ERC20 Token What are they and how do they work?

In the world of cryptocurrencies there are hundreds of terms that are heard over and over again, but if there has been one that has been constantly repeated over the last few years, it has been ERC20 token.

What is an ERC-20 token?

create ERC20 token are those that do not have their own blockchain, but are developed on the Ethereum blockchain and belong to the so-called world of decentralized finance .

More specifically, they are smart contracts that add functionalities to the Ethereum network, creating a very broad ecosystem of decentralized applications.

Origen

The process of creating tokens on an existing blockchain network was possible with Bitcoin itself, although this was a relatively complex process and did not have much development.

For this reason, in November 2015 it was approved that Ethereum developers could create their own tokens on the network, with a proposal promoted mainly by Vitalik Buterin and Fabian Vogelsteller.

But where does the name “ERC-20” come from? ERC20 was the name of this proposal to permit the production of tokens.

EIP stands for Ethereum Improvement Proposal , and 20 referred to the number of the proposal.

Subsequently, the acronym ERC was adopted for Ethereum Requests for Comments , which in Spanish means Request for Comments for Ethereum.

Since their creation, ERC20 tokens have gained a lot of popularity, and today they are one of the most used for the development of cryptocurrencies.

Characteristics

The most important features of ERC-20 tokens are:

• Identification : all of them have an associated identifier to be easily differentiated from other tokens within the Ethereum network.
• Issuance : Token creators have complete freedom in establishing token issuance details, both in quantity and form.
• Review of balances : the network is prepared to allow analyzing the balances of the owners’ portfolios using only their address anonymously.
• Transfers : Being tokens of the Ethereum network, they have native functions, such as fund transfers.
• Uniformity : Every token runs on the same API, which has been standardised to increase the Ethereum network’s compatibility and interoperability with other tokens.
• Free API : the API developed by Ethereum for the creation of tokens is 100% free, so it can be used in a large number of programming languages; Solidity, Java, Python, Javascript, Go…

Currencies that use it

I have already mentioned that ERC tokens are very widespread, but what real examples can be given of their use? You are undoubtedly familiar with the following cryptocurrencies:

• Tether (USDT)
• Uniswap (UNI)
• Chainlink (LINK)
• Dai (DAI)
• Axie Infinity (AXS)

However, these are just a few examples, as there are currently thousands of tokens developed with this technology.

Advantages and disadvantages

✔️Advantages :

The creation of ERC20 token development represents a great saving of time and resources for all developers, since they use a base structure on which they develop their projects.

Since these tokens may be created in a variety of programming languages, it will be easy to modify them to fit in with diverse settings and circumstances.

It greatly facilitates interoperability with other projects developed on Ethereum, so the creation of complete ecosystems in which some tokens complement others is a reality.

The vast majority of wallets and exchanges recognize ERC20 tokens, so there are usually no problems storing or trading them. Additionally, this makes it easier for when a new token is created to be added to the exchanges quickly.

All transactions made with Ethereum tokens must be validated and approved by miners, so auditing processes are secure.

❌Disadvantages :

All of these tokens run on the Ethereum network, and to trade them you must pay the fees of this network. Additionally, the commissions are typically rather large due to the saturation

Network congestion leads to another problem, which is that transactions are slower, especially at times when there are many users making transactions.

It is easy to get confused and send ERC20 tokens through the wrong network, losing funds irreversibly.

By making the development of ERC20 tokens so easy, it is easy for many useless projects to be added to the network, “dirtying” the project and unnecessarily congesting the blockchain.

Conclusion and future of ERC20 tokens

ERC20 tokens are one of the great representatives of today’s crypto landscape, and since they were created their popularity has only increased, making Ethereum the second largest cryptocurrency in the world.

And yes, these tokens have provided rapid development to the blockchain landscape, although as you have seen, they are not without problems.

In fact, its congestion of the Ethereum network has caused real traffic jams, as if it were a highway, slowing down transactions for very long periods of time that have ended in million-dollar hacks.

For this reason, the future of ERC20 tokens is somewhat uncertain, and although they will surely continue to be used, little by little they will be replaced with other alternatives, such as ERC223 or ERC777 .

What’s more, many people consider the ERC777 token an update or improvement of ERC20, because although its characteristics are similar, it has other functionalities to speed up transfers.

However, we will also have to be aware of other blockchain that can take away “market share” from Ethereum tokens, such as the Binance Smart Chain (BSC).