ERC20 is an acronym for Ethereum Request for Comments and 20 is the number assigned to it. ERC20 is a set of specs or standard that an Ethereum Token must have so that it can be shared, exchanged and transferred on the Ethereum Environment. The ERC20 standard not only specifies how the rules for sending tokens from one address to another, it also set downs rules on how data will be accessed within a token. These rules apply to all tokens on the Ethereum Environment. In simple terms, ERC20 is the rulebook (Buterinstitution!!) for all tokens that are part of the Ethereum Environment.
These rules were drafted, adopted and put into effect by the Ethereum Community. The ERC20 rulebook includes 6 mandatory and 3 optional rules that an ERC20 standard token must follow.
Advantages of the ERC20 Standard
1. Compatibility with other tokens/clients/wallets on the Ethereum Environment.
2. Tokens can be easily traded with each other.
3. Set the transparency standard that each token most abide by like token transfer, balance inquiry for specific addresses, and finding out total token supply.
Before the ERC20 standard was adopted, all tokens worked as per their own functionalities. This created confusion and non-compatibility between different token owners. Hence each token behaved differently on the Ethereum Network. This made smart contract implementations impractical. The complexities were further aggregated with each token on the network havings its own set of rules, token transfer function, and unique names. But once ERC standard was adopted, smart contracts became a possibility.
Smart Contracts and Their Advantage
When an ICO is conducted, Smart Contracts play the intermediaries or the conductors. Any request is processed as per the smart contracts agreement by the Ethereum virtual Machine. An ICO is a three-step procedure.
1. All requests/payments for token purchase by the customer or participants are made to the smart contract (a sort of central robot part of the Ethereum Virtual Machine)
2. The payment/request is forwarded to the contract owners by the smart contract
3. Upon execution, the ICO tokens are transferred to the customer/participant.
From the above three steps we can draw the following conclusive points:
a. Smart Contracts are important for executing agreed ICO protocols on the Ethereum environment.
b. Smart Contracts are necessary for the holding and distribution of new tokens.
In simple terms, smart contracts do what centralized authorities do. The only difference is that once programmed and implemented, smart contracts cannot be altered. Hence, smart contracts remain a security wall for most ICOs. Smart Contracts serve the following purpose in an ICO or the Ethereum Environment at large:
Smart Contracts self-execute themselves if the coded pre-conditions and agreements are met.
Smart Contracts eliminate the role of central authority or middlemen in transactions.
They are token specific and keep track of specific token data like owner addresses, supply, and distribution as per the instructions.
They ensure a transparent, trust-free and decentralized process for token purchase, sale or transfer. They subsume all contract terms between the two parties and execute all agreements automatically.
Pre-Requisites of a Smart Contract
1. Specific goods or services under contract
2. Terms that set the condition for executing the contract
3. Digital Signature or private keys of participants for validation
4. Decentralized platform for its distribution among participating nodes
Advantages of Smart Contracts
Security: They are encrypted and distributed by nature. This eliminates any chances of forgery or misuse.
Cost-Effective and Fast: Eliminates middlemen and the self-executing nature speeds transactions.
ERC20 Tokens and ICO
The Ethereum Blockchain by virtue of its environment and structure fosters programmable money. ERC20 Tokens are built on top of the Ethereum Environment. Token creators pay in ETH for the Ethereum’s Computing power. As discussed above, The ERC20 tokens are driven by smart contracts. Hence their programmable feature makes them ideal for a whole lot of real-world use case. Tokens can be pegged against Fiat Currencies, existing popular cryptocurrencies as well as different goods and services. It is up to the programmer’s skill set. The use cases for a token depends one and only on the capability of the developer.
Some of the popular use cases for ERC20 standard tokenization include:
1. MEP (Medipedia.io): MEP token decentralizes medical health services and offers transparent, efficient cost-effective health tourism solutions for one and all. Medipedia blockchain solution for affordable healthcare will eliminate existing over budgeting and lack of transparency in the Global health sector.
2. Storjcoin X (SJCX): A dApp that enables secure, private, and encrypted cloud storage
3. BIX (Bibox): BIX tokens are used for making payments on the Bibox platform. Token owners get fee reduction on transactions on a YOY basis.
4. OmniseGo (OMG): A collateral token for USD Pegged loans
5. SMT (Smart Media Tokens): Blockchain based platform for publishers to monetize from content and grow a community.
How is ERC20 Token useful for ICO’s?
As discussed above, ERC20 standard serves as a lighthouse for token developers. Following the ERC20 standard is not mandatory on the Ethereum environment but to make ample use of the smart contract environment of the Ethereum Blockchain it is advisable for token developers to stick to the ERC20 rulebook. The following points further cement this argument:
Compatibility: The last few years have witnessed a bombardment of ERC20 tokens on the Ethereum network. A new ERC20 standard token does not affect other tokens on the ethereum environment and vice-versa.
Credibility: ERC20 standard ensures that the token executes query calls like the total token supply, transfer tokens you own to someone else, or query anyone’s token balance. ERC20 renders transparency to the token without compromising on security.
Exchangeability: ERC20 facilitates a universal interface for all token. ERC-20 helps to web-clients(stock exchanges, etc) to interact with the token. Also, it allows existing software/dapps (e.g exchanges) to make standard query calls to the token without the need for extra programming.
Security and Liquidity: Spec Uniformity ensures that security protocols are most robust and difficult to breach. Further, easy token interactions ensure strong liquidity, unlike the Bitcoin.
ERC20 standard is a sort of assurity that the tokens will soon be listed on an exchange which accelerates ICO sales. In Fact, the ERC20 standard is the main reason for the diverse growth in ICO offerings over the last year. The Ethereum Environment is now a full-fledged marketplace of tokens offering real-world usage. Hence an ERC-20 standard token ensures that users can opt for other services on the Ethereum network in a much more transparent and decentralized way.