WHAT IS ERC20?
The Ethereum Token Standard (also known as ERC20) was developed in late 2015 and is used as a protocol for Ethereum smart contracts. Basically, The ERC20 standard defines a common list of rules and functions that an Ethereum token has to implement before performing an Initial Coin Offering (ICO) or a crowdfunding event.
Within the Ethereum ecosystem, digital tokens can be used not only to represent a variety of digital assets or tradable goods (e.g. coins, gold certificates, vouchers, IOUs, loyalty points and so forth) but also as a mean to tokenize voting rights, which would, for example, mitigate the need for human intervention during elections, potentially preventing adulteration and other dishonest activities. These digital tokens are created through the use of smart contracts on the Ethereum blockchain.
The ERC20 standard is currently implemented in a wide range of cryptocurrency projects. By August of 2017, there were over 5,300 ERC20 Token Contracts. With the ICO boom and increased interest towards blockchain technology and cryptocurrencies, we now have more than 42,000 active ERC20 compliant contracts.
The implementation of the ERC20 standard makes it easier for all compatible tokens to be supported by many different decentralized applications (dAPPs) and services, such as wallets and exchanges. Moreover, it ensures that different types of Ethereum tokens present a more predictable behavior, with similar functionalities and working mechanisms.
On a more technical level, the ERC20 protocol standard defines six major functions that are responsible for maintaining some basic features within the Ethereum network. These functionalities include the way tokens are transferred from one address to another and how users can access the token data (e.g. name, symbol, balance). The process of defining the total supply of a digital token is also part of these functionalities.
ERC20 tokens have a wide range of possible use cases. Some of the most common applications are related to:
- Initial Coin Offering (ICO) and other crowdfunding events;
- Token-based voting system;
- Tokenized assets (e.g. gold, silver);
- Staking platforms;
Before the creation of ERC20 Token Standard, every new ICO token (deployed as an Ethereum smart contract) had to create and implement its own functionalities from scratch. Since 2015, this process was standardized, providing reduced complexity and enhanced liquidity of tokens.
On the other hand, the ERC20 standard presents a major disadvantage. Since ERC20 token contracts cannot recognize incoming transactions, any token sent to a contract address will be lost. At least $1,500,000 worth of tokens have been lost in this manner.
In order to address the limitations of ERC20 protocol, a new standard was introduced in March of 2017, named ERC223, which was proposed as an extension to ERC20. Among other implementations, the ERC223 protocol aims to prevent accidental sends of tokens to contract addresses.
There are many different ERC20 compatible wallets. Some of the most popular are the web wallet MyEtherWallet (also known as MEW) and MetaMask (a browser extension for Firefox and Chrome).
It is also possible to store your ERC20 tokens on hardware wallets (like Ledger and Trezor), which can be integrated with MyEtherWallet via USB. Using a hardware wallet allows you to access your MEW wallet with increased safety, since your private key never leaves the hardware device.
- Sending ERC20 tokens to a token contract will result in a financial loss. Make sure to send your tokens to a compatible address and not directly to a smart contract.
- Before participating in any ICO token sale, make sure to move your ETH to a compatible wallet. Sending ETH directly from your exchange account or from non-supported wallets will result in a financial loss. Mostly, the tokens are kept by the exchange, but they may also get stuck on a smart contract address (depends on how the exchange works).
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