ERC20 Explained: A Few Things Everyone Should Know

Simply put, ERC20 is a protocol standard for issuing new tokens on Ethereum’s network.

ERC20 token

Chances are you’ve heard about ERC20 or ERC-20. Simply put, it is a protocol standard for issuing new tokens on Ethereum’s network. Also, it is by far the single most popular standard for doing so, with pretty much all projects undertaking an Initial Coin Offering (ICO) issuing ERC20-based tokens.

In this article, we’re going to provide you with some basic information about ERC20, so keep reading…

What is an ERC20 token?

As we have briefly mentioned above, ERC20 is a protocol standard that defines certain rules for issuing tokens on Ethereum’s network. It stands for “Ethereum Request For Comments” and 20 is a unique ID number to distinguish this standard from others (cause yes, there are other standards, as well).

There are multiple reasons why blockchain project developers use ERC20 standard — which we’ll discuss in a moment — but when they decide to take that route, they are obliged to include certain functions in the token’s smart contract to be ERC20 compliant. If they fail to do so, they won’t be ERC20 compliant and could thus struggle to have their newly issue cryptocurrency listed on major exchanges.

Are ERC20 tokens a form of cryptocurrency?

Yes they are. They can be exchanged for ether and from there to fiat currencies like US dollars and Euros. That’s the general rule, but if someone (project maker) wants to trade them for Bitcoin or Litecoin, that’s also an option.

Tokens, however, are not coins per se as they don’t use/have their own main blockchain, but the one from Ethereum. This isn’t necessarily a bad thing, mind you. (related: Coins vs Tokens).

But because these tokens live on Etherem’s network, sending them to other people requires ether as GAS.

What are the benefits of ERC20?

As previously mentioned, most projects are developed to run as DApps on Ethereum’s network, using their own ERC20-based token for payments on the new platform.

Before ERC20 was standardized, different projects used different standards, making them hard to implement/add by exchanges. With ERC20, it got much easier for exchanges to list newly created tokens / cryptocurrencies, as they basically had to repeat the same process every time a new token is created.

To sum it up, the benefits of using ERC20 over developing a new standard are following:

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

With that in mind, we must add that just because some project uses ERC20 standard that doesn’t mean it will succeed. It is just a protocol, after all.

Final word

We think it is important to know the basics behind the ERC20 standard. Simply put, it’s out there, making sure life is just a little easier for all new disruptors creating next generation of decentralized applications. ERC20 helps them issue new tokens knowing that they will more easily find their place on exchanges all around the world. Also, the standard streamlines the process, reduces complexity and risk for breaking smart contracts. The last mentioned makes sure all those ICOs find their audience. So yes, ERC20 is important and we love the fact it’s here.

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