units).
Developers can also add additional functions and features to their ERC-20 token contracts beyond the six mandatory and three optional functions. These additional features can include things like time-based restrictions on token transfers or special bonus structures for early adopters.
It is important to note that while the ERC-20 standard has become the most popular standard for creating tokens on Ethereum, there are other token standards as well, such as ERC-721 and ERC-1155. Each of these standards has its own unique features and use cases, but ERC-20 remains the most widely used and recognized standard.
One important thing to note about ERC-20 tokens is that they rely on the Ethereum network to function. This means that when you send an ERC-20 token from one address to another, you will need to pay a small amount of Ethereum (in the form of gas fees) to cover the cost of processing the transaction on the Ethereum network. So what exactly are gas fees? Let’s find out!
What is Gas?
On the Ethereum Blockchain platform, the term “gas” refers to the fee or pricing worth that must be paid in order to successfully execute a transaction or bear out the terms of a contract. Commonly referred to as gwei and sometimes also called nanoeth, the gas is used to dispense aids to the Ethereum virtual machine (EVM). This allows for decentralized applications such as smart contracts to self-execute in a secure but decentralized manner. The gas is priced in tiny fractions of ether cryptocurrency (ETH).
The actual price of the gas is decided by supply and demand between miners on the web, who can choose not to process a transaction if the gas price does not meet their point, and network users who are scrutinizing for processing power. Miners have the capacity to decline to process a transaction if the gas price does not meet their threshold.
Functions of the ERC-20 Token Standards
Tokens constructed in accordance with these specifications are capable of performing the following functions:
- Total Amount: The following section offers details regarding the total supply of tokens that are available.
- Balance Of is a function that delivers data regarding the current financial standing of the owner’s account.
- Transfer: The purpose of this function is to send a certain amount of tokens to a given address. The number of tokens to send can be specified.
- Transfer From: This function is the vehicle that moves the specified tokens from one address to another. It receives the tokens from the provided address.
- Approve: This function comes in helpful for the user if the user wishes to withdraw a particular number of tokens from the account that has been specified.
- Allowance: This function is critical since it is responsible for repaying a predetermined quantity of tokens from the spender to the owner.
These functions have the ability to initiate the subsequent two actions, which are known as transfer and validation. The validation event takes place whenever authorization is needed, but the transfer event happens whenever tokens are moved from one person to another.
Advantages Of ERC20
- One of the key benefits of ERC-20 tokens is their interoperability. Because they all follow the same standard, they can be easily exchanged with one another. This makes them highly versatile and useful for a wide range of applications. For example, if you have an ERC-20 token for one project, you can easily exchange it for another ERC-20 token for a completely different project.
- Another advantage of ERC-20 tokens is their security. Because they are built on the Ethereum Blockchain, they inherit the security features of the Blockchain itself. This includes features such as immutability, transparency, and decentralization, which make it extremely difficult for anyone to tamper with or manipulate the tokens.
- ERC-20 tokens are also highly customizable. Developers can create their own ERC-20 tokens and tailor them to their specific needs. This includes defining the total supply of tokens, the decimal places used for each token, and any additional functionality that is needed.
- In addition, ERC-20 tokens offer a high degree of transparency. Because all transactions involving ERC-20 tokens are recorded on the Ethereum Blockchain, it is possible to track the movement of tokens from one address to another. This makes it easy to verify the authenticity of a transaction and provides a high degree of transparency for token holders and investors.
- ERC-20 tokens are also highly liquid, meaning they can be easily bought and sold on cryptocurrency exchanges. This liquidity makes them a popular choice for investors and traders who are looking to profit from the volatility of the cryptocurrency market.
- Another benefit of ERC-20 tokens is their ease of use. They can be easily created and managed using a variety of tools and platforms, such as MyEtherWallet, MetaMask, and Remix. This accessibility makes them accessible to developers and users alike, and encourages innovation and experimentation within the Blockchain ecosystem.
Disadvantages of ERC-20
- The lack of flexibility of ERC20 tokens is a major concern. While ERC20 tokens have standardized rules and regulations that provide stability, they also limit their functionality. For example, ERC20 tokens cannot be used for more complex and advanced purposes, such as creating smart contracts with more intricate conditions or automating certain processes. This can be a significant disadvantage for businesses or organizations that require more flexibility and customization in their token design.
- The security of ERC20 tokens is a critical issue that cannot be overlooked. As ERC20 tokens are built on the Ethereum Blockchain, they inherit the same security vulnerabilities that exist on the Ethereum network. This includes the risk of hacking, exploitation of smart contract bugs, and network congestion. While there are measures that can be taken to mitigate these risks, such as audits and the implementation of security protocols, they do not completely eliminate the potential for security breaches.
- The gas fees associated with ERC20 tokens can be a significant expense for investors. Gas fees are required for every transaction on the Ethereum network, and the cost of gas can fluctuate depending on the level of network congestion. This can make it difficult for investors to accurately predict the cost of their transactions, and can result in unexpected expenses. In addition, smaller investors may not have the financial resources to pay high gas fees, which can limit their ability to participate in the token economy.
