Ethereum is a blockchain designed in order to have functionalities beyond those of creating and registering transfers of your own cryptocurrencies. Its protocol was designed with broader and more ambitious functionalities. Among those features, the ability to create other tokens to be run on your blockchain stands out.
This curious Ethereum functionality is possible thanks to the ERC-20 tokens . In this article, we will examine some elements that will allow us to know everything related to one of the most important technologies implemented by Ethereum.
The origin of ERC-20 tokens
These tokens were born thanks to the introduction of the EIP-20 (Ethereum Improvements Proposal). With this enhancement, Ethereum developers wanted to implement a standard system for tokens within smart contracts. Ethereum developers would use this system to provide the basic functionality to transfer tokens, as well as allow the tokens to be approved so that they can be spent by another third party on the blockchain.
The idea was presented by the developer, Fabian Vogelsteller in the official Ethereum GitHub repository in 2015.
What are ERC-20 tokens?
ERC-20 tokens are essentially a smart contract . These smarts contracts use a standard interface that runs on the Ethereum network. Thanks to this, they obtain great flexibility and usability in different scenarios. All this governed by a set of rules that allow interoperability in the Ethereum ecosystem, with the wide variety of tokens and other decentralized applications ( DApps ) compatible with each other.
The purpose of these rules is to allow the coexistence of other tokens on Ethereum, without diminishing the evolutionary capabilities of blockchain technology or the platforms that use them. In this way, DApps developers have ample freedom when programming their applications and effectively tokenizing their projects. Thanks to this, the ERC-20 tokens are able to achieve the objective for which they were created; allow any Ethereum token to be reused by other apps - from wallets to any decentralized app.
How does an ERC-20 token work?
Without delving too much into the technical aspect, the operation of an ERC-20 token is simple. The developers of Ethereum worked hard to make this standard easy to use in software development. This has a clear objective: to facilitate its adoption and use by other developers.
To achieve this, the design of the token interface has a series of well-identified and defined elements. Each of these elements has a specific utility and function, and can be used by any DApp built to use this standard. To explain these elements, let's take Golem's ERC-20 token as an example :
- Name. With this element we can name the token created and managed by the DApp. It is used to identify and differentiate the created token from other existing ones. For example, the name Golem is the name of the Golem Distributed Computing DApp token .
- Symbol. This element refers to the symbol or abbreviation of the token. Following the example above, this field would define the symbol of the Golem token, the GNT.
- Decimals (Decimals). This field is used to define the number of decimal places that the token will use.
- Total supply (TotalSupply). This indicates the total supply of tokens that will exist. In the case of Golem, the total supply is 1,000,000,000 GNT tokens. This is a value that is decided by the developers of the new token, and may be associated with different economic rules depending on the consideration of their developers.
- Balance (BalanceOf). With this element, you can know the balance that exists in a certain account on the network. In this case, it would be the amount of GNT tokens that a user has in a certain wallet.
- Transfer. This is one of the elements that allow us to control the assets that we have in our accounts. Using it, we can send money to other accounts that are within the network. The ERC-20 token has two elements that allow this type of actions.
- Approve. Thanks to this function we can make withdrawals from accounts.
- Allowed (Allowance). This is a special element of control, since it allows us to know the amount of tokens that we can withdraw from a certain account. Together with the Approved function, it allows you to have accounting control of the tokens within an account and enable automated management options for them.
ERC-20 tokens, in essence are a smart contract
It is thanks to each of these functions that the ERC-20 tokens have the great versatility that characterizes them. It allows a rapid implementation of the same for various uses without having to alter its structure. Also thanks to the fact that these run on the Ethereum blockchain, if traceability and auditability are guaranteed, then their actions can be tracked on the Ethereum blockchain.
Advantages of ERC-20 tokens
The fact that ERC-20 tokens are a standardized interface has great advantages for the entire Ethereum ecosystem . Among those advantages we can point out:
- It makes it easier for developers to unify work criteria within the Ethereum blockchain.
- Reduces the complexity of tokenized systems.
- It improves the interoperability of the systems, since the standardization advocates a programmatic horizontality of the software.
- Economically speaking, the existence of ERC-20 tokens helps liquidity within Ethereum. This is because ICOs made to finance projects, and their use as a base of work within them.
- Elimination of risk factors that can break or misrepresent smart contracts.
- Reduced incompatibilities and increases interoperability capabilities.
- ERC-20 tokens allow the Ethereum blockchain to have multiple uses.
Conclusions
Ethereum is certainly a blockchain designed to support a multiple, well-defined and interoperable ecosystem. But these characteristics would not be possible without the use of smart contracts and advances such as ERC-20 tokens. It is thanks to the use of these two tools, that Ethereum has become the second most important cryptocurrency in the crypto world. But that's only the beginning, the evolution of Ethereum as a blockchain is leading to existing projects improving, and new projects adding value to it. Under this scenario, the development of Ethereum and technologies such as ERC-20 tokens is promising. One more demonstration that the tokenized world is possible and that it is only a matter of time to develop it.
(If you're wondering, ERC stands for Ethereum Request Comment, and 20 is the arbitrary number assigned to the proposal.
Your blockchain processes your transactions and your virtual machine executes your smart contracts .Ethereum.org describes the mechanism of ICOs as follows: Customers pay for the smart contract (the robot is in the center).
The robot sends the money to the owner of the contract.
They reside on the ethereum blockchain and depend on its distributed computing power.Risks of smart contractsAlthough smart contracts are very efficient, they carry certain risks.
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As a solution, the industry invented a standard protocol for all tokens, now known as ERC-20.The ERC-20 token standard has six mandatory parameters for any smart contract, plus three optional (but recommended!).
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