An Introduction to ERC-20 Tokens: What Crypto Users Need to Know

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If you’ve been around the crypto markets for a while, you might’ve noticed that many cryptocurrencies are referred to as ERC20 tokens. But what exactly are those coins anyway? And what does the acronym represent?

In this article, we take a brief look at ERC20 tokens, how they are different from other coins, and why you might want to acquire some after you buy bitcoin. Let’s delve in.

What is an ERC20 token?

ERC20 tokens are blockchain-based assets that can exchange value from one wallet to another. In other words, they operate in a similar fashion to Bitcoin but are built on its blockchain.

The main difference between Bitcoin and ERC20 tokens is that the latest is built and are operated on top of the Ethereum network. In other words, Ethereum acts as their foundational layer, and they are not subject to their own unique blockchain.

Due to ERC20 tokens being fueled by the Ethereum network, they are also stored, sent, and received in Ethereum addresses, and use gas for the transaction fees.

Why should you consider ERC20?

If you are planning to create a token or are looking to better understand the concept of ERC20 tokens, make sure you understand the following:

  • ERC stands for Ethereum Request of Comment. The number 20 reflects the identifier of the proposal, as there are other types of ERC tokens available too. The ERC20 token is by far the most popular when it comes to the development of new cryptocurrencies.
  • ERC20 tokens have to abide by a certain set of rules and limitations that enable interoperability between them.
  • Cryptocurrency wallets and trading platforms use the standard to enable trading of ERC20 tokens, and their ability to be exchanged between wallets on the platform itself.
  • ERC20 tokens can be listed and traded on Decentralized exchanges like Uniswap at no cost. However, users that choose to buy them have to pay hefty fees since the network is currently congested. This does not seem to negatively affect the price of Ethereum for now but has led many developers to consider other blockchains for the development of their tokens.

The ICO boom (and bust)

ERC20 tokens were famously used back in 2017 to create a wide array of new cryptocurrencies that were heavily marketed without having any actual utility. This negatively affected the cryptocurrency space as a whole but also Ethereum specifically, as the latest dipped more than 95% in the bear market that ensued. 

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The so-called ICOs held a simple proposition. Buy shares of a new cryptocurrency in exchange for Bitcoin or Ethereum, after believing the marketing and optimistic promises of the project. A few of these projects were actually legit. Most, however, were simply quick cash grabs.

Ever since the latest bear market, investors have become a lot smarter, and are now able to understand (for the most part) which ICOs are worth investing in and which not. Currently, most new projects are listed as IEOs (Initial Exchange Offerings) in popular platforms, making them more legit as a result.

ERC20 in the future ahead

After ERC20 rose to popularity in 2017 and continued to experience large adoption in 2018 and 2019, it is now considered to be the international token standard for new cryptocurrency projects. With the utility of smart contracts growing, we can expect to see more projects with unique features enter the markets, each trying to resolve a pressing problem that will further propel the industry forward.

As the ICO space is becoming increasingly tighter in terms of regulatory frameworks, we also see ERC20 tokens being taken more seriously by new investors who enter the market in hopes of finding the next promising coin. Together with ERC20, we are now also witnessing a massive growth in ERC721 tokens which, according to CoinMetrics has experienced rapid growth of 500% over the past two years.

The future is certainly optimistic for ERC20 tokens, as it is for Ethereum. With the scalability proposals ahead of us and the project’s imminent switch to PoS, we will most likely experience rapid growth in terms of retail adoption, as well as institutional interest.

Wrapping up

You should now have a better idea about the concept of ERC20 tokens, and the role they play in the crypto economy. Apart from increased adoption across the board, we see that Ethereum is slowly becoming the foundational layer of the whole crypto market, a fact which further empowers all ERC20 tokens that have already been developed over the past few years.

From here onwards, all we can do is wait to see the changes that will come as soon as Ethereum becomes deflationary, and removes the exorbitant transaction fees. Our best guess is that we will see governmental agents and banks adoption the protocol, as they proceed to create their own currencies.

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