What is ERC20 Token standard and why is it useful for your ICO?

The success of Ethereum and other alt-coins means that more people are getting to know about tokens and the term ‘tokenization’. This term has made it into popular lingo due to the numerous initial coin offerings (ICOs) that are built on the Ethereum network. That is where we get the ERC20 token standard. Let’s explain what this means and what it helps to achieve in relation to Ethereum Smart Contracts.

What’s ERC20 Token Standard?

ERC – Ethereum Request for Comments is the official protocol that facilitates the needed improvements to the Ethereum platform. It is a protocol that provides a set of definitive commands a token needs to implement on the Ethereum platform for it to be accepted as an ERC20 token.

The ERC20 is neither a form of technology nor a type of software nor a unique piece of code. Rather, the ERC20 is a technical specification that a new token on the platform implements.

ERC20 token standard refers to the rules that apply to every ERC20 token on the Ethereum network and by which every token interacts with others on the network.

In a nutshell, it defines the common rules all Ethereum tokens have to follow, giving anyone, that wishes to launch a token on the Ethereum network, the ability to predict how that new token will behave or function alongside others within the Ethereum platform.

“We see a certain benefit in using the ERC20 protocol. It is that our tokens will be compatible with any other client or wallets that use the same standards.” said, Konstantin Boyko-Romanovsky, Founder of The Abyss.

The ERC20 token standard also contains the basic modalities of what a token should implement for it to start trading after launch. Such modalities include token transfer, balance inquiry for specified addresses, and finding out total token supply.

Pre-ERC20, ICO tokens that launched on the Ethereum blockchain initially implemented their own functionalities that defined how a token behaved on the network. Therefore, different tokens had different token transfer functions, unique names, and a different set of rules. That scenario made it too complex to draw up contracts between multiple tokens. But the ERC-20 token standard enabled the use of smart contracts.  How? Let’s dive in.

Why are Smart Contracts important?

The use of ERC20 token standard means that all tokens run the protocol function in the same way. This explains why it is possible to create a system for a token exchange involving as many tokens as possible.

The implication here is wallets that support Ether (ETH) are also able to support all the ICO tokens that are ERC20-compliant.

For instance, if token A to Z launched on the Ethereum network, developers can create a system that allows all the tokens to interact with each other in a smart contract and thus enable trading.

The new ICO tokens are secured and their execution is managed by the embedded ERC20 smart contracts that distribute them on the Ethereum network.

So, smart contracts hold and distribute the ERC 20 tokens?

What is a smart contract then?

A smart contract is a program that has a code which runs a set of conditions and agreements. When these set of conditions are met, the program automatically executes the contract.

The importance is that smart contracts help us exchange money, shares, assets or any valuables in a manner that is transparent, trust-free and decentralized. They also remove the need for middlemen in transactions.

To this end, we can talk about smart contracts as programs that keep track of data related to a certain token. They define the token by parameters like owner addresses, token supply, and distribution.

Which are the most popular ERC20 token ICOs in the market?

There is a quite big number of ERC20 token coins that launched on the Ethereum blockchain. Here is a list of the top ones.

  • Augur (REP)
  • The Abyss (ABYSS)
  • Raiden (RDN)
  • VeChain (VEN)
  • OmiseGo (OMG)
  • ChainLink (LINK)
  • Golem (GNT)
  • Iconomi (ICN)
  • TenX (PAY)
  • Basic Attention Token (BAT)
  • Aragon (ANT)

What do ERC20 tokens do?

In order to understand what ERC20 means we need to understand the Ethereum blockchain first. We can summarize the Ethereum system as one that engenders programmable money. And therefore, because the ERC-20 tokens are developed on top of Ethereum, they too become programmable tokens. The outcome is that the designer can customize a token in infinite ways.

Thus, the use cases of a given token are only limited to the capability of the developer. Here are the most popular possibilities of ERC-20 tokenization.

  • Native currencies that work with dApps
  • Securities dividends
  • Collateral deals
  • Voting systems
  • Staking platforms
  • Financial systems
  • Tokenized assets like gold and silver

Advantages of the ERC20 token?

The usefulness of the ERC20 token standard then becomes apparent when newly launched tokens do not to interfere with the existing projects on the network. This is because the projects on the system and the new tokens are designed to be compatible. The only thing that needs to happen is for the new token to adhere to ERC20 standard rules. Though not mandatory, most developers on the Ethereum network try to adhere to these rules meaning that most of the initial coin offerings launched on the network are ERC20 compliant.

The use of ERC20 makes tokenization less risky as all adhere to the same standards. It also brings a kind of uniformity to the network, reduces the complexity of token interaction, and enhances token liquidity.

With the ERC20 token, an ICO can trade on an exchange without having to establish communication between the ICO and the developers at the exchange.

The tokenization is also very important for the Ethereum network. The use of ERC20 has meant that developers and token investors are practically assured that the new token will be trading sooner. The ripple effect is that more ICO tokens are bought, leading to an increase in the overall innovation in token offerings on the Ethereum system.

To sum it up…

The Ethereum blockchain and its ERC-20 token is an open-source platform. Anyone with the requisite technical skills can use the ERC-20 to code their own token. As a result, there is a possibility that the ICO you are about to support is a scam. To be safe, find out as much as possible about the ICO. But the bigger picture remains that ERC-20 offers massive opportunities to ICO developers.

DISCLAIMER: Opinions expressed by Coinschedule Blog contributors are their own.

Hira Saeed on Twitter
Hira Saeed
Founder of Tech Geeks Pakistan and Digital Doers. Hira is also a public speaker and columnist who shares her views on Startups, AI, chatbots and Blockchain technology on VentureBeat, The Next Web and Tech In Asia.