Cryptocurrency is based on the blockchain. Within blockchains themselves, there are technical specifications and protocols. There are a lot of somewhat barbaric and complex terms to define the protocols that govern the field of cryptocurrencies. Today, we are going to talk about ERC-20 tokens. A protocol that has become a standard for publishing tokens on the Ethereum blockchain.
Take a seat, we'll try to explain it as simply as possible.
Dictionary 📖
Before getting into the heart of the matter, let's start by defining the terms Ethereum, Smart contracts, and Token. Let's go for the boring definitions, but I promise it will help you to understand better.
Ethereum :
Ethereum is a decentralized exchange protocol that allows users to create smart contracts. These smart contracts are based on a computer protocol allowing to verify or enforce a mutual contract. Its infrastructure is based on the blockchain, which is a completely virtual environment on which unique addresses can exchange tokens of the same nature. We speak of the Ethereum ecosystem to designate all the actors who work on this platform.
SmartContract :
Smart contracts are autonomous programs on the Ethereum blockchain. Once validated, they automatically execute conditions written upstream in the contract, without requiring human intervention. They work like any conditional instruction of type "if - then" (if such condition is verified, then such consequence is executed). The smart contract allows a phenomenal progression of decentralized finance. In particular for savings, loans, exchange rates etc. The triggering of its execution can be programmed in time or on a value, it then connects to a database via an oracle and activates automatically when needed.
Token / Jeton :
In the literal sense, a token is a coin representing a unit of value. The meaning of the term token can also refer to a cryptocurrency that does not use its own blockchain. Ethereum is what is called a governance token, it is a blockchain that can host other projects on its own protocol. Thus, a token is a currency that uses a host blockchain for its distribution. The ERC-20 protocol of the Ethereum blockchain is widely acclaimed by the community for its quality, thousands of tokens have been created on the Ethereum network.
Pourquoi ERC-20 ? 💡
ERC for "Ethereum Request for Comments" this is the name used by developers waiting for comments after the publication of new lines of code of the protocol. 20, because it is the twentieth proposal that was selected for its creation in November 2015. The proposal was about standards for the development of tokens on Ethereum. This is the birth of the ERC-20 standard. In this one, the developers wanted to create something very basic that could be used easily and would allow more people to develop ideas based on cryptocurrencies.
ERC-20 is a standard: it defines functions and events that a token must handle to qualify as an ERC-20. Anyone can create their own ERC-20 token code as long as it respects the standard functions and their behavior. Any token can thus be ERC-20 as long as it is in conformity with the standards.
Vitalik Buterin, creator of Ethereum in 2013
Operation 🔍
The first token standard to take hold on the Ethereum blockchain, ERC-20 defines a common list of rules that the Ethereum token must implement. This standard determines the minimum functions: creating new units, dividing them into fractions, destroying them and transferring them to another wallet. The token can be initially planned as a simple exchange system or contain real complex functions as with the use of smart contracts and the resolution of (often) financial problems.
It can be a currency, company shares, loyalty points... It is indeed programmable, so it allows to create a transactional system, to integrate it on exchanges, to offer ICO (Initial Coin Offering, i.e. a fundraising in cryptocurrencies), swap and many other features.
The ERC-20 tokens are therefore currencies executed on the Ethereum blockchain. They work within a framework established by the Ethereum team. This framework is broad enough to allow multiple uses. It is this enormous flexibility that has led ERC-20 tokens to become a standard. This is achieved by closely checking certain rules and parameters for acceptance by the user community, which will naturally be able to audit the code of the said token.
The objective and necessity of ERC-20 tokens is therefore to maintain a global standard to create interoperability and compatibility between tokens, as well as to promote improvements in the Ethereum ecosystem. The infrastructure is such that it has become ultra scalable. Anyone can create their own Ethereum token today. At the same time, it was designed for that.
However, this standard may not be perfect and proposals have emerged to improve the flaws. On Github, some of them have been retained. An extension named ERC-223 proposes for example to implement a filter in the heart of the mechanism in order to avoid the accidental loss of tokens, this one happens when sending a token to another wallet which is not compatible and does not allow to work with the sent token.
Things to remember 🤯
An ERC-20 token is not a new technology per se, but a kind of certification with specific characteristics, for tokens created on the Ethereum blockchain. It contains a register with different information, it is a standard. From the moment you create a token that contains these specifics, it belongs to the ERC-20 standard.
This will define the rules of behavior that the token will follow.
This protocol has become a reference for creating tokens at a lower cost, as it does not require the creation of a full-fledged blockchain. It is widely adopted by the community and has become a guarantee of quality compared to other tokens of the same ilk.
Even if it is possible to launch tokens on other blockchains that allow the creation of similar protocols, Ethereum remains the most used to date. Its reliability and robustness against hackers makes it a standard for the cryptocurrency of this decade.
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