The cryptocurrency world may seem daunting to the average investor, especially for those without technical knowledge of blockchain and smart contracts. However, the prospects of many new digital currencies have drawn in all types of investors, including those who might have otherwise been cautious about investing in a digital token or cryptocurrency.

While investors can certainly be successful in the cryptocurrency space without having under-the-hood 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 govern a large portion of the space, and which is especially relevant to smart contracts and smart property, is what is known as the ERC20 token standard.

"ERC20" refers to a scripting standard used within the Ethereum blockchain. This technical standard dictates a number of rules and actions that an Ethereum token or smart contract must follow and steps to be able to implement it. 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.

Key Takeaways

  • An ERC20 token is a standard used for creating and issuing smart contracts on the Ethereum blockchain.
  • Smart contracts can then be used to create smart property or tokenized assets that people can invest in.
  • ERC stands for "Ethereum request for comment," and the ERC20 standard was implemented in 2015.
  • Plenty of well-known digital currencies use the ERC-20 standard, including Maker (MKR), Basic Attention Token (BAT), Augur (REP), and OmiseGO (OMG).

Prevalence and Importance of ERC20

ERC stands for "Ethereum request for comment," and "request for comment" is a similar concept to that devised by the Internet Engineering Task Force as a means of conveying essential technical notes and requirements to a group of developers and users.

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. There have now been tens of thousands of distinct tokens that have been issued and are operating according to the ERC20 standard.

While many ERC20 smart contracts are used to execute various routines and functions in digital space, many of them have been used to create non-fungible tokens (NFTs) for the purpose of an initial coin offering (ICO). An ICO is essentially the cryptocurrency industry’s equivalent to an initial public offering (IPO) in the stock market. A crypto company looking to raise money to create a new cryptocurrency, decentralized app, or service launches an ICO as a way to raise funds from investors and early adopters.

A report by Yahoo! News suggests that ERC20 tokens almost single-handedly dominated the ICO bull market back in 2017, and that many successful cryptocurrencies are founded according to the ERC20 protocol. EOS, for example, remains a popular ERC20-based token that raised more than $185 million in its five-day ICO launch. Bancor (BNT) is another, having earned $153 million in crowdfunds during its ERC20 token sale. Multiple other ERC20-compliant tokens have raised in the several millions of dollars each in ICOs.

History of ERC20

ERC20 was created by Ethereum developers on behalf of the broader Ethereum community in 2015 and was officially recognized by 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) which describes the new functionality along with its specific protocols and standards. A committee then reviews, approves, amends, and finalizes that EIP—at that point, it becomes an ERC.

Smart contracts and other features within Ethereum are then obligated to conform to one of the approved standards. While ERC20 is perhaps the most important and best known of all of these ERC standards, it is not the only one in existence.

Contents of the ERC20 Standard

ERC20 contains several functions that a compliant token must be able to implement.

  • TotalSupply: provides information about the total token supply
  • BalanceOf: provides account balance of the owner's account
  • Transfer: executes transfers of a specified number of tokens to a specified address
  • TransferFrom: executes transfers 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: returns 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/validation event, which is activated whenever approval is required.

Today, people can trade ERC20 tokens in a peer-to-peer fashion among one another, or on cryptocurrency exchanges such as Coinbase.

Issues and Alternatives

While ERC20 has seen widespread support in the form of new tokens conforming to its standards, there are many in the development community who believe ERC20 is limited or flawed in one or more ways. For this reason, since the development of ERC20, several 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 proposes 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.