Without a standardized token framework, each individual application would require its own token, requiring users to find a way to convert them between the numerous apps being developed.
What is ERC-20?
ERC-20 is the technical standard for any token supported by the Ethereum network.
It is needed for all smart contracts on the Ethereum blockchain and is essential for the implementation of Ethereum tokens since it sets the set of rules for all of these tokens.
The ERC-20 standard defines a set of criteria that must be fulfilled for a token to function effectively inside the Ethereum ecosystem. As a result, ERC-20 should not be considered a piece of code or software. It is better stated as a technical guideline or specification.
For some time, the ERC-20 standard has been a popular conduit for the production of new tokens in the cryptocurrency market. It has been especially popular with ICOs and crowdfunding companies. Tens of thousands of unique tokens have already been produced and are working in accordance with the ERC-20 standard.
The ERC-20 standard allows developers to better predict the interaction of multiple tokens and apps. It also specifies how ERC-20 tokens are exchanged on the Ethereum blockchain, as well as how their supply and address balances are continuously stored.
While numerous ERC-20 smart contracts are used to conduct various routines and tasks in digital space, many of them have also been used to issue non-fungible tokens (NFTs) for the purpose of an initial coin offering (ICO), which is the cryptocurrency industry's equivalent of a stock market initial public offering (IPO). An ICO is launched by a cryptocurrency firm intending to generate funding for the creation of a new coin, dApp, or service.
Technically, the ERC-20 standard defines six functions that preserve some of the characteristics and functionality of Ethereum-based digital tokens. These functions contain how tokens are moved between addresses as well as certain crucial token smart contract data such as symbol, name, and supply:
- TotalSupply - provides data on the overall token supply.
- BalanceOf - provides the owner's account balance.
- Transfer - sends a specific quantity of tokens to a specified address.
- TransferFrom - performs a given number of token transfers from a specified address.
- Approve - Allow a spender to withdraw a given quantity of tokens from a specified account.
- Allowance - returns a set number of tokens to the owner from a spender.
While ERC-20 has received extensive support in the form of new coins that adhere to its specifications, many developers think ERC-20 is limiting or problematic in one or more ways. As a result, various alternative token standards have been proposed since the introduction of ERC-20.
These include ERC-223, which tries to fix a problem with the ERC-20 approval and transfer parts, ERC-621, which offers the same fundamental functionality as ERC-20 but adds the ability to increase or reduce the total token supply, and ERC-827, which allows a holder to authorize the use of tokens by a third party.
Objectives of the ERC-20 Standard
The ERC-20 standard plays a crucial role in the blockchain space by defining a standardized set of rules that all Ethereum tokens created with smart contracts must follow. This standard covers crucial aspects such as token transfer, transaction approval, data access, and total token supply.
By adhering to these rules, ERC-20 ensures that developers can accurately predict how new tokens will interact within the Ethereum ecosystem, eliminating the need for redoing existing projects each time a new token is introduced. Moreover, projects developed in the future can be assured of compatibility with existing projects, as long as the new tokens abide by the ERC-20 rules.
Fortunately, the majority of token developers have adopted the ERC-20 standards, resulting in most Ethereum tokens being ERC-20 compliant.
The Impact of ERC-20
The ERC-20 standard has enabled the widespread adoption of Initial Coin Offerings (ICOs) in recent years and facilitated the development of decentralized applications (dApps) on the Ethereum platform.
By providing a standard protocol, the ERC-20 standard simplifies the process for developers of dApps to create new tokens. The standard allows for the creation of tokens with high liquidity, and smart contract transactions are considered low-risk if properly programmed.
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