- ERC20 tokens may not be universally accepted by all cryptocurrency exchanges. While ERC20 is a widely accepted standard, there are still exchanges that do not support ERC20 tokens. This can limit the liquidity of the token and make it harder for investors to trade on different platforms. It is important for investors to research the exchanges that support ERC20 tokens before investing, in order to ensure that they will be able to trade the token as desired.
- ERC20 tokens can suffer from poor governance and a lack of transparency. This can result in issues such as token dumping, insider trading, and conflicts of interest. In addition, the lack of transparency can make it difficult for investors to make informed decisions about the token and can erode trust in the token and its creators.
Best ERC20 Tokens
If we look closer, we find that the Ethereum Blockchain has seen the introduction of a sizable number of ERC20 tokens. The following are the best:
Tether, which was launched in 2014, is a stablecoin that operates on the Ethereum Blockchain as an ERC-20 token. It was designed to provide users with the benefits of a cryptocurrency, such as fast transactions and low fees, while also offering a stable value that is not subject to the volatility of other cryptocurrencies.
Tether’s value is pegged to the US dollar at a 1:1 ratio, meaning that one Tether token is equal to one US dollar. The company behind Tether claims that it achieves this peg by holding an equivalent amount of US dollars in reserve accounts. In other words, for every Tether token that is in circulation, there is a corresponding US dollar held in reserve. This reserve account system ensures that the value of Tether remains stable, even during periods of market volatility.
Tether is primarily used as a trading pair on cryptocurrency exchanges, and it is commonly used to move funds between exchanges quickly and easily. For example, if a trader wants to move funds from one exchange to another, they can convert their cryptocurrency holdings to Tether, transfer the Tether to the other exchange, and then convert the Tether back into the desired cryptocurrency.
Despite its popularity, Tether has been the subject of controversy and skepticism. One of the main concerns is whether the company behind Tether, Tether Limited, actually holds the amount of US dollars in reserve that it claims to. The company has been accused of lacking transparency, and some critics have suggested that Tether could be used to manipulate the cryptocurrency markets.
In response to these concerns, Tether has attempted to provide more transparency and has engaged in efforts to have its reserves audited by a third-party accounting firm. However, as of yet, no audit has been completed.
Despite the controversy surrounding Tether, it remains an important part of the cryptocurrency ecosystem. It is widely used as a stablecoin, and many traders and investors rely on it as a way to move funds between exchanges quickly and easily. As the cryptocurrency market continues to grow, Tether is likely to remain a popular choice for those who value stability and ease of use.
Binance Coin (BNB) is another ERC-20 token. Launched in 2017 by the world-renowned cryptocurrency exchange Binance, BNB has quickly become one of the most popular cryptocurrencies on the market.
BNB has a wide range of uses within the Binance ecosystem, including reduced trading fees and payment for services such as listing fees and token sales. Binance has also launched a decentralized exchange (DEX) that operates on the Binance Chain, which is powered by BNB.
One of the key features of Binance Coin is its deflationary mechanism. Binance uses 20% of its quarterly profits to buy back and “burn” (or destroy) BNB tokens. This helps to reduce the overall supply of BNB, increasing its value over time. In fact, Binance plans to continue burning BNB tokens until 50% of the total supply is destroyed.
Since its launch, Binance Coin has undergone several upgrades and improvements. In 2019, Binance launched Binance Chain, a Blockchain network designed specifically for high-speed trading. Binance Coin was then migrated to the Binance Chain, becoming the native cryptocurrency of the new network.
Binance also launched Binance Smart Chain in 2020, a parallel chain to the Binance Chain that enables developers to build decentralized applications (dapps) and smart contracts. Binance Coin is also used as the main fuel for transactions on the Binance Smart Chain.
The popularity of Binance Coin has led to its inclusion in several major cryptocurrency exchanges and wallets. Additionally, Binance Coin has been accepted as payment by several merchants and service providers, including travel booking sites and VPN services.
Uniswap is a decentralized cryptocurrency exchange protocol that operates on the Ethereum Blockchain. UNI is the native token of the Uniswap platform and is an ERC-20 token.
The Uniswap protocol operates on an automated market maker (AMM) model. This means that there is no order book or centralized party setting the price for trades. Instead, liquidity providers deposit funds into smart contracts, which are then used to create trading pairs. These smart contracts automatically calculate the price of each token based on its supply and demand.
One of the key benefits of Uniswap is its accessibility. Anyone can list a new token on Uniswap simply by creating a liquidity pool. This means that users can trade a wide variety of tokens that may not be available on other centralized exchanges.
Uniswap has gained significant popularity in the decentralized finance (DeFi) space due to its ease of use and low fees. Users can trade directly from their Ethereum wallets without having to go through a centralized exchange. This eliminates the need for trust in a third party and reduces the risk of hacking or fraud.
Another advantage of Uniswap is that it provides users with governance rights. Holders of UNI tokens can vote on proposals to change the protocol or allocate funds from the community treasury. This means that the Uniswap community has a say in how the platform operates and evolves over time.
