ERC20 Token: the Basics

Although smart contracts have been widely applied in various fields for quite a while, their concept still remains somewhat of a mindbender for the average user. This series of articles aims to shed some light on the purpose and working principles of the selected smart contracts supported by Smartz platform thus providing you with a simple explanation in relation to each of them. Today’s article is dedicated to the ERC20 token — arguably the most common type of token within the Ethereum network.

First things first: «ERC20» is an acronym that stands for «Ethereum request for comment 20» — a term that refers to a technical standard applicable to the tokens on the Ethereum blockchain. Developed in 2015, this standard represents a set of requirements to be met by an Ethereum token as well as functions it should be able to perform in order to be interoperable on the Ethereum platform, i.e. to be shared and exchanged for other tokens.

Broadly speaking, the main purpose behind the development of ERC20 was to «harmonize» the existing tokens within the Ethereum network and thereby simplify their compatibility with other platforms and decentralized applications — an objective that was achieved through the implementation of a uniform standard with which all the tokens were obligated to conform.

ERC20 is by no means the only token standard existing within the realm of Ethereum network — there are others, such as ERC223 or ERC721; ERC20, however, certainly had the greatest impact on the market, given the fact that it gained wide acceptance among the projects launching ICOs from the very first day of its introduction. In fact, it would be no exaggeration to say that almost every token on the Ethereum platform is an ERC20 token: the majority of the tokens released through ICOs on the Ethereum blockchain are ERC-20 compliant, mainly due to the simplicity of its implementation. Hence the ICO’s whose tokens don’t conform to the standard (where they should) usually end up being a failure.

It should be pointed out that an ERC20 token (as well as a token that confirms to any other standard) can’t be reduced merely to what we usually call a digital currency; its functionality goes far beyond that and is defined by the economic logic behind a certain token. From this point of view tokens can be classified as:

a) Consensus tokens — basically what we refer to as cryptocurrency — a type of currency available in digital form which generally functions the same way as a physical currency, but also has certain advantages over it (e.g. intermediate party is no longer required, transactions are faster, etc);

b) Security tokens — these tokens represent participation in some kind of activity — the most obvious example being shares in the ownership of a company, where owning a certain amount of tokens allows a shareholder to have a voting power. The same logic is applied to the DAOs (Decentralized Autonomous Organizations), where every participant with a certain amount of tokens is allowed to vote. Such tokens can also represent other assets, be it oil, gold or any other kind of security;

c) Utility tokens, which allow their holders to perform certain activities on the platform that has issued the token or provide him with the access to a product or service. These are perhaps the most popular among ICOs along with security tokens;

d) Tokens representing other digital objects also referred to as payment tokens. These tokens play the same role as vouchers/coupons allowing the owner to get a discount or providing him with the access to certain areas (e.g. website membership).

Everything falls into place now: an ERC20 token is basically any Ethereum token that conforms to the ERC20 standard and most importantly — implements the required functions. These functions — the Rosetta stone for the understanding of an ERC20 token — determine how tokens are transferred and how the data within each token can be accessed by the user, allowing to predict how an ERC20 token released through a particular platform will work on the Ethereum blockchain and how it will interact with other tokens. To conform to the standard, a smart-contract should implement six mandatory functions (which include providing info about the total supply of tokens, executing the transfer of tokens, etc.); the developers, however, can extend beyond this number.

If all the requirements are met and mentioned functions of a smart contract are properly implemented, we acquire an ERC20 token that can easily interact with other smart contracts on the Ethereum platform. The deployment of an ERC20 token on the Smartz platform is actually not that big of a deal even for a non-tech savvy person: if it is the first smart-contract you’re working with, you can use a simple step-by-step guide on how to deploy relatively similar smart contracts. You can also visit this page to learn more about the functions for ERC20 token and the details of its deployment in general. The whole process can be best described as intuitive, since both mentioned guides are self-explanatory.

Also we prepared a simple video about deploying ERC20 token on Smartz platform. More info on the supported smart contracts will follow.

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