What is ERC-20?

If you are interested in the cryptocurrency market, you have probably come across the term ERC-20 token. But what does ERC-20 stand for? 

ERC-20 means Ethereum Request for Comment (ERC), with the 20 representing a proposal identifier within the blockchain. The proposal ID number represents the list of rules required for tokens on that particular ID to be created, shared or transferred, with the ERC-20 list being the most widely utilised set of protocols. 

ERC-20 is based on Ethereum technology. To define ERC-20 it’s useful to have a good understanding of Ethereum. Ethereum is a blockchain that allows users to create and transfer different types of tokens, which essentially represent smart contracts. 

While there are multiple standards under which tokens can be created within Ethereum, ERC-20 tokens are used as a standard for creating smart contracts on the Ethereum blockchain. ERC-20 allows for compatibility and exchangeability between all other tokens which follow the same protocols. 

What does ERC-20 do? 

ERC-20 defines the functionality and protocols for coins created within its framework. ERC-20 does not try to define the reasoning behind the creation of the individual token. By defining how they must operate, it allows for new tokens to be created relatively easily. It instills user confidence in the security of that token, in comparison to creating them on your own blockchain. 

The relative ease to deploy is one of the fundamental reasons why 466,379 token contracts exist within the ERC-20 framework according to Etherscan as of 12 November 2021.

Some of the standard requirements of ERC-20 define rules surrounding how tokens are exchanged, how to authorise transfers and what information must be made publicly available regarding transactions. 

Some specific details required of ERC-20 tokens are visibility of the total token supply, visibility of the token owner's account balance, and defined rules governing how and when withdrawals of tokens can be completed from users’ accounts. 

Why is ERC-20 important?

ERC-20 allows for a quick creation of new tokens as well as the fungibility (transferability) with all previous and future tokens created within the same protocols. 

This fluidness allows for creativity within new projects and security for users. ERC-20 transactions are efficient and low cost while mitigating the risk of fraudulent activity. 

Some of the more common uses for ERC-20 based tokens are crowdfunding, project voting rights delegation, the representation of physical assets like real estate or commodities and recording transaction fees. 

There is also a long list of unique projects that use ERC-20 tokens for payment within the project or as a means of funding new technology. A few examples of ERC-20 tokens include Maker (MKR), Basic Attention Token (BAT), Tether (USDT) and OX (ZRX) among many others.