Ethereum, the popular cryptocurrency and blockchain system, is based on the use of tokens which can be bought, sold, or traded. There are several different tokens which may be used in conjunction with Ethereum, and these differ from ether, which is the currency native to the Ethereum blockchain. Tokens, in this case, represent digital assets that can have a variety of values attached. They can represent assets as diverse as vouchers, IOUs, or even objects in the real world. In this way, tokens are essentially smart contracts that make use of the Ethereum blockchain. One of the most significant token standards of all for Ethereum is called ERC20, which was developed about a year and a half ago.


ERC-20 Empowers Developers

In short, the ERC-20 defines a common list of rules for all Ethereum tokens to follow, meaning that this particular token empowers developers of all types to accurately predict how new tokens will function within the larger Ethereum system. The impact that ERC-20 therefore has on developers is massive, as projects do not need to be redone each time a new token is released. Rather, they are designed to be compatible with new tokens, provided those tokens adhere to the rules. Developers of new tokens have by-and-large observed the ERC-20 rules, meaning that most of the tokens released through Ethereum initial coin offerings are ERC-20 compliant.


ERC-20 Specifies Six Functions

ERC-20 defines six different functions for the benefit of other tokens within the Ethereum system. These are generally basic functionality issues, including how tokens are transferred and how users can access data about a token. ERC-20 also prescribes two different signals that each token takes on and which other tokens are attuned to.

Put together, this set of functions and signals ensures that Ethereum tokens of different types will typically work the same in any place within the Ethereum system. This means that almost all of the wallets which support the ether currency also support ERC-20 compliant tokens.

ERC-20 is technically still in draft form, meaning that it has gone unenforced by the broader Ethereum community. Still, it seems that the momentum is strong enough that all new tokens are highly likely to conform to the ERC-20 rules. Because the standard remains young, there will likely be some troubleshooting which must occur as Ethereum continues to develop. One significant issue with Ethereum tokens so far is that tokens sent directly to a smart contract will lose money. An error in the protocol means that a token’s contract cannot respond to an attempt to make a direct transfer, resulting in the “loss” of the money associated with that transfer. According to CoinDesk, about $70,000 worth of tokens have already been lost for this reason. Nonetheless, ERC-20 remains a crucial aspect of Ethereum now and into the future.

This article originally appeared on Investopedia


Vamshi

Tech enthusiast, currently focused on crypto-currencies.

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