The main platform for creating tokens is the Ethereum network. More precisely, its smart contracts. Most often they comply with the ERC20 standard.

The ERC20 standard was developed in 2015 by Vitaly Buterin, one of the founders of the Ethereum network. The main goals of creating the protocol:

replacement of securities in virtual space;
ensuring the universality of virtual currency;
conducting an ICO (attracting investments for the development of projects).

Before the development of the protocol, each token had a special type of smart contract. And for a crypto exchange or wallet to be able to work with a new token, its creators had to write a new script. The ERC20 token development standard solved problems related to compatibility and support for various tokens.

The standard implies a set of rules by which all tokens developed based on this protocol operate. With ERC-20, there is no longer a need to create new software code to operate a new token.

After the introduction of the ERC-20 protocol, the ICO market began to rapidly expand. People involved in development no longer needed to create compatibility protocols for tokens with an exchange service, blockchain platform, storage, and DApps.

Protocol Characteristics

ERC20 are considered the most common tokens on the Ethereum platform. They are intended to pay for the functionality of the network and are service elements. In addition, you can purchase various goods and services with ERC-20.

Main characteristics of the protocol:

Interchangeability. The code for all tokens is the same. At the same time, using the history of operations, you can identify and separate them.
Portability. Tokens can be sent from one address to another.
Unchangeable number. Since the number of tokens is fixed, people involved in development cannot create more than the limit.

Token functions

The ERC20 protocol provides 6 mandatory and 3 optional functions for any smart contract. Mandatory ones include:

Total Supply. Responsible for the overall emission of cryptocurrencies. It also makes it impossible to generate new tokens if the limit is reached.
Balance0f. Determines the initial number of tokens that are assigned to a specific address. Most often this is the address that belongs to the creators of the ICO. In addition, the protocol describes two ways to move cryptocurrencies. Through them, tokens are distributed among system participants, and financial transactions are also carried out.
Transfer. Allows you to transfer tokens to a person who invested money in the project during the ICO.
Transfer Form. Responsible for conducting transactions between system participants.
Approve. Designed to verify a smart contract. Using this function, it is checked whether the contract can distribute tokens.
Allowance. Used to check the balance of the sender of cryptocurrency units.

Optional features:

name — token name;
decimal — number of characters after the decimal point;
symbol — designation of a token for crypto exchanges.

The set of listed functions allows crypto exchanges and currency storage operators to form a common code base that interacts with any smart contract based on ERC20.

How are ERC20 tokens different from other cryptocurrencies?

Tokens, unlike cryptocurrency units, are generated by the creator of the ICO and can act as a discount or bonus for a product. They serve as a kind of status marker. Tokens show the presence of money in the account, reflect the user’s merits, and allow him to use certain services and buy goods. Using tokens, you can monitor financial transactions. ERC20 development is tied to the Ethereum platform and operates within the framework of a format that operates within this network.

How do cryptocurrency units differ from ERC20:

used to measure the price of various goods, have purchasing power;
can be mined by miners;
the issuer is not any specific organization, but everyone involved in mining;
do not provide any bonuses or discount offers;
are based on blockchain technology.

ProstoCoin suggests looking at the essence of tokens using examples. A citizen’s passport is considered a token because it provides the owner with the exercise of civil rights. The same applies to the metro token, which allows you to travel to the desired stop. Tokens can be exchanged for money if they are no longer in demand. Their cost will increase if, due to the high load on the metro, people are given no more than 2 tokens per month. In this case, they can be sold on exchanges. However, this does not mean that tokens sold on the exchange turn into cryptocurrency. Cryptocurrency units are based on blockchain technology, while tokens are based on cryptocurrency. In other words, a token is a derivative of a coin.

What are ERC20 tokens?

ERC20 tokens differ in usage scenarios. For example, they can serve as project shares, certify ownership of assets, provide points in various loyalty programs, and be used to pay for goods and services. Some tokens simultaneously perform several of the listed functions.

Most Popular ERC20 Tokens

A common standard, simple development, and support for various platforms are the main reasons why ERC-20 tokens have become so widespread. It is impossible to list everything. Listed below are a few of the more well-liked ones:

EOS is one of the most popular ERC-20 tokens. It has the maximum capitalization among tokens based on the Ethereum platform. In addition, EOS has its own blockchain, which includes Ethereum tokens. The main purpose of EOS is the formation of smart contracts, so this token competes with Ethereum. The EOS system makes it possible to simultaneously conduct smart contracts and financial transactions. Thanks to this, the queue moves quickly, and each transaction costs a much smaller amount.
USDT Tether. A stablecoin was released by Tether Ltd in 2015. The token is pegged to the American dollar. The price is supported by the US dollar exchange rate on the company’s accounts.
TRON is a protocol that was created for people involved in the entertainment industry. Unlike conventional networks that publish media content, the platform publishes content uncontrolled. The buyer and content creator interact using the TRX token. The creators of the platform claim that the government’s tighter control of media content forces people to buy films and music that are beneficial to the state.
VeChain is a platform that allows you to transform information between systems that manage and control supplies. Intelligent chips do most of the work and, in fact, act as confirmation of the quality of the purchased products. VeChain also integrates information bases that control the entire supply chain. The project’s token is called VET.
WETH (wrapped ETH) was created because ETH, the base currency of the Ethereum network, appeared before the ERC20 standard was adopted and did not comply with it. WETH is used to exchange ETH for tokens that comply with the ERC-20 standard. The RELAY converter is used for this.
LCS. This is a token of LocalCoinSwap, a decentralized system that allows you to directly buy and sell currency. You can search for a buyer/seller and conduct a transaction without using wallets. LCS uses a standard escrow system in which currency is deposited for exchange transactions. Once the transaction is confirmed by the buyer and seller, the platform sends tokens to the buyer. The platform has the opportunity to receive dividends at the end of the quarter.

