What are ERC20 Tokens?

What are ERC20 Tokens?

If you are interested in crypto currencies and trade with them, you will sooner or later come across the term ERC20-Token. This refers to altcoins that are technically based on the block chain standard of Ethereum (ETH). What this means exactly is explained here.

Ethereum (ETH), the second most important global crypto currency after Bitcoin, has quickly become popular because the block chain devised by Vitalik Buterin allows transactions to be linked to a smart contract. This is exactly where ERC20 tokens come in. From a technical perspective, they use the ETH block chain to process their transactions, but only move ETH for fees and record the actual movement of digital money in a Smart Contract. In the code of the ETH block chain, ERC stands for “Ethereum Request For Comments” and the 20 serves as an ID number indicating that the standard protocol is used.

Advantages of ERC20 tokens

For the publishers of crypto currencies, ERC20 has the great advantage that no separate block chain solution has to be programmed, but simply the solution offered by Ethereum is used. This also leads to the fact that the crypto exchanges can include ERC20 tokens in their portfolio without additional technical effort. Otherwise they have to implement corresponding APIs for each crypto currency with its own block chain. The third advantage for ERC20 tokens is that the existing infrastructure aka computing power from Etherereum is available. So-called 51% attacks become unlikely. Furthermore, ERC-20 tokens can be generated within minutes. How this works I show you in the video.

Criticism of ERC20 tokens

However, the commitment to the ERC20 standard brings disadvantages for corresponding crypto currencies. They are designed to use Gas/ETH for transaction fee payments, so they only work for investors who have ETH available in addition to the ERC20 token. In addition, ERC20 tokens are dependent on the capacity and speed of the ETH block chain, which has reached its limits.

Important ERC20 tokens

To quickly implement the idea of a new crypto currency, the ERC20 standard was and still is probably the most popular solution. Even big old coins like EOS, TRON (TRX) and Binance Coin (BNB) based their original launch on ERC20, before they later developed their own block chain to be able to act independently from ETH. Etherscan has more than 200,000 ERC20 contracts in place by July 2019. The most important ERC20 tokens by market capitalization are Bitfinex Leo (LEO), ChainLink (LINK), Maker (MKR) and BAT. At NBB, the changeover to its own block chain BEP 2 is in full swing, and Tether (USDT) as a stablecoin is compatible with several block chains.

ERC20-Token: Future-proof or dying species?

The charm of ERC20, basically being able to create your own altcoin in less than 15 minutes, has been particularly noticeable during the ICO boom. In practice, however, it has been shown that ERC20 tokens have to live with the technical limits of ETH and therefore have a uniform appearance. That is why all important altcoins change to their own block chains as soon as possible after the launch. It is questionable whether future crypto currencies will still choose ERC20 as their first solution. Because meanwhile alternatives such as NEO, EOS or Cardano are available to such projects, which permit Smart Contracts like ERC20, which administer in reality strange Coins. Whether ERC20 will remain popular depends decisively on when and how Ethereum gets its problems under control with scalability (keyword: Ethereum 2.0).