The cryptocurrency world may have at one point seemed daunting to the average investor without technical knowledge of the blockchain and smart contracts realms. However, the prospect of massive profits and the influx of many new digital currencies has drawn in all types of investors, including those who might have otherwise been cautious about investing in a product or currency, the inner workings of that they did not understand well. While investors can certainly be successful in the cryptocurrency space without this technical knowledge, a basic understanding of some of the most important properties of many of the current digital currencies is undoubtedly helpful in guiding an investor toward the safest and soundest financial decisions. One of the major concepts that governs a large portion of the space is the ERC20 token standard.

ERC20 refers to a token standard for ethereum. It is a technical standard that dictates a number of rules and actions that an ethereum token or smart contract must be able to implement. ERC stands for "ethereum request for comment," and the standard was developed in 2015. "Request for comment" is a version of a similar concept that was devised by the Internet Engineering Task Force as a means of conveying essential technical notes and requirements. It is perhaps easiest to think of ERC20 as a set of basic guidelines and functions that any new token created in the ethereum network must follow.

Prevalence and Importance of ERC20

The ERC20 standard has been a dominant pathway for the creation of new tokens in the cryptocurrency space for some time. It has been particularly popular with ICOs and crowdfunding companies. By some accounts, there were more than 20,000 distinct tokens operating according to the ERC20 standard as of the first weeks of 2018. A report by Yahoo! News suggests that ERC20 tokens "almost single-handedly dominated the ICO bull market of 2017," and that many successful cryptocurrencies are founded according to ERC20 protocol. EOS is, as of this writing, the most successful ERC20-based token, having raised $185 million in a five-day ICO launch. Bancor is the next on the list, having earned $153 million in crowd funds during its sale. Multiple other ERC20-compliant tokens raised at least $70 million each in ICOs.

History of ERC20

ERC20 was created by ethereum developers on behalf of the broader ethereum network and community in 2015 and officially recognized in September 2017. To create a standard of this type for ethereum, a developer or group of developers must submit what is known as an Ethereum Improvement Proposal (EIP) with specific protocols and standards. A committee then approves, amends, and finalizes that EIP, at that point it becomes an ERC.

Smart contracts are then obligated to conform to one of the standards. ERC20 is the best known of all of these ERC standards, but it is not the only one in existence.

Contents of the ERC20 Standard

ERC20 contains several functions, meaning that a compliant token must be able to implement this list (descriptions of each function are in parentheses):

  • totalSupply (provide information about the total token supply)
  • balanceOf (provide account balance of the owner's account)
  • transfer (execute transfer of a specified number of tokens to a specified address)
  • transferFrom (execute transfer of a specified number of tokens from a specified address)
  • approve (allow a spender to withdraw a set number of tokens from a specified account)
  • allowance (return a set number of tokens from a spender to the owner)

Additionally, these functions will also trigger up to two events, including the transfer event (that takes place whenever tokens are transferred) and the approval event, which is activated whenever approval is required.

In March 2018, popular digital currency exchange Coinbase announced its plan to add ERC20 support to a number of its products. It is expected that the implementation of this change will "open up the door for a more diverse set of cryptocurrency trusts" in the Coinbase Custody platform, according to Yahoo! News. Exchanges catering to individual investors could also add new cryptocurrencies to their list of offerings as well.

Issues and Alternatives

While ERC20 has seen huge support in the form of tokens conforming to its standards, there are many in the development community that believe ERC20 is flawed in one or more ways. For this reason, since the development of ERC20, a number of alternative token standards have also been proposed. These include ERC223, which aims to address a concern with the approval and transfer elements of ERC20. ERC621 is another alternative, which suggests the same basic functions that ERC20 provides but also adds the capacity to increase or decrease the total token supply. ERC827, on the other hand, allows a holder to approve the spending of tokens by a third party. Each of these new protocol proposals takes ERC20 as its foundation to some degree.