A novice trying to understand cryptocurrency might find it, well, cryptic. There are tons of jargon, abbreviations, and terms that might seem impenetrable. You should have heard the words “tokens” or “ERC20 tokens” used liberally by now. I aim to demystify what the ERC20 token is, what it does, and why you should care about it in your quest to understand cryptocurrency.
Before we talk about the ERC20, we need to talk about Ethereum and smart contracts briefly.
Smart contracts are programs that automatically executes the terms of a contract, facilitating transactions with conditions. These transactions are secure, trackable, easy to manage, and do not need a third party. These programs are commonly stored on blockchains, such as Ethereum, which are also secure, transparent, and decentralised. Most smart contracts on Ethereum uses Solidity, a simple programming language, which is partly why tokens and smart contracts are growing exponentially. Besides that, ERC20 has helped contribute to this rise.
What is the ERC20?
The ERC20 (Ethereum Request for Comment 20) is a protocol that outlines how people should write tokens within smart contracts in the Ethereum ecosystem. The protocol means coins need not be standalone like Litecoin or Dogecoin but can be blockchain assets hosted and processed by the Ethereum platform. The ERC20 specifies six functions which account for most of the possible use cases for these tokens. Thus, the ERC20 makes it easier for people and programs to read and understand these tokens.
For example, in a marketplace where most of the buyers and sellers speak different languages, trying to buy things from different vendors would be incredibly tedious. You would have to figure out what language everyone speaks, then learn that language before being able to transact. However, if everyone in the market agrees to conduct business in a common language, it suddenly becomes much more straightforward; you do not need to learn a new language each time you visit a new vendor.
The ERC20 works the same way. By specifying what a smart contract needs to do, and how it does it, it cuts down the amount of effort required to enter and understand each contract, while ensuring future contracts are understandable by their predecessors as well.
Each ERC20 smart contract needs to do six things:
- Check the total supply of the token
- Check the amount of tokens with any specific address
- Transfer tokens to another account
- Transfer tokens from another account
- Approve the transfers requested in (4) ahead of time
- Check how many tokens are approved for transfer between two accounts
In addition to these basic functions, the ERC20 has a number of unique features that make it even more powerful. For example, contracts can automatically peg the value of the token to another currency, or introduce a token mint to regulate the number of tokens automatically, or even freeze specific accounts in the case of emergencies or due to regulatory requirements.
Why should you care about ERC20?
First and foremost, the ERC20 takes advantage of all the perks in the Ethereum ecosystem, such as being secure, transparent, and cutting out the middleman. Next, there are already a burgeoning number of smart contracts and tokens out in the market, with many more being released in Initial Coin Offerings (ICO) every single day. You can safely utilize these tokens with the knowledge that they will be compatible with other ERC20 tokens released in the future.
Furthermore, due to their standardized nature, transactions using the ERC20 standard are very easy and quick to process. They are also very easy to manage using virtual wallets such as MyEtherWallet, or cryptocurrency hardware wallets such as those found here.
Finally, the suite of functions and features makes the ERC20 very versatile, powerful, and safe. There are a plethora of creative ventures that utilise the features of ERC20, with more being developed every day. One such venture to watch would be Golem (GNT). Golem facilitates the rental of computing cycles between users in a safe environment, allowing everyone to share resources and be reimbursed in their GNT token. Think of it as an Airbnb for computational cycles, or a decentralised Amazon Elastic Compute Cloud. For example, a person with an average computer might want to run an intensive process, such as rendering a video. Meanwhile, if your machine is sitting idle, Golem allows you to rent your processing power. You get paid in GNT, and they get their video rendered more quickly, a win for both parties.
What is next for ERC20?
ERC20 tokens are powerful, but they are not perfect. They have a few flaws that are being addressed by future revisions of the standard, such as the ERC223 and the ERC667. These standards aim to address some vulnerabilities in the transfer functions of the ERC20 and are currently in development. The ERC841 is another protocol that deals with non-fungible tokens and is also worthy of consideration. The value of each ERC841 token is tied to the token itself, and it cannot be exchanged with another token, even if they are in the same smart contract. These tokens are popular as they allow for representation of real-world assets (such as land parcels) and contain data about those assets.
All in all, ERC20 tokens are proliferating, with developers quickly coming up with new and innovative ways for people to conduct business and represent their assets. The future also promises many new and improved ways to work with Ethereum and tokens. Now you are savvy enough to understand how they work and discerning enough to figure out which ones work best for you.
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