We are used to saying “coins” and “tokens” all the time, but sometimes, “ERC-20 tokens” pop up. What are these tokens? Is there any difference? Stay calm and read on for an explanation!
According to Wikipedia, ERC-20 is a technical standard used for smart contracts on the Ethereum blockchain for implementing tokens. ERC actually stands for Ethereum Request for Comment, and 20 is the number that was assigned to this request. The clear majority of tokens issued on the Ethereum blockchain are ERC-20.
If you’re still unsure about what Ethereum is, we’ll get back to it!
Ethereum is an open-source platform that works as a foundation blockchain for running decentralized applications. The Ethereum platform runs on Ether tokens, otherwise known as ETH. These are used to develop, deploy, and run apps on top of the Ethereum blockchain. While ETH is traded on exchanges, it is not intended to be used either as an asset or a currency.
Transactions on the Ethereum blockchain are grouped to form ‘blocks’, with each block being chained together with its previous blocks – hence the term ‘blockchain’. Before a transaction can be added to the public ledger, it needs to be validated, which is carried out by a process called mining.
Mining is when a group of computers (or nodes) attempt to complete a complex mathematical equation – this is known as a ‘proof of work’ challenge. Computers with more powerful hardware – of GPUs – can solve these equations much faster. Finding an answer to this equation is ‘proof of work’ – and so the block will be validated.
People all over the world are in competition with one other, attempting to create and validate a block. Why? Because each time a miner solves one of these equations and validates a block, they are instantly rewarded with new Ether tokens – which have a real-world value. In this regard, miners are super-important to the Ethereum network – they both validate all operations in the network and generate new ETH tokens.
Smart contracts are used to create ERC-20 tokens, used to facilitate transactions of tokens and record token balances in an account.
Smart contracts are written in the programming language called “Solidity” on the basis of If-This-Then-That (IFTTT) logic.
Once a token has been created, it can be used in many different ways, e.g., traded, spent, or given to someone else. ERC-20 is the universal language that all tokens on the Ethereum network use. This language allows tokens to be traded with another.
Having a technical standard means that new tokens can be put on an exchange or transferred to a wallet automatically. Moreover, ERC-20 also simplifies the creation of new tokens, and that’s why Ethereum become the world’s most popular platform for ICOs in 2017.
No technological solution is perfect, so, yes, there are issues that ERC-20 can’t solve. It might occur that tokens are unintentionally destroyed when they are used as a payment method. An estimated $3 million tokens has been destroyed so far!
Currently, the Ethereum community is working on a new standard named ERC-223. Until it’s functional, ERC-20 will remain in use.
We hope you found this blog post useful. Don’t be shy to comment if you have any questions, ideas, or suggestions!
The CoinMetro Team