Introduction to ERC-20 Tokens
Put simply, an ERC-20 token is a digital coin based on cryptography and build on top of the Ethereum Network that is designed through smart contracts, allowing anyone to create their own tokens for a nearly limitless list of possible applications. ERC-20 refers to the standard that the code must be written to in order for it to be compatible with the Ethereum Network. Since it is a structure that can be adapted within the rules of compatibility, these tokens can act as the foundation for projects that require financing, such as Initial Coin Offerings (ICOs).
If a new blockchain company wants to have an ICO, they can create their own ICO token based on the ERC-20 standard. This would allow investors to have an opportunity to see returns on that initial investment while the company continues development of the blockchain and further refines the technology. It is a way for start-ups to start building a user base and support for the technology while keeping interaction with the company at high levels.
Who Can Create ERC-20 Tokens?
Given the open-source nature of the program, ERC-20 tokens can theoretically be created by anyone. Since the tokens run on the Ethereum Network and the ERC-20 standard can be implemented by anyone with access to the network and a competent understanding of the language of smart contracts. Smart contracts are how actions are carried out on the Ethereum Blockchain. They are essentially a list of instructions written in a language called Solidity. This language centers around IF-THIS-THAN-THAT Logic (IFTTT logic), which can be programmed to carry out any number of tasks without the intervention of a person after the contract is written. To learn more about smart contracts check out our page What is Ethereum.
While everyone has the ability to build their own token based on the ERC-20 standard, making it compatible with the Ethereum Network, actually programming the smart contracts is another issue. As it stands right now, there are very few people who understand the technical side of Solidity well enough to write ironclad contracts simply because it is such a new system. However, anyone can learn the coding language as it is publicly available to anyone with the interest and drive to learn the new protocols involved in writing ERC-20 token smart contracts.
It is very likely that the technical know-how will spread out and diffuse across the space as more people learn the skills required to write the code. When this happens ERC-20 standard tokens could become the standard operating language for a majority of the tokens in operation.
What Can You Do With ERC-20 Tokens?
Since the Ethereum Network itself, and by extension the ERC-20 tokens running on it, can be considered as essentially programmable stores of value. The scope of different uses for these tokens is only really limited by the imagination of the person writing the program itself. Most of the altcoins you see are based on that same ERC-20 standard that run off of the Ethereum Blockchain and can be stored in ETH-configured wallets. Some of the possible uses for these tokens include but are certainly not limited to:
– Native currencies on DAPPs
– Securities Dividends
– A decentralized and tokenized voting system
– Digitized assets pegged to the token (e.g. gold, silver, oil, etc.)
Beware ICO Scams
Since there is very little oversight in the cryptocurrency market, there have been many opportunities for people to get scammed out of their investments. This fact highlights the need for people to conduct diligent research into their investments before pouring funds into something claiming to be the “Next Bitcoin” while lacking the platform to prove it.
This issue of ICO coins based on the ERC-20 standard masquerading as viable investments is something that is not likely to go away anytime soon. Given the relative ease at which someone can program a token to look and operate as a legitimate coin, it becomes simple to gather investments and then evaporate the next day having successfully carried out an exit scam.
The Ethereum Network is growing every day and like any other aspect of the cryptocurrency and blockchain space things are just starting to ramp up. ERC-20 tokens will become far more commonplace in the near future and having a working understanding of them is essential to interacting with them in the blockchain space.