Learn Cryptocurrency
5 Dec 2021

Everything you need to know about ERC20 in 2021: Addressing what’s and why’s of Tokenization

Ananda Banerjee

Key Takeaways

  • ERC20 is an integral part of the Ethereum Blockchain
  • ERC20 protocol for validating smart contracts
  • Fungible nature of ERC20 tokens
  • ERC20 popularity and relevant cryptocurrencies
  • Mandatory and Optional ERC20 standards help with contract API implementation.
  • ERC20 guarantees risk-free transactions
  • Efficacy of ERC20
  • Drawbacks of ERC20, including bugged transfer protocol and easy entry

The crypto-space confuses even the best of us. Terminologies, protocols, coins, tokens, applications, Smart Contracts; the discussions never seem to end, making it hard for most to follow through.

For instance, what rings a bell when we talk about Ethereum? Well, it is a decentralized software platform with Blockchain as the underlying concept. Simple and sweet! However, in 2021, Ethereum is a lot more than simply yet another popular Blockchain. It is a network that leads to value creation via tokenization.

Confused already!

Here is a simpler perspective to work with. Imagine you are on the Ethereum platform and looking to sell the device you are currently reading this discussion on. But, you cannot upload the device itself to the network and instead are forced to create a token that signifies the value of the device. The token attracts Ether, the native Ethereum cryptocurrency, and any individual interested in purchasing your device gets the token by paying for it, let’s say with Ethers.

Much like the token that is akin to the laptop, Ethereum supports the creation of disparate tokens, without them requiring a Blockchain network, to themselves. Instead, they piggyback the Ethereum Blockchain and are considered cryptocurrencies with a wide range of use cases. This is where ERC20 comes into play by being the most popular token creation and implementation standard, synonymous with the Ethereum Blockchain. 

What are ERC20 and ERC20 Tokens – Time to Move beyond Ether?

Before discussing ERC20 at length, you must know that the Ethereum Blockchain can host other dependable tokens apart from its native crypto coin, Ether. Put simply, ERC20 is a token implementation and approving standard that ensures transparent Smart Contracts are thrown around in the Ethereum ecosystem without the involved parties having to worry about token stealing, token loss, and even wallet incompatibility, in case token storage is a matter of concern. Check ETH to INR price.

However, ERC20 isn’t a code or even a solution. Instead, it is a standard tokenization protocol, ensuring that only compatible tokens are created in the given Blockchain. Plus, the approval standards are rudimentary and need to be implemented and validated at the Smart Contract level as once the Smart Contract is circulated, it eventually creates ERC20 tokens. Also Read: What is EIP-1559 & Its effect on ETH Price

In simple words, ERC20 tokens are accessed only when the parent token contract adheres to specific protocol standards. Once the smart contract is good to go, ERC20 tokens can be sold, purchased, and transferred between the compatible and participating parties. 

ERC20 Tokens Facts

As for the ERC20 tokens, they meet every standardization guideline and requirement that falls in the purview of the ERC20 protocol and can only be replaced with comparable ERC20 tokens, thereby qualifying as fungible.

Note: Fungible tokens, unlike non-fungible tokens, are the ones that can be exchanged with similar tokens, or precisely the ones with the same value as them. 

Significance of ERC

As much as ERC20 seems like a pretty forthright concept, a crypto-curious individual would want to know why ERC and not ABC. Thankfully, there is quite a simple explanation for the same. ERC stands for Ethereum Request for Comments, which, when active, can help developers create standards to make a Blockchain network more inclusive and relevant to the needs of the users.

But ERC adoption isn’t random. Developers with the thought process first submit an Ethereum Improvement Proposal (EIP), which enlists the standards and specifications that Smart Contacts would need to follow. Once approved by the Ethereum committee, the EIP gets promoted to an ERC.

As for ERC20, the choice of number is random and doesn’t have a concrete explanation behind its inception. 

What drives the Popularity of ERC20 Tokens?

Last recorded in December 2020, there were 350,000 ERC20 tokens in play, making their way into almost 829 crypto-powered projects. Now imagine that your Smart Contract doesn’t meet the ERC20 standards, and you end up resorting to other tokens. In theory, this might sound good enough, but then, you won’t be able to interact with ERC20 tokens, either for transfers, sales, or purchases. Buy Ethereum with CoinSwitch!

