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Concepts: ERC-20

Gunnar Jaerv
Gunnar Jaerv 11 October 2020

ERC 20 Tokens is a technical standard used for smart contracts on the Ethereum blockchain for implementing tokens.

ERC 20 tokens are currently the industry standard for all kinds of tokenization tasks, from tokenizing real assets to creating utility, securities, and even governance tokens. There are certainly other options, but ERC 20 accounts for the majority of tokens created.

ERC tokens can be used for :

  • Collateral deals
  • Securities dividends
  • Token-based voting systems
  • Native currencies for decentralized apps
  • Tokenized assets — gold, silver, real estate and even art
  • Staking platforms

Why is it so ubiquitous, what is it, and how does it work?

ERC 20 tokens are popular for three main reasons:

  1. They are simple to create and deploy, meaning they can be created rapidly and inexpensively.
  2. They use a standardized set of commands meaning they can operate within an ready-made set of rules that makes trading with other tokens simpler and easier.
  3. ERC 20 was the first token protocol to offer these advantages and gain some popularity. It’s now ubiquitous because it’s good enough for most purposes and well-known.

ERC 20 is built on the Ethereum blockchain, a PoW-based (with some modifications) blockchain designed to run general computing applications. Ethereum supports the ETH cryptocurrency, but can also be thought of as a kind of distributed, decentralized computer and operating system.

Software called smart contracts are available ready-built in Ethereum, and these smart contracts underlie the creation of secondary tokens on the Ethereum blockchain.

Technically, to create (“define”) an ERC 20 token, you need:

  • The address of the smart contract
  • The number of tokens available

There are other optional values for additional information such as:

  • Name, for example “TRON”
  • Symbol, such as “TRX”
  • Decimals, or how much you can divide the token. You can choose from 0 to 18 decimal values (between 1 and 0.000000000000000001)

ERC tokens can be created very quickly and simply, which explains part of their popularity. The basic token protocol defines two event types, “Transfer ()”, which is triggered when tokens are transferred, and “Approve ()”, which is the function used to approve transactions. There’s more technical detail on these and other, additional ERC 20 functions at the Ethereum github. As an example, here is the contract for the Ox project token ZRX.

ERC tokens can be stored on consumer wallets, and listed on exchanges like Binance and Coinbase Pro. A large part of launching a new ERC token is arranging to have it listed on exchanges.

However, the risks involved with holding these tokens in consumer-level wallets increase dramatically as the value of the tokens rises, since such wallets usually lack adequate security. For institutional, HNWI or professional investment purposes, or for tokenizing high-value assets or businesses, it’s safer and more effective to use a trust-and-custody arrangement backed by a technology solution like the Ledger Vault.

Disclaimer:

Disclaimer: This publication is general in nature and is not intended to constitute any professional advice or an offer or solicitation to buy or sell any financial or investment products. You should seek separate professional advice before taking any action in relation to the matters dealt with in this publication. Please note our full disclaimer here.