Tokens are digital assets that run on a blockchain. They can perform different functions such as representing value, being an asset, or even providing access to some functionalities of a platform that runs them.
Table of contents
- How Does ERC-20 Work?
- Popular ERC-20 Tokens
- ERC-20: Advantages and Limitations
- How to Create an ERC-20 Token
- The Future of ERC-20
- Conclusion
Ethereum is one of the main blockchains that hosts tokens. There, tokens can be digital currencies, in-game assets, or whatever - they can perform very different functions. Tokens are digital assets created on blockchain networks, representing value, assets, or functionalities. Developers use smart contracts to develop tokes. Different tokens can have different standards, and their functionalities depend on those standards.
The Role of ERC-20 in the Cryptocurrency Ecosystem
ERC-20 is one of the most popular standards not only on the Ethereum blockchain but in general. This standard determines common rules to create fungible tokens. This is why all ERC-20 tokens have the same features, and this is why they are easily integrated into wallets, exchanges, and decentralized applications.
ERC-20 standard provided a consistent framework for tokens; this is why we say that it has launched a new stage in cryptocurrency development. It also allowed to introduce new ways of raising money such as Initial Coin Offerings, to develop decentralized finance, tokenized assets, and many other things.
Why ERC-20 Became Popular
RC-20 standard became so popular because it is very simple and efficient. Before this standard was introduced, there were different tokens with different implementations. This caused significant compatibility issues.
ERC-20 standardized such functions as transfers and approvals, and made token interactions very predictable. This, in turn, led to the widespread use of this token standard in DeFi, gaming, and even in fundraising.
How Does ERC-20 Work?
ERC-20 tokens function as smart contracts on the Ethereum blockchain. These smart contracts define strict rules for token creation, transfer, and interaction.
These tokens operate within Ethereum’s decentralized network. They ensure secure and transparent transactions within the network.
Functions and Requirements of ERC-20 Tokens
ERC-20 tokens should maintain consistency. This is done through specific functions that manage token supply, balances, and rules for transfers. These rules allow tokens to be used across many wallets and exchanges, and they also ensure token usability across the entire Ethereum ecosystem.
Examples of ERC-20 Token Interactions
ERC-20 tokens are used for gaming, trading, payments, and for governance purposes. Many ERC-20 tokens are listed on centralized and decentralized exchanges, where users can buy, sell, and swap them.
Many businesses accept ERC-20 tokens for payments, and many blockchain platforms allow to stake these tokens and generate revenue. ERC-20 tokens can be used to get voting rights and earn passive rewards.
Popular ERC-20 Tokens
The Most Important ERC-20 Projects
Many well-known blockchain projects use ERC-20 tokens. For example, stablecoins such as USDT (Tether) provide price stability, governance tokens like UNI (Uniswap) allow users to participate in decision-making, and infrastructure tokens like LINK (Chainlink) facilitate decentralized data transfer through oracles. All these coins are available as ERC-20 tokens.
ERC-20 in ICOs and DeFi
The ERC-20 standard has played a crucial role in the development of Initial Coin Offerings. This made it easier for startups to raise money.
DeFi uses ERC-20 tokens to provide such services as lending, borrowing, and liquidity provision. These all services are the foundation of the entire DeFi ecosystem.
The Role of ERC-20 in Ethereum’s Ecosystem
The ERC-20 standard is the base for the entire Ethereum economy. With this standard, the ecosystem can enable transfers, the operation of decentralized applications, and the execution of smart contracts. This token standard can also be integrated in multiple other blockchain applications which is very important for the further development of the Ethereum ecosystem.
ERC-20: Advantages and Limitations
Even though ERC-20 tokens bring a lot of benefits, it also has some limitations.
Benefits of ERC-20 Tokens
All Ethereum-based projects can use ERC-20 tokens very easily. These tokens are compatible with a majority of wallets and exchanges, this is why it is easy to buy, sell, and swap them. Smart contracts are responsible for all operations, and this means that all processes are highly secure. It also allows to use ERC-20 tokens for complex financial applications.
Challenges and Limitations of ERC-20 Tokens
ERC-20 tokens also have some issues. For example, they are very popular, and transfers in them are very frequent. However, the Ethereum network cannot scale infinitely, and this is why at times, it gets congested. This leads to delays in transfers and high gas fees.
Even though Ethereum transitioned to PoS and implemented some changes to reduce gas fees, the problem is still there.
The development of smart contracts is a very complex process. Even the smallest mistakes can cause significant errors which may result in huge losses.
The smallest mistake in the wallet address also leads to the loss of all funds.
Alternatives to ERC-20 Standard
ERC-20 standard has some limitations, and this is why, other standards were developed to eliminate them. For example, the ERC-712 standard introduced non-fungible tokens (NFT) that are used for unique digital assets. ERC-1155 supports both fungible and non-fungible tokens within the same contracts. There are also multiple Layer-2 scaling solutions that improve the situation with gas fees and transaction speed.
How to Create an ERC-20 Token
To create an ERC-20 token, follow these steps:
- Define the token purpose, what it will be used for
- Write a smart contract
- Deploy the smart contract on Ethereum
- Test the contract to ensure it works as expected.
These are the skills and tools that you will need.
To create an ERC-20 token, you need to know Solidity, a programming language of the Ethereum ecosystem. Further, you shall understand well the blockchain security and Ethereum’s infrastructure. To deploy and test your contract, you need to know Remix, Truffle, and MetaMask.
Listing ERC-20 Tokens on Exchanges
ERC-20 tokens cannot exist in a closed ecosystem. To make them operate, you shall list them on exchanges. This means that the token shall meet the platform’s requirements such as liquidity level, regulations, and so on.
The Future of ERC-20
Even though ERC-20 remains irreplaceable, there are already some newest token standards such as ERC-721 and ERC-1155. They introduce new functionalities beyond ERC-20. More standards may be developed in the future, and it may lead to specialized token use cases and impact the ERC-20 standard utility in the long run.
The Role of ERC-20 in Ethereum’s Future
Even though there are alternatives to ERC-20, this standard remains important for the Ethereum infrastructure. It is widely used in DeFi and in the sector of tokenized assets. This is why it will continue playing an important role in the ecosystem and in the crypto world.
Prospects for Ethereum’s Ecosystem
Ethereum has already implemented some major changes such as switching to PoS, improving transaction speed and reducing gas fees for Layer-2 solutions. This is why in the future, the ERC-20 standard will continue growing in popularity.
Conclusion
ERC-20 has played an important role in the adoption of blockchain in general and the Ethereum blockchain specifically. It laid a foundation for the development of tokenized assets, decentralized finance, and digital operations.
It also contributed to the growth of Ethereum-based projects. Thanks to ERC-20 tokens, blockchain has become more accessible and functional.