What are Ethereum ERC20 Tokens and how do they work?
To understand the Ethereum token concept , you must start by first understanding some fundamental concepts.
Ethereum is a decentralized platform on which smart contracts are run . So the definition above makes it clear that Ethereum is not a digital currency (Ethereum’s native cryptocurrency is called ether). Put another way, Ethereum is a piece of code that could automatically transfer home ownership to the buyer and funds to the seller after reaching an agreement, without the need for a third party.
For its part, Token is generally defined as a thing that serves as a representation of something else. On the blockchain , a token often represents a financial value or a digital asset , similar to how casino chips symbolize or represent fiat money just for use on different machines and games of chance.
Keeping these concepts clear, it turns out that Ethereum tokens are simply digital assets that are built on top of the Ethereum blockchain . Developers take advantage of Ethereum’s existing infrastructure to build their applications, unlike developers who choose to build an entirely new blockchain. At the same time, tokens strengthen the Ethereum ecosystem by driving demand for ether, Ethereum’s native currency, needed to power the smart contracts on which tokens are issued.
Ethereum tokens can represent anything: from a physical object like gold (Digix), to a native currency used to pay transaction fees (Golem). In the future, tokens can even be used to represent financial instruments such as stocks and bonds. The properties and functions of each token are completely subject to the use established for them: they can be used as payment to access a network or for decentralized governance over an organization, among many other possibilities.
Tokens are often issued to the public through a general or open sale called the Initial Coin Offering (ICO). The creators of the ICO will issue tokens to others in exchange for ether or bitcoin and also for other cryptocurrencies. They can have a fixed supply, a constant inflation rate, or even a supply determined by sophisticated monetary policy. There have been many ICOs recently and in a short time they have completely changed the way projects are financed. There is no mandatory distribution requirement, although if you are building a decentralized application you would ideally want tokens to be owned by as many people as possible.
ERC20 is a standard interface that guarantees interoperability between tokens. The ERC20 tokens are simply a subset of ethereum tokens that conform to certain parameters. To fully comply with ERC20 standards , the developer must incorporate a specific set of functions in their smart contract that, at a high level, will allow them to perform the following actions:
1. Get the total supply of tokens
2. Get the account balance
3. Transfer the token
4. Approve spending the token
ERC20 enables seamless interaction with other smart contracts and decentralized applications on the Ethereum blockchain. Tokens that with some (but not all) of the standard functions are considered partially ERC20 compliant and may still interact depending on which functions are missing.
In general, a token ERC20 is no different from any other token , but also conforms to the standard token of ethereum.
Why does Ethereum need a standard token?
Interoperability. If all the tokens created on the Ethereum network use the same standard, those tokens will be easily interchangeable and will be able to work immediately with Dapps that use the ERC20 standard .
What a “standardized” token does is that it uses a certain set of functions. If developers know in advance how a token will work, they can easily integrate it into their projects with less fear of making mistakes. If multiple tokens behave similarly, calling the same functions the same way, then a Dapp can more easily interact with different sub-currencies.
Like bitcoin and ether, ERC20 tokens can also be tracked on the blockchain, which is the public ledger of all transactions that have occurred. This is because Ethereum tokens are just a specific type of smart contract that ‘’ lives ‘’ on the Ethereum blockchain.
Currently there are many projects that are leveraged on the Ethereum blockchain and the ERC20 standard to issue the necessary tokens to operate their platforms. It is very likely that this market will continue to grow with new and better applications that meet this standard in order to interact with each other.