What are ERC-20 tokens?

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What are ERC-20 tokens?

The Ethereum network is arguably the most important in the crypto ecosystem today and the network continues to create a connected system where everything seamlessly works together. Around a year after the launch of in 2014, Vitalik Buterin, the founder of Ethereum, introduced the initial standards token and with the help of Fabian Vogelsteller, this later became the ERC-20 standard.

Cross-Compatible

The ERC-20 defines a common list of rules for all Ethereum tokens to follow; this allows developers to accurately predict how tokens will function within the Ethereum network. The ERC-20 standard makes it easier for all compatible tokens to be natively supported by new projects and services and all tokens are cross-compatible with different Dapps and projects. The ERC-20 standard allows developers of wallets, exchanges and other smart contracts to easily integrate their design with other projects in the ecosystem.

As a result, there are a total of 8631 ERC-20 Token Contracts on etherscan today and almost all of the major tokens on the Ethereum blockchain today are ERC-20 compliant.

Key Functions

The ERC-20 standard defines a set of six functions that the smart contracts within the Ethereum ecosystem can recognize and understand. These are generally basic functionality issues, including how tokens are transferred and how users can access data about a token.

The ERC-20 standard also prescribes two different signals that each token uses and which other tokens are attuned to, here a smart contract can fire a signal that other smart contracts listen out for. This set of functions and signals ensures that tokens of different types will typically work the same in anywhere within the Ethereum system.

These tokens contrast to Ethereum’s native currency Ether. is hard coded into the Ethereum blockchain, bought and sold as a cryptocurrency, and powers the Ethereum network through allowing users to pay for transaction fees. In addition, when tokens are sent or traded the transaction costs are paid in Ether.

Use Cases

ERC-20 tokens are essentially smart contracts running on top of the Ethereum blockchain, however they also act as digital assets that can represent a host of things in the Ethereum ecosystem. Token creators choose how they want their token to interact with their business and how they would like users to interact via the token. ERC-20 token use cases include:

  • In-Dapp currency

Many Dapps use their own token for interactions between users. This can increase efficiency and give users an increased sense of loyalty to the platform. Golem for example, uses GNT to transfer value between computing power requesters and providers

  • Voting Rights

Many project tokens offer investors voting rights related to the future of the project, allowing users to increase their relevance to the project as stakeholders. The project operates in this way.

  • Tokenized assets

Certain projects allow high value or difficult to trade assets to be tokenized and easily traded. Assets such as real estate, art, and precious metals are difficult to trade in real life and often involve a drawn out purchasing process. The Digix Global project allows for the quick trade of gold as every asset represents a unique bullion sitting in designated securitized custodial vaults

  • Staking mechanism

The Numerai project works alongside data scientists to create a machine learning-based hedge fund. Here, users submit algorithms that make autonomous trades on the stock market and receive rewards in . To guarantee a high quality of submissions, users have to stake a certain amount of NMR tokens onto their algorithm before submitting it. Users with algorithms that produce valued results receive their stake back, while low quality submissions result in tokens being burned. This incentivizes data scientists to submit high quality work.

George is a cryptocurrency analyst and investor with extensive knowledge of crypto markets, having first gotten involved with the industry just before the “ICO craze” of 2017. He regularly puts his fundamental and technical analysis knowledge to use to both identify promising investment opportunities and warn against potential market drawdowns. While his portfolio includes crypto staples like BTC and ETH, he is not afraid to pursue riskier investments in various altcoin projects.

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