The popularity of cryptocurrencies has overgrown in recent years. Most crypto tokens on the market are built on the Ethereum blockchain using the ERC-20 token standard.
ERC-20 is a scripting standard frequently used in the Ethereum blockchain. These technical standards define several rules and actions that Ethereum tokens or smart contracts must follow. In a simple manner, ERC-20 is a basic guideline or benchmark that every new token created on the Ethereum network must follow.
To find out more about tokens and the ERC-20 token standard, let’s look at the discussion below.
Why Do Crypto Users Need to Know the ERC-20 Token Standard?
For some investors, especially those without technical knowledge of blockchains and smart contracts, the world of cryptocurrencies may seem daunting. Even though there are many interesting new digital currency prospects to invest in. This is where the ERC-20 token standard comes in as a strategic pathway for the creation of new tokens.
Often, new tokens are difficult to interact with each other. Therefore, Ethereum sets the technical standard for any new tokens built on top of it. Later, individuals or organizations that have complied with the protocol can issue their tokens.
The Difference Between Coins and Tokens
ERC-20 tokens can indeed function as ordinary crypto assets, but tokens and coins have a different concepts. Because literally, the terms token and crypto coin (cryptocurrency) represent different meanings that cannot be used interchangeably.
Crypto coins are digital assets that have been encrypted by cryptography and run on their blockchain. Meanwhile, a token is a utility asset that is built and operates on an existing blockchain.
You can identify the basic difference between standard crypto coins and ERC-20 tokens lies in the blockchain they use. This will incur gas fees when making transactions. The fee will fluctuate according to network activity. The denser the activity in the network, the higher the cost of gas.
ERC-20 correlation and smart contracts
A smart contract is a decentralized computer code that runs on a blockchain network at the request of a user or other program. This smart contract will play a role in executing orders based on predetermined rules after certain conditions are met.
Oftentimes, smart contracts are also used to carry out various routines and functions in the digital space, including token creation. Here, ERC-20 acts as a smart contract technical standard in token creation on the Ethereum blockchain.
Purpose of ERC-20 Tokens
Since it is built on smart contracts, ERC-20 tokens have various functions. One of them is to represent financial assets, much like shares in a company. Apart from that, ERC-20 tokens can also be used as loyalty rewards or reputation points. For example, an online travel agency awards point to users every time they make a booking through its platform.
On the other hand, ERC-20 tokens can be used as a representation of a physical object, such as gold or real estate. However, maintaining the relationship between digital tokens to represent physical objects is quite difficult.
How ERC-20 Works
To create a token with the ERC-20 token standard, you must fulfill some basic rules to carry out the following functions:
- Total supply: Shows or provides information regarding the total amount of supply of ERC-20 tokens created.
- Transfer: Allows sending a certain amount of tokens from one account to another.
- BalanceOf: Provides information on the amount of the balance in the account from the account owner.
- TransferForm: A capability that allows a user to receive several tokens from another user.
- Approve: Function for checking transactions as well as granting permission to withdraw tokens from an account.
- Allowance: A function that allows cancellation of transactions or returns of a number of tokens from the buyer to the original owner if the number of tokens is insufficient.
What Crypto Assets Use the ERC-20 Token Standard?
Most crypto assets currently have implemented token standards on the Ethereum blockchain. In this respect, the ERC-20 token standard is the most popular. Some examples of crypto assets that use the ERC-20 token standard include:
The ERC-667 token (which inherits functionality from the ERC-20 token standard) runs on blockchain middleware. It functions as a link between crypto smart contracts, APIs, traditional bank account payments, and data feeds.
This one utility token implements the Decentralized Autonomous Organization (DAO) protocol for issuing stablecoins on the Ethereum blockchain, namely DAI.
This stable runs on the ERC-20 protocol with an ETH deposit address. Meanwhile, the withdrawal and deposit systems will be carried out on the ETH network.
TEN is Tokenomy’s token which can provide more benefits in crypto investment in Tokenomy, such as:
- Discounts on trading fees on Tokenomy.
- More profit in investing fixed deposits in Tokenomy Earn.
- Using TEN tokens to increase loyalty status.
- Get discounted interest for crypto lending.
IDK is an ERC20 stablecoin issued by IDK Foundation Ltd. This digital asset is backed up by the Indonesian Rupiah (IDR) with a ratio of 1:1,000.
Advantages of ERC-20 Tokens
The popularity of ERC-20 tokens is not without reason. Several factors make it seem so attractive to blockchain users, namely:
The use of ERC-20 tokens can be adjusted according to feature needs, such as freezing and thawing tokens, automatic gas fee refills for future transactions, and much more.