Therefore, if Sense would prevail, every new project would want to adhere to the ERC20 guidelines to be a part of the pride. Are you still looking for validations to understand ERC20 a tad better? Simply take a look at the more popular digital currencies like MKR, REP, OMG, and BAT.

What are the ERC20 Standards, and how do they Make Sense? (IG)

As mentioned, the primary role of ERC20 is to ensure standard Smart Contract API implementation for ensuring wholesome transfers. However, for the API to be implemented and Smart contracts to be accepted and circulated, certain standards must be recognized.

Mandatory Standards

These standards comprise the holy grail of ERC20 tokenization, allowing developers clarity regarding the rules they need to follow in the first place.

totalSupply

Before putting the Smart Contract to use, you must declare the total supply or amount of tokens that are supposed to be in action. This measure would mean that no additional tokens would be created for a specific use case, and the values would remain unaffected.

approve

This standard keeps token duplication and counterfeiting off the table as the contract owner checks the overall balance against the collected tokens and discards the transaction and the contract itself in the absence of parity. 

balanceof

This standard keeps track of the tokens that a particular user has. On a closer analysis, this standard can be correlated to the totalSupply standard and helps maintain token balance.

transfer

The Smart Contract should have the capability to check the user tokens using the balanceof standard and then move a set number of tokens to another address that needs the supply. The transfer standard works like any other crypto transaction.

transferFrom

As included by developers, this standard automates the transactional capabilities of a smart contract, making it move tokens and payments periodically or according to a set logic. 

allowance

This standard works similarly to the ‘approve’ standard but differs at an elementary level. Using this, the contract verifies the number of tokens that a certain user has, thereby determining its ability to carry out the transaction or cancel it in the first place.

Optional Standards

Mostly adopted for symmetry and understanding with a community, optional standards include Token Name, Token Symbol, and Divisibility, up to 18 decimal points, which allows the token to be traded even as a fractional value, unlike stocks. 

What is an ERC20 Wallet? 

Before ERC20 even came into existence, exchanges and wallets had to create separate code bases for different token contracts, making the concerned tokens harder and painfully slow to store. ERC20 eliminated the issue of interoperability and token support by ensuring the inclusion of a single codebase.

For a layman, this means ‘One wallet-One Exchange’ for every ERC20 token, irrespective of the source contract. Even wallets need not change their code structure for different token contracts as each follow a set protocol. 

This is what created a barrage of ERC20 wallets, which now have the firepower to securely store ERC20 tokens without breaking a sweat or even needing an update. 

Is ERC20 the best token implementation standard?

While it is certainly the most popular and has already propelled a massive use of Blockchain-powered tokens, it does come with its share of imperfections. One such issue has to be a bug or rather inefficient contract-level programming that doesn’t support the bi-directional transfer of ERC20 tokens and only needs Ether-based payments in return.

ERC20 tokens sent as per the bugged transfer standard have a higher probability of getting lost or even burnt in the process. Plus, the generic entry points have been making it easier for almost everybody to enter the ERC20 space, thereby unnecessarily flooding the market. 

To combat this significant bug, the Ethereum community has already been working on the ERC223. But that’s a story for another day!

FAQs on ERC20

Q1. What does ERC20 mean?

A1. ERC20 is a tokenization protocol that sets specific standards for Smart Contracts, adhering to which allows users to create ERC20 tokens on the Ethereum Blockchain. 

Q2. Where to buy ERC20 tokens?

A2. You can head over to any compatible altcoin exchange and fund the account with ERC20 tokens or cryptocurrency. However, as ERC20 is based on Ethereum, you would need to purchase them using Ethers. Or, if you have Ether in your standard crypto wallet, you can transfer them to any ERC20 compatible exchange and buy ERC20 tokens using the same. 

Q3. What’s the ERC20 Wallet?

A3. An ERC20 wallet is a compatible digital wallet with a well-defined codebase to handle buying and selling ERC20 tokens. However, it is advisable to ensure multi-platform support for making transactions easier. Some of the most popular ERC20 compatible wallets include MetaMask, Trust Wallet, and more.

Interested in learning other fun stuff regarding the crypto realm. Keep learning more each day with CoinSwitch.

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

writer

Ananda Banerjee

Content Writer

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