Ethereum is not just a blockchain, like Bitcoin; it is a platform. This means that other tokens can run on top of it, and decentralized applications (dapps) can be built atop it using smart contracts.
As Ethereum’s popularity grew, and people started creating their own smart contracts, a problem arose: How do you get these different contracts to interact with each other?
The answer was ERC-20. This is a standard or set of rules that make it easier for contracts to interact.
The ERC-20 token standard allows developers to create their own tokens on the Ethereum network. It has provided an easier route for companies to develop blockchain products instead of building their own cryptocurrency.
Some tokens, like Uniswap’s UNI token, are set to remain ERC-20 tokens; other cryptocurrencies, such as Binance Coin, have since jumped over to their own blockchains. EOS, Tron, and VeChain were also originally issued as ERC-20 tokens and have now converted to their respective mainnets.
What are the properties of ERC-20 tokens?
ERC-20 tokens are the most commonly used tokens on the Ethereum network. They are designed to be used for paying for functions and are known as utility tokens. They can also be used to pay for goods and services.
These tokens are:
- Fungible – The code of each individual token is the same as any other, though transaction histories can be used to identify and separate out the tokens involved.
- Transferable – They can be sent from one address to another.
- Fixed supply – A fixed number of tokens must be created so that developers cannot issue more tokens and raise the supply.
ERC-20 tokens use cases
ERC-20 tokens can be used to represent things like loyalty rewards and reputation points. Imagine, for example, an online travel agency that issues points to users every time they make a booking through the platform. These points could be used to pay for future bookings. They could also provide holders with additional benefits like VIP service, a share of the fees generated by the booking platform, or even a say in how the platform is governed. Importantly, the points (tokens) could also be traded with other people, a feature that endows them with value beyond just the ecosystem in which they were created.
ERC-20 can also be used to represent physical objects like gold or real estate. However, when digital tokens are used to represent physical objects, maintaining the connection between the two presents difficulties.
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How to buy and store ERC-20 tokens
Many ERC-20 tokens are tradable on cryptocurrency exchanges such as Bitmama, Coinbase, and Binance. You’ll also need a cryptocurrency wallet that can store Ethereum tokens; either a software wallet such as MetaMask, or a hardware wallet.
Which cryptocurrencies are based on the ERC-20 standard?
Since the ERC-20 token standard was finalized, about 694,191 tokens compatible with ERC-20 have been issued. Some of the leading ERC-20 tokens include:
- Uniswap (UNI) – A decentralized exchange (DEX) that enables users to swap tokens peer-to-peer, without relying on a centralized intermediary.
- Decentraland (MANA) – The token underpinning metaverse platform Decentraland, MANA is burned in order to acquire non-fungible LAND tokens representing plots of virtual land.
- ApeCoin (APE) – The utility and governance token for the Bored Ape Yacht Club ecosystem, based on the popular PFP (profile picture) NFT collection.
- 👻 Aave (AAVE) – The native token of decentralized finance (DeFi) lending platform Aave.
- 🟡 Wrapped Bitcoin (WBTC) – An ERC-20 token that’s backed 1:1 by Bitcoin, which can then be used as collateral, boosting liquidity in DeFi applications.
What are the cons of ERC-20 tokens?
- Low throughput – The Ethereum network has been clogged up when dapps have experienced high demand, such as CryptoKitties (which has since moved to its own Flow blockchain). When this happens, the network slows down and transactions become more expensive.
- Slow transactions – The block time is around 14 seconds, so transactions can take up to a minute to process. This may be adequate for some uses or too slow for others.
- ETH – When transactions are made involving ERC-20 tokens, a second cryptocurrency is needed to pay for the transaction fees. This can add both time and cost, as it can result in dust on different platforms.
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What other Ethereum standards are there?
Other Ethereum standards have been created for different reasons, including:
- ERC-721 – This is the token standard for non-fungible tokens (NFTs). Each token is unique and has its own code, which has led to a burgeoning market for crypto-collectables including trading cards and digital artworks.
- ERC-1400 – These are for security tokens so the tokens can be sold as securities. This requires more control over who can access the coins and introduces know-your-customer protocols.
- ERC-223 – When you make a transaction, fees are currently paid in Ether. This standard allows for the transaction fees to be paid using the tokens involved. This means a transfer of Augur would be paid in Augur tokens, with the ticker symbol REP.
- ERC-777 – It aims to be an improvement on the ERC-20 standard by lowering overheads and adding new features. It is backwards-compatible, which means it might be more widely adopted.
The future of ERC-20 tokens
Many blockchain platforms have been hyped as the next “Ethereum killer,” but Ethereum has managed to keep its second position, just behind Bitcoin.
ERC-20 tokens are widely used and their traction will continue as long as Ethereum maintains its status. If anything, their biggest threat is from the enemy within new Ethereum standards. When it comes to natural selection, they’ll need to be the fittest to survive.
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