How Do ERC-20 Tokens Work and Where to Find Them

How Do ERC-20 Tokens Work and Where to Find Them

June 22, 2021 Off By Glespynorson

With the internet, many everyday tasks are now just a click or touch away. It is no wonder that most financial transactions are now possible through an app on the smartphone including cryptocurrency transactions.

The introduction of blockchain-based cryptocurrencies has taken the world in the direction of currency decentralization. With the Ethereum network-based ERC-20 tokens, the change has gotten cemented for good.

How Do Cryptocurrencies Differ from Traditional Currencies

Throughout history, currencies have been issued by a central authority under a region’s government. They have derived their value by basing themselves on another valued commodity like gold. Modern monetary systems rely on the demand for a currency to place a value on it.

When using one currency beyond its government’s jurisdiction, its exchange rate compared to the other country’s currency gets considered. That exchange gives you your money’s worth in that other currency. Digital transactions only shifted the playground but didn’t change the game.

Cryptocurrencies, however, have done that. A cryptocurrency, unless issued by a central government-backed authority, is free from any such authoritarian hold. Its value varies like a stock on exchanges but has similar value calculation methods to regular currency. Anyone knowing how to launch a cryptocurrency can do so, and its value will get determined on crypto exchanges based on some criteria.

Tokens for Ethereum

Ethereum, a blockchain and cryptocurrency network, uses tokens that are purchasable, sellable, and tradable. In this network, tokens stand for many digital assets, such as Non-Fungible Tokens (NFT), IOUs, Vouchers, or tangible, real-world objects. They function as digital contracts that use modern smart-technology features for validity and security. The Ethereum blockchain is that backbone technology.

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What’s ERC-20?

For any contract to function, there needs to be a set of protocols or rules that they abide by. Furthermore, these protocols must get approved by both the parties making it. When you consider an entire network like Ethereum that’s home to scores of contracts, the need for a universal protocol is inevitable.

Ethereum token users have relied primarily on individual protocols attached to the different types of tokens on it. Some of those tokens were vying to make their protocol a standard across the network. That task has mainly gotten accomplished by the ERC-20 token.

The Ethereum network allows multiple tokens to run on it, unlike other popular networks that concentrate on their respective cryptocurrency or token. Whenever a new one is implemented in the Ethereum network, the ERC-20 technical specification or protocol lets the creators know how to go about it and how it should operate. All smart contracts on the Ethereum network are done based on ERC-20.

So, in a nutshell, ERC-20 is a token that got introduced to the Ethereum network whose operation protocols have become the network standard.

Other Uses

ERC-20 tokens also support other cryptocurrencies like Bitcoin, Litecoin, etc. They are digital assets that carry a value relative to the US Dollar, similar to other cryptocurrencies.

They can be bought, sold, and traded on crypto exchanges like the others and stored in digital wallets.

While conceived as another cryptocurrency, its primary role is that of an overseer of all inter-token transactions like transfers, approvals, etc., on the network. It also dictates how users can access their data and share it, besides determining the total number and supply method of tokens.

The benefits that developers get from such a stable foundation for their work are innumerable. First, they now know how their token will perform on the network. They don’t have to be concerned with changing redoing their projects on every new token’s release anymore.

There will be default compatibility between tokens that adopt this standard across the network. That means traders can also make more accurate predictions about the values their tokens will be worth after a certain period.

Finding Them

You needn’t look far to get hold of an ERC-20 for yourself. More than 200,000 existed on the Ethereum network in October 2019. Their numbers continue to grow due to greater adoption and popularity. Some of the most popular tokens on the Ethereum network, like Maker (MKR), OmiseGO(OMG), and Augur (REP), use the ERC-20 standard.

A prerequisite for purchasing and using any ERC-20 based digital currency is a compatible digital wallet. The good news is that the popularity of ERC-20 has led to the spawning of many such compatible wallets. All those that support the Ether currency will also handle other ERC-20 based currencies.

Blockchain and crypto-tech continue to evolve, ironing out the ever-reducing number of glitches in the ERC-20 standard, improving its reliability. It, thus, makes sense to go with ERC-20 tokens for all your needs while on the Ethereum blockchain.