What are ERC-20 Tokens?

The cryptocurrency world may seem intimidating to the average investor, especially for those without technical knowledge of blockchains or 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.

You’ve probably heard about ERC-20 tokens, but what exactly are they?

Ethereum request for comment - popularly known as ERC-20 - refers to a scripting standard used within the Ethereum blockchain. This technical standard dictates several rules and actions that an Ethereum token or smart contract must follow and steps to be able to implement them. It is perhaps easiest to think of ERC-20 as a set of basic guidelines and functions that any new token created in the Ethereum network must follow.

ERC-20 tokens can represent a diverse range of digital assets. Like other crypto assets, they can have a value and be sent and received. The difference between ERC-20 tokens and other cryptocurrencies such as Bitcoin and Litecoin is that ERC-20 tokens don’t have their own blockchain but reside on top of the Ethereum blockchain.

ERC-20 was created by Ethereum developers on behalf of the broader Ethereum community in 2015 and was officially recognised by September 2017. Since then, it has become one of the driving forces behind the popularity of cryptocurrency. In the Ethereum system, tokens represent a diverse range of digital assets, such as vouchers, IOUs, or even real-world, tangible objects. Essentially, Ethereum tokens are smart contracts that make use of the Ethereum blockchain.

As of today, more than 200,000 ERC-20 tokens coexist on the Ethereum blockchain; because they live on this blockchain, they benefit from its technology. They are stored in Ethereum addresses and sent using Ethereum transactions.

The ERC-20 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 ERC-20 standard.

While many ERC-20 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 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, decentralised app, or service launches an ICO as a way to raise funds from investors and early adopters.

How are Tokens Created?

Smart contracts can be used to create a smart property or tokenised asset that people can invest in. To create a token on the Ethereum blockchain, one must write a contract.

The contract is a piece of code stored on the Ethereum blockchain that will be executed when either someone or another contract requests it.

This contract is not only responsible for creating tokens, but also for handling its transactions and keeping track of the balance of each token’s holders. 

How to receive ERC-20 tokens? 

To receive an ERC-20 token, you simply have to send it to your Ethereum address. Because ERC-20 tokens only exist on the Ethereum blockchain, you can safely use any Ethereum address provided by your Ledger Hardware wallet. As a consequence, ERC20 tokens are always stored in an Ethereum account.

How to send ERC-20 tokens

When you send an ERC-20 token, you are informing the token contract that a transfer operation is required. To be executed, a contract on the Ethereum blockchain will require a fraction of Ether, called “gas.” That’s the reason why sending an ERC-20 token will also consume a small bit of Ether from the account they are stored in. As a consequence, you cannot send ERC-20 if your Ethereum balance is too low or empty.

Can ERC-20 Tokens be stored in a Wallet?

All ERC-20 compliant tokens can be stored on Ledger hardware wallets or other compatible wallets thanks to the Ethereum application. As the ERC-20 tokens are running on the Ethereum blockchain, there is no specific application for a token. Instead, you can simply use the Ethereum application. Today, people can trade ERC-20 tokens in a peer-to-peer fashion among one another, or on cryptocurrency exchanges such as Coinbase, TigerWit, etc.

Knowing about ERC-20 tokens is an important step to understanding the broader cryptocurrency ecosystem. This integral standard for this industry is used throughout this space, and most cryptocurrency traders interact with ERC-20 tokens every day. Now that you have a basic understanding of what ERC-20 is, the rest of the Ethereum ecosystem may start to make more sense.