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Blockchain Semantics Blog What Is ERC20 Tokens?

What Is ERC20 Tokens?

By Krishna Vishwakarma | July 25, 2018, 2:58 p.m. GMT

ERC20 is a technical standard used for building smart contracts on the Ethereum Blockchain.

Ethereum is a new technology, best referred to as a platform, that uses Blockchain technology to replace ‘third party’ internet vendors that store data or keep track of complex financial instruments.

In the Ethereum network, the nodes have replaced thousands of servers and clouds. Computing power is offered by participants in the network, who work together to serve as a decentralized ‘world computer’. The main aim of the Ethereum platform is to provide users around the world control over their own data through a distributed computing platform, wherein new projects could build services atop the platform itself.

If a user wishes to use this network, the computational requests are paid in Ether instead of the traditional currency. The Ether is the official currency of the Ethereum platform; other forms of payment can be used to signify the trade of different assets or tokens on the platform.

The Ethereum can be used to buy, sell, or trade digital assets called tokens that can have a multitude of values, regardless of whether they represent real-world assets (such as property), a voucher, or even a form of IOU. Ethereum has the ability of handling different digital assets that rely on a variety of technical standards, though the most recognizable technical standard is ERC20.

What is ERC20?

In simple terms, ERC20 is a technical standard that defines commonality between differing tokenized assets on the Ethereum platform. The existence of a technical standard enables Ethereum-based smart contracts to process certain forms of tokens in a particular manner. It also enables developers to follow a ‘format’ or ‘guideline’ when creating new digital assets, to ensure that their creations can, in fact, be accommodated on Ethereum.

The term ERC refers to Ethereum Request for Comment, while the number ’20’ is the number assigned to this request. The framework was first suggested by developer Fabian Vogelsteller on November 19th, 2015.

For the most part, developers have adopted ERC20 as a prominent standard for new digital assets and as such, ERC20 is a common term one might see when exploring new assets set to launch through an ICO(Initial coin offering). The ERC20 technical standard allows developers to create digital assets using a common framework without the requirement to write new code for a cryptocurrency wallet or exchange to support it.

How are ERC20 tokens created?

ERC20 tokens are created through smart contracts. The smart contracts independently govern transactions between wallet addresses and accounts, both for the balance of each wallet address as well as the total number of tokens in circulation and supply.

What defines ERC20 tokens?

ERC20 has introduced six imperative functions that are used to define how a tokenized asset can function within Ethereum:

  • The totalSupplyfunction dictates the maximum supply of a token, after which no more may be created.
  • The balance0ffunction assigns an initial number of tokens to an address.
  • The transferfunction moves tokens from the total supply to a user (address).
  • The transferFromfunction is used to transfer tokens from one wallet to another.
  • Theapprovefunction is used to check whether a smart contract can distribute tokens without exceeding the maximum supply.
  • The allowancefunction ensures that one address has sufficient balance to transfer tokens to another address.

What issues do ERC20 tokens have?

While the ERC20 tokens have arguably become the most popular and ever-present form of Ethereum-based cryptocurrency or tokens, the platform is not the only technical standard relied on by the platform.

Since Ethereum exists in a decentralized and distributed community of computers, developers, and value holders, many cryptocurrency projects implement Ethereum's ERC20’s guidelines in a variety of interpretations, which can lead to confusion or render their interoperability obtuse or overly complicated.

Another, and perhaps, more philosophical complaint outlines that the presence of the ERC20 technical standard makes the creation of a functional currency far too easy, giving many participants around the world the ability to easily create trivial, needless, or risky currencies, where otherwise they would not be able to.

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