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What Is ERC-20 And Why Is It Crucial For Ethereum

ERC-20 And Why Is It Crucial For Ethereum
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It’s hard to underestimate the impact of ERC-20 tokens on the crypto world. According to Coinmarketcap, over a half of the top 100 cryptocurrencies rely on the ERC20 standard with new ICOs favoring it as well.

For Ethereum, the ERC-20 plays a paramount role as it outlines common rules for Ethereum tokens to abide by. But what is ERC-20 and how come it is so important? Let’s figure it out.

History of ERC-20

ERC20 came to birth in 2015 with the joint efforts of Ethereum developers. It took two more years to recognize the standard. Although ERC-20 is on everybody’s A-list, it’s not the only application-level standard for Ethereum.

You, me, and anybody else can create an ERC token provided a creator can clearly explain the standard and is backed up by the community. To launch any request for comment, you need to submit an EIP proposal with an in-depth explanation of the functionality. If your standard is approved, it becomes an ERC.

Fundamentals of ERC-20

Ethereum Request For Comments or ERC-20 for short outlines a bunch of rules that unify the development of Ethereum-based applications. Number 20 is a unique identifier that distinguishes the standard from others.

Back in the day, the blockchain platform used to face the following challenges:

  • You had to write the code from zero to launch a new token;
  • New tokens took a long time to become a part of the system due to the lack of compatibility.

The ERC-20 standard has eliminated these issues, while also regulating token exchange, transaction acceptance, and user access to the token data. According to statistics, there are over 442 ERC-20-compatible tokens  that take up a lion’s share of Ethereum’s network.

The anatomy of ERC-20

This technology outlines some mandatory parameters for smart contracts. Along with compulsory functions, there are also other three recommended parameters that enhance compliance.

Mandatory standards include:

  • totalSupply – this feature specifies the total number of tokens in circulation; smart contracts will not generate any tokens in excess of this limit.
  • balanceOf – gives the number of tokens at a specified address, including information about the user.
  • transfer – this function enables participants to send tokens to other addresses.
  • transferFrom – this method automates token transfers to a different address.
  • approve – specifies the exact number of tokens to be removed from the balance.
  • allowance – this standard is similar to ‘approve,’ but it also checks your balance to ensure you have enough tokens.

ERC-20 is also accompanied by a few other optional fields that include the token name, symbol, and separability. The latter defines how dividable your token is, by specifying the decimals.

Therefore, if you’re looking to create a token based on ERC-20 standard, you have to abide by the six standards mentioned above.

What is so special about ERC-20?

As we’ve already mentioned, ERC-20 unifies the rules for creating tokens. Before that, developers had to create a custom code for each wallet and exchange. This translated into low transaction speed and additional effort. Therefore, the biggest benefit of ERC-20 is its ability to standardize the development process.

Among other things, ERC-20 brings the following benefits to the table:

  • High liquidity – transactions are filled more quickly due to a large number of participants;
  • Speed – all transactions are run faster within a standardized system;
  • Security – the low presence of custom code boosts security of smart contracts;
  • Ease of development – blockchain developers don’t have to create everything from scratch;
  • Lower costs of development.

The dark side of ERC-20

Just like any other technology, ERC-20 isn’t perfect. The one thing that not all realize is that this standard is platform-dependent. It means that ERC-20 is as viable as Ethereum itself. And since Ethereum is plagued by high fees and transaction congestion, ERC-20 inherits these problems.

Other disadvantages of this standard include scalability issues. Like many cryptocurrency networks, Ethereum is not immune to problems tied with the network growth. Thus, the mainnet is currently facing scalability issues, which translate in high fees and delays during high congestion hours. Hence, if you launch an ERC-20 token when the network is overloaded, the usability of the token can be lower.

Top ERC-20 projects in 2022

As one of the most popular frameworks, ERC-20 lays the ground for a great number of other blockchain-based projects. Possible applications vary from project shares to stablecoins. With that said, let’s see where you can implement this standard to reap the benefits.

Stablecoins

Most leading stablecoins are based on ERC-20 standards since they need to be compatible with DeFi and other decentralized applications. As such, stable coins are a hybrid of crypto and fiat currencies with their value being pegged to traditional currency like USD or euro. Tether, for example, which is the most popular stablecoin is available within Ethereum as an ERC-20 token. DAI, a stablecoin by MakerDAO, is another example of ERC-based stablecoin.

DeFi tokens

DeFi token transfer value during financial transactions, being run on smart contracts. The price of the DeFi token can be pegged to the fiat currency or based on another crypto currency. Some of the most bankable DeFi tokens rely on ERC-20. UniSwap, for example, is a blockchain exchange that allows users to swap ERC-20 tokens. Compound tokens are also ERC-20 and have become one of the most popular as well.

Utility tokens

This type of token allows users to access a specific type of service. Basic Attention Tokens, Chainlink and Binance Coin are among the most common utility tokens. Just like the two other use cases, utility tokens are developed under ERC20 standards.

The bottom line

The Ethereum platform is one of the most popular platforms for blockchain applications and boasts a large community of developers. ERC-20 tokens, in turn, help the platform to unify Ethereum-based applications and make them interoperable.

Also, the importance of ERC-20 tokens lies in its ability to allow Ethereum users to exchange tokens directly with each other. This also makes it easy for developers to create wallets that can hold any type of ERC-20 token, and also makes it possible for exchanges to list any ERC-20 token without having to do any extra work.

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