The ERC-20 token standard acts as a proper blueprint for developers. This allows them to create new tokens easily, instead of building one from scratch.
ERC-20 tokens can be exchanged on various cryptocurrency trading platforms. So when projects using the Ethereum ERC-20 token standard are active and interact with each other, it will bring more projects and users to the blockchain network.
Standardization of tokens
Ethereum provides a token specification that includes the rules for interaction between various tokens and their trading. With this universal standard, users can transfer tokens and exchange tokens at the same time.
The ERC-20 token standard and its tokens are recognized in most exchanges and wallets. Because this protocol is universal, it can adapt to a wide range of exchange activities.
Eradicate counterfeit tokens
By the ERC-20 token standard, every transaction must be subject to valid approvals. In this case, the total supply of tokens will help expedite the audit process while ensuring that there are no duplicate or counterfeit tokens circulating.
Limitations of ERC-20 Tokens
ERC-20 is perhaps one of the most popular standards used by many developers around the world. However, the token is still not perfect. There are still some limitations that ERC-20 tokens have as follows:
Due to system instability, some tokens are at risk of being destroyed when used in smart contract payments.
Risk of bugs
Tokens that are transferred from one external account to another don’t cause significant problems. However, the process of transferring funds to a smart contract account has the risk of generating bugs which result in large losses.
Slow transaction process
Every ERC-20-related transaction is correlated with the Ethereum blockchain. If the network is congested, transfer activity will be slower.
Expensive gas costs
ERC-20 tokens rely heavily on the Ethereum blockchain for each transaction. So when blockchain traffic is heavy, gas costs will also increase.
When you have entered the ERC-20 token delivery address, the token will remain trapped forever in the contract that was made. Consequently, there is no way to get a refund if you enter the wrong address.
Alternatives to ERC-20 Tokens
Apart from ERC-20, there are several ERC token standards that have similar protocols which could be alternatives. Although each of these tokens has different purposes. Some alternatives for ERC-20 tokens are:
The ERC-721 token is non-exchangeable so it can hedge its different values. This means that each token is unique and maintains its uniqueness. This type of token also helps prevent counterfeiting and increases investor confidence.
This type of token is often seen as an advanced version of ERC-20. Despite having the same function as the ERC-20, the ERC-777 offers the option of making or burning precisely to speed up the transfer process as a differentiator.
Another alternative is ERC-223. ERC-223 tokens can be a solution to overcome transaction scenarios that cannot be changed by smart contracts on ERC-20 tokens. This type of token will inform the user to cancel the transaction if it accidentally triggers a transfer to the smart contract. However, you have to be prepared for additional gas costs.
How to Send and Receive ERC-20 Tokens?
Each user can send or receive ERC-20 tokens using a wallet that supports Ethereum-based assets. However, each transaction process requires a gas fee. Therefore, make sure that the amount of Ether you keep in your wallet must be slightly higher than the actual amount you want to send.
The cost of sending Ethereum assets can increase if you send them to a smart contract address, such as an initial coin offering (ICO). This is because the transaction process is more complicated which is why it requires several interactions.
Meanwhile, to receive tokens, you only need to provide a public address starting with “0x”. We recommend that you copy-paste and not type it manually. This method can minimize the risk of writing errors or typos because the funds that have been sent cannot be returned for any reason.
How to Store ERC-20 Tokens?
Exchanging ERC-20 tokens on the Ethereum blockchain is easy. However, both ERC-20 token addresses and exchange addresses are unique in their way. This is what makes sending ERC-20 tokens to private wallet addresses and Ethereum exchange addresses different.
To be more secure, you need to identify the address of the exchange or wallet to that you want to send tokens. Otherwise, the transaction risks failing and the ERC-20 tokens cannot be credited by the exchange.
Can I Send ERC-20 Tokens to Ledger Nano and MetaMask?
The answer is yes, you can send ERC-20 tokens to Ledger Nano and Metamask wallets as they are compatible with the ERC-20 token standard.
For your information, Ledger Nano S/X is a hardware wallet that is used to store digital assets and make transactions in popular cryptocurrencies. Call it Bitcoin, Ethereum, and USDT, to ERC-20 tokens. With Ledger Nano, you can securely manage more than 1,500 cryptocurrencies. Apart from that, you can also make coin purchases directly in your ETH account using the Ledger Live application.
On the other hand, Metamask is a cryptocurrency wallet for storing, sending, and receiving Ethereum and ERC-20 tokens via a normal website. Metamask is available as a browser extension and mobile app.
If you’re considering storing your tokens in a hardware wallet with the convenience of a hot wallet, these two could be an ideal solution.