Storing ERC20 tokens

ERC-20 tokens are used in many areas. Thus, they can serve as shares of the project, the internal currency of the platform, and even an independent cryptocurrency. To successfully use and store them, you need to create a secure wallet that supports the ERC20 protocol. most well-known and well-liked among them:

MyEtherWallet. One of the most common wallets that are compatible with Ethereum and ERC-20 coins. The repository was created in 2015. It is a graphical interface that allows you to easily make and check financial transactions. All private keys are generated locally on the user’s device, so unauthorized persons cannot access the wallet through the website.

Exodus. A desktop wallet that does not require downloading the blockchain, it simply synchronizes with it. Therefore, the program takes up little space on your computer. It was created in 2016. Through the vault, you can exchange many currencies, which is very convenient. A special feature of the application is its intuitive interface, which allows you to easily control your portfolio of cryptocurrencies and their rates.
Coinomi. Mobile storage developed in 2015. It can be downloaded for free to a smartphone running Android or iOS. The wallet uses a special encryption method that mixes the IP addresses and storage addresses of transaction participants. This increases the level of security of operations.
Jaxx. This storage can be installed on both a smartphone and a computer. The wallet is compatible with a large number of blockchains and has a clear interface. You don’t need to create additional accounts to use Jaxx on different devices. All versions are in perfect synchronization with each other. Not long ago it became possible to use a browser interface for fast payments.
LedgerNano S. A secure way to store cryptocurrency units, which is a special device similar to a flash drive. In such a wallet, tokens are protected from hacker attacks because they are stored in storage without an Internet connection. The private key is stored in the equipment memory. An additional level of protection is provided by a passphrase and PIN.

Problems and risks

The ERC20 protocol has several serious disadvantages that can cause you to lose money:

Automatic transaction execution. The ERC20 protocol was developed first. Since 2017, information began to appear that the standard is not perfect, and during operations the currency is simply lost. In 2018, the creator of Dextran reported a bug that caused a loss of $1,000,000. The transaction is considered complete when the money is successfully transferred. If problems occur, the currency must be returned to the sender. If ERC20 works with smart contracts that do not support this protocol, the operation freezes. Because of this, tokens are frozen and lost.
BatchOverFlow vulnerability. In 2018, a system that analyzes the movements of cryptocurrency units published an alarming message due to the transfer of a huge number of tokens. After verification, it was determined that the transfer of such a quantity of cryptocurrency occurred due to an in-the-wild attack, which exploits contract vulnerabilities. It was confirmed that more than 10 contracts have similar vulnerabilities. Hackers were able to generate a lot of tokens, send them to a regular address and begin manipulating the market. When the security check was completed, the project team announced that they had developed protection for coins against such vulnerabilities.
Deploying a token is technically simple. The ease of developing digital assets makes ICOs a standard procedure that can be carried out even by teams unable to fulfill their obligations to investors. Because of this, tokens began to be created, used to make money from investors, and not from improving the project. Thus, in 2017, a commission specializing in US securities accused the creators of PlexCoin of fraudulent actions. The latter attracted investors with supposedly huge income (more than 1000% per month). They misled investors by quoting non-existent financial experts. It was found that the scammers spent $200,000 of the invested money on their own needs.

It should be noted that the ERC20 token generator standard is not always suitable for achieving the goals pursued when developing tokens. It does not guarantee that they will be useful, valuable or functional.

The use of tokens can be accompanied by a number of problems. They may be mistakenly sent to the smart contract of another ICO. In this case, if the contract does not provide for the acceptance of tokens, they will be lost. Over $3 million was lost this way. You can get rid of this problem by using the ERC-223 protocol, which describes the possibility of rejecting an operation.

The second problem is the overly trivial procedure for creating tokens, which led to the appearance of a large number of them. This has led to the creation of similar tokens, among which it is difficult for investors to choose the right investment option.

Conclusion :

ERC20 token were designed to eliminate compatibility and support issues. Today they represent assets that allow participation in various projects and serve as proof of ownership. But you should understand that there are certain risks associated with using tokens of this standard. Investors should carefully select tokens for investing their funds, cryptocurrency senders should provide the correct details when sending tokens, and ERC-20 holders should use special hardware wallets to protect their savings.

Why was the ERC20 Standard created and what they are?