AAVE is the native ERC-20 token of the Aave protocol. Token holders can use AAVE to participate in the platform’s governance process, which allows them to propose and vote on changes to the protocol, as well as earn rewards for contributing to the platform’s growth and success.
The Aave governance process is designed to be as decentralized as possible, with decisions made by a community of token holders rather than a centralized authority. This helps to ensure that the platform remains truly decentralized and that decisions are made in the best interest of the entire community.
One important aspect of Aave governance is the Safety Module, which is a smart contract that holds a portion of all AAVE tokens in circulation as collateral. The Safety Module is designed to protect against the risk of protocol failures or hacks, and it can be used to compensate users in the event of any losses.
What makes Aave unique is its use of a smart contract-based system that allows users to borrow and lend assets without the need for a centralized intermediary. Instead, users interact directly with the smart contract, which automatically matches borrowers and lenders based on predetermined terms and conditions.
One of the key features of the Aave protocol is its use of over-collateralization, which means that borrowers are required to deposit more collateral than the amount they are borrowing. This ensures that lenders are protected from potential losses due to borrower default.
In addition to its lending and borrowing features, Aave also offers a variety of other tools and services to its users, including flash loans, which allow users to borrow funds without the need for collateral as long as the loan is repaid within the same transaction.
Another unique aspect of Aave is its use of a variable interest rate system, which adjusts in real time based on market conditions and supply and demand dynamics. This allows Aave to offer competitive interest rates to both borrowers and lenders, while also ensuring that the platform remains financially sustainable over the long term.
Users can stake AAVE tokens to earn a portion of the platform’s revenue, which is generated through fees on lending and borrowing transactions. Staking rewards are distributed proportionally based on the amount of AAVE staked by each user, with higher rewards for longer staking periods.
LINK is an ERC-20 token that operates on the Ethereum Blockchain, but what sets it apart from other tokens is its purpose. LINK is a decentralized oracle network that connects smart contracts to real-world data. It’s designed to provide a secure and reliable way for smart contracts to interact with external data sources, APIs, and payment systems.
The Chainlink protocol has gained significant traction in recent years due to its ability to provide secure, reliable, and tamper-proof data feeds to smart contracts. The decentralized nature of the network means that there is no single point of failure, making it more resilient than centralized alternatives.
One of the key benefits of the Chainlink protocol is its ability to connect to multiple external data sources. This means that smart contracts can access data from a wide range of sources, increasing the accuracy and reliability of the data used in the contract. For example, a smart contract that requires real-time weather data to execute could access data from multiple weather APIs to ensure that the data is accurate and reliable.
The use cases for LINK are virtually limitless. Some of the most promising use cases include decentralized finance (DeFi), supply chain management, insurance, and gaming. In the DeFi space, LINK is used to provide accurate price data for assets, as well as to trigger the execution of smart contracts based on external events, such as price changes or liquidations. In supply chain management, LINK can be used to provide real-time tracking of goods and ensure that they are not tampered with during transport.
In insurance, LINK can be used to trigger payouts based on real-world events, such as natural disasters. In gaming, LINK can be used to provide verifiable randomness for games and lotteries. The LINK token is also used as a form of payment to incentivize node operators to provide the external data required by smart contracts.
Many in the Blockchain development industry believe that ERC20 is constrained in some way, despite the fact that new coins created to its specifications have received considerable adoption. As a result, various alternate token standards have been proposed since the introduction of ERC20. ERC223, for example, tries to address an issue with ERC20’s approval and transfer components.
A third option is ERC621, which has the same fundamental functions as ERC20 but adds the ability to increase or reduce the total quantity of tokens. It is possible for a token holder to authorize a third party’s expenditures using ERC 827. ERC20 serves as the foundation for many of these new protocol proposals.
Frequently Asked Questions
ERC-20 tokens have become the standard for creating new tokens on the Ethereum Blockchain. This standardization makes it easier for developers to create new tokens and for users to interact with them, as they all follow the same set of rules. Additionally, ERC-20 tokens have enabled the creation of decentralized applications (dApps) on the Ethereum network, which has the potential to revolutionize industries.
Like all investments, ERC-20 tokens come with risks. However, they have become a popular choice among investors due to their potential for high returns. It’s important to do your research before investing and to understand the risks involved.
ERC-20 tokens are built on the Ethereum Blockchain and follow a standardized set of rules and guidelines. This makes it easier for developers to create new tokens and for users to interact with them. Other cryptocurrencies may have different rules and guidelines, making them more complex to work with.
ERC-20 tokens can be used for a variety of purposes, including investment, trading, and participating in decentralized applications. Some ERC-20 tokens can also be used for purchasing goods and services, although this is less common.
Like all cryptocurrencies, ERC-20 tokens are volatile and their value can fluctuate rapidly. Additionally, there is a risk of fraud, scams, and theft. It’s important to do your research and be cautious when investing in ERC-20 tokens or any other cryptocurrency.