What’s the deal with ERC20?
If you are interested in the world of Crypto you must have come across the term ERC20 while buying or selling coins. What can an ERC20 token be used for? Almost anything. Read on to find out more about ERC20.
Let’s start with the basics.
What’s the difference between a token and a coin?
It’s easy to get confused between a crypto token and a coin.
A Coin operates on its own blockchain. Bitcoin and Ether are some examples of coins. A coin can be used like conventional money, i.e. it can be used for payment. It can be mined on a blockchain.
A Token does not have its own blockchain. It rides on the Etherium blockchain. A token usually uses smart contracts to maintain useful information like who owns what. Coins may be used for various services on the blockchain whereas tokens are used for very specific use cases.
You can think of coins as a digital version of money and tokens can be thought of as assets or records of deeds.
An ERC20 token can represent anything from a cryptocurrency to the US Dollar, from a kilogram of gold to shares in a company.
Why do you need a standard ERC specification?
Why does anything need a standard? So that people can integrate their products or devices easily. Take the 3 pin power outlet in your house for example. Since the power socket is standard (in a region), it is easy for manufacturers to produce power sockets that will plug into the wall outlet. It is not difficult to manufacture and build unique and different power connectors. It will take just three pieces of metal. But the standardisation enables ease of integration and the creation of an ecosystem for both the manufacturers and the customers.
Similarly in the Etherium world, the ERC20 standard enables the creation of various tokens but the different systems in the DeFi do not have to spend time integrating the new tokens. Each ERC20 token has standard definitions that the exchanges and wallets can understand. At the programming level, to transfer an ERC20 token, the method, the parameters and its order remain the same.
Does ERC20 give value to the coin?
ERC20 is a standard and it does not give value to the coin. The value of a coin depends on various factors like its usage as collateral, its gas fees, the ability to be lent and borrowed and the fact that it can be traded and used to purchase NFTs.
What are Ethereum Improvement Proposals?
EIPs are proposals on the official Etherium Github page where people propose improvements for the Ethereum platform. After deliberations, they are included in the main standard.
All requests for changes start as ‘Ethereum Request for Change’ or ERCs. Once it gets approved, they become a part of the ‘Ethereum Improvement Proposal’ or the EIP repository.
ERC20 Methods
ERC20 proposes that the following methods will enable exchanges and wallets to handle tokens across multiple interfaces or dapps (Decentralized Applications)
totalSupply
Get the total token supply
balanceOf
Get the account balance of the owner account
transfer
Send tokens to an address
transferFrom
Send tokens from one address to another address. Mostly used to automate transfer.
approve
Allow debits from your account
allowance
Returns an amount that is allowed to be withdrawn
As you can understand, these standards enable wallets to support any currency as long as they are on the ERC20 token standard.
Today, popular tokens like USDT, MATIC, SHIBA INU, Chain Link, Uniswap, SAND all run on ERC20 standard.
Key Takeaways
The ERC20 token has provided a standard protocol and enabled various tokens to exist on the Etherium blockchain. The token implementation is easy for developers. Smart contracts on ERC20 ensure that the transactions are risk-free.
References:
https://cointelegraph.com/news/what-gives-ether-token-its-value
