What are ERC-20 Tokens? A Beginner’s Explanation
Initial Coin Offerings (ICOs) have become extremely popular ways to raise funds while avoiding the regulatory restrictions of fiat financing. In 2017, ICOs raised around $6.5 billion. And as of March 2018, they’d already raised $2 billion this year.
The majority of ICOs are based on Ethereum as a platform, and more specifically on Ethereum’s smart contracts. Shares in ICO projects are usually sold for ETH or BTC and awarded in the form of tokens (also known as ERC-20 tokens).
For newcomers to Ethereum, we usually recommend using MyEtherWallet.com (MEW) to monitor and manage ICO tokens. For optimal security, MyEtherWallet is best paired with a hardware wallet.
So, while we’re used to seeing and dealing with ERC-20 tokens, few people know exactly what they are, how they work, or even what ERC-20 means. (In case if you’re wondering what is the meaning of ERC is, ERC stands for Ethereum Request Comment, and 20 is the arbitrary number assigned to the proposal.)
The ERC-20 Basics
As the name implies, the native currency of Ethereum blockchain is ether (ETH). But ERC-20 tokens also act as coins on Ethereum. Ethereum is the heart and mind of ERC-20 tokens. Its blockchain processes their transactions, and its virtual machine runs their smart contracts.
Remember that these tokens aren’t independent. They reside on Ethereum’s blockchain and depend on its distributed computing abilities.
Smart Contract Risks
While smart contracts are very efficient, they do come with risks. For instance, a smart contract can’t be changed once it’s initiated by the ICO’s developers. If a smart contract contains bugs or vulnerabilities, you could easily lose your funding, tokens, or both. Such misdeeds have frequently occurred throughout Ethereum’s history. The most notable example was the $55 million DAO hack, and correcting it required a hard fork of the Ethereum network (which is how Ethereum Classis was created).
Why the Need for the ERC-20 Standard?
Before the ERC-20 standard came about, there were many compatibility issues among the various forms of Ethereum tokens. Each token had a completely unique smart contract. In other words, it had to write completely new code for each exchange or wallet, in order to host a new token. And supporting the increasing array of tokens was becoming excessively problematic and time-consuming.
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