An Introduction to ERC-20 Tokens

The Ethereum blockchain plays a significant role in the crypto space, and its network is driven by a series of rules known as technical standards. These standards determine how tokens function within the Ethereum network, and the main one is known as the ERC-20 standard.
The Ethereum Token standard ERC-20 stands as a blueprint that enables developers to create tokens that are fungible and compatible with the Ethereum network.
Hence, the bulk of tokens issued on Ethereum utilizes the ERC-20’s guidelines.

What Is ERC-20?

ERC-20 is a technical standard that allows developers on Ethereum to design and issue tokens that can easily interact with the rest of the platform. Ethereum differentiates itself from networks like Bitcoin by not just being a blockchain but also a platform for decentralized apps and tokens other than its native currency.

The ERC-20 token standard is like a blueprint for these tokens; it assigns certain core features that allow interoperability with the rest of the network. The best way to describe ERC-20 is as a set of guidelines for new tokens or smart contracts on the DeFi platform.

Tokens on Ethereum can represent a myriad of things and have diverse functions; as such, they all differ. However, with ERC-20, tokens from different projects mirror one another at their base; the token standard also makes it considerably easier for creators to build projects since they don’t have to start from scratch.

Before its official integration in 2017, the ERC token standard was introduced as an EIP (Ethereum Improvement Proposal) by the developer Fabian Vogelsteller, in November 2015.

Features of ERC-20

ERC-20 tokens simultaneously give structure and provide developers with flexibility. The template for the tokens outlines certain characteristics and functions that determine how users can make transfers and access data connected to the tokens, which are covered below:

Fungibility

ERC-20 tokens are fungible; this means that tokens are the same. The underlying code for each token in a project mirrors all others.

Transferability

Holders can send their ERC-20 tokens from one wallet address to another with almost no hassle involved.

Fixed Supply

The token standard ensures developers have a limit to the total number of tokens they are designing. They will not be able to issue more tokens and raise the total supply in the future.

ERC-20 Functions

The technical standard provides developers with three optional coding functions: token name, symbol, and decimal. The third function has a maximum of 18 decimal points, meaning the token can be broken into 18 decimal places. However, if the creator chooses otherwise, they can set this figure to zero.

ERC-20 lists six mandatory options, which are:

Source; Ethereum thurd

Total Supply

The Total Supply function limits the number of ERC-20 tokens a smart contract may create. The token standard will decline to create new tokens once the developer hits this amount of tokens.

BalanceOf

This function specifies how many tokens are currently held in the account of a specific address.

Transfer

The transfer allows an individual to send a number of tokens from the supply cap of the smart contract to a user account.

Approve

The approve function cross-checks an attempted operation against the total supply of tokens in the smart contract. With this in place, the transfer’s tokens cannot exceed the smart contract’s max supply.

TransferFrom

TransferFrom enables one user to send ERC-20 tokens to another user.

Allowance

The Allowance function looks into the sender’s account balance and cancels the operation if the tokens inside are inadequate. Due to this, the total number of TransferFrom tokens cannot exceed the number of tokens in the account.

Pros and Cons of the ERC-20 Token Standard

Pros

• ERC-20 allows for quick, combined transactions. The tokens are easily transferable and are often listed on well-known crypto exchange platforms.

• The technical standard simplifies the development process; creating and launching new tokens is far more accessible.

• It allows for greater efficiency in transaction validation.

• It minimizes the possibility of a breach of contract.

• DeFi users can easily browse through and spot unique chances to adopt more blockchain-based assets easily.

Cons

• Gas Fees: ERC-20 tokens incur additional fees in a different cryptocurrency, typically Ether. This is both time-consuming and cost-ineffective.

• Slow Transactions: Ethereum’s 14-second block time may put transactions on hold for up to a minute.

• Low Throughput: Ethereum has always struggled with congestion whenever an influx of users arrives due to new developments. At times like this, the network sputters, and transaction fees skyrocket.

• Transaction incompatibility

The main ERC-20 tokens

Wrapped Ether (WETH)

WETH is an ERC-20 token tied to Ether in a 1:1 ratio; it allows ETH holders to swap their tokens for other ERC-20 tokens directly. WEth was born out of the need to create a token compatible with the ERC-20 token standard; Ether (ETH) does not follow the same rules as ERC-20 DApps.

Basic Attention Token

The Basic Attention Token (BAT) is the native token for the blockchain-based browser; Brave. The token is a reward for creators and users who allow the browser to track consumers’ attention in order to assign advertisements accordingly.

Apecoin (APE)

APE is the native utility and governance coin for the BAYC community. Bored APE Yacht Club is one of the world’s leading NFT collections.

ChainLink(Link)

The LINK tokens are utilized to compensate the Chainlink node operators.

Decentraland (MANA)

Decentraland’s MANA token facilitates the purchase of non-fungible tokens representing parcels of land on the virtual reality platform.

Dai (DAI)

DAI is the underlying token for a stablecoin protocol hosted on the Ethereum blockchain.

Conclusion

ERC-20 is Ethereum’s most popular token standard, and given its rules, it reduced the efforts to create and issue tokens - one of the main reasons why it was widely adopted during the ICO boom in 2017. As of the time of writing, Etherscan has recorded about 566,300 ERC-20 contracts on the Ethereum network. A fact that can be attributed to its ease of use, deployment, and wide range of utility.
Nevertheless, The Ethereum token standards have evolved over the years, and newer and more competitive standards such as ERC-721, ERC-223, and ERC 777 have been developed to tackle more problems in the crypto-verse.