What are ERC-20 tokens?

Initial Coin Offerings (or ICO’s) are the most common way to raise funds for beginning blockchain projects. A large percentage of them take place on the Ethereum network, which is very popular with both...

Initial Coin Offerings (or ICO’s) are the most common way to raise funds for beginning blockchain projects. A large percentage of them take place on the Ethereum network, which is very popular with both beginners and experienced startups.

In such a scheme, the sponsored company accepts money from investors and gives them tokens in return. As a rule, these are ERC-20 tokens. These ERC-20’s is what our article is about.

Background to the emergence of ERC-20’s

Every year there are many blockchain projects, the lion’s share of which launch their ICO’s on the Ethereum virtual machine. But despite the apparent commonality, each platform uses its own program code which have their own problems.

For each new token to work correctly, a lot of support is needed from the developers who need to reconfigure the system each time so that it will «understand» how to work with the new token. Needless to say, all of this is very time consuming and expensive.

In order to reduce costs and significantly simplify the work, Vitaly Buterin decided to develop a single technical standard for tokens which are created on the basis of Ethereum. Simply put, a token-constitution — a set of rules that must be strictly followed. He named them the ERC-20. It happened in 2015 and from that moment a new milestone was reached in the history of ICO’s and the entire blockchain industry.

Benefits of ERC-20

• The main advantage of the standard ERC-20 is to simplify the work with smart contracts. This is achieved in an unusual way of transactions: instead of actually moving money (or information), tokens simply change owners.
• Lightweight market entry. ERC-20 has long established itself as a guarantor of the «quality» of the token, so for projects that are relevant to it, it is much easier to list the coins on the exchange.
• Supports popular wallets. Ethereum is a megapopular project, so all the innovations that it introduces are immediately accepted unconditionally by the entire blockchain industry. If you are the owner of ERC-20 tokens, you can work with almost any crypto-wallet.
• Simplicity and functionality. The standard is designed in such a way that even a novice programmer will be able to work with it. But despite this, the range of functions in it can surprise even an experienced developer.

Disadvantages of ERC-20

• The main problem of ERC-20 is the impossibility of processing transactions. Let’s give an example: the organizer of an ICO accepts investments only in Bitcoin and the investor wants to send him Ethereum. In this case, the transaction simply will not work. If he sends ERC-20 tokens, the operation will be accepted but the money will not reach the project; it will simply be lost forever in the blockchain. The thing is that ERC-20 has two types of functions: one is for sending tokens to a specific address and the second is for intra-system transfers (in particular, for participation in an ICO). But it needs to be combined with the approval function which checks whether the recipient’s address can accept tokens. If this is not done, the money will go anywhere.
• Another problem of ERC-20 is related to its advantage — simplicity. This standard provides many opportunities for developers, but no one can vouch for their good faith. That is why we have a lot of fraudulent projects that collect millions of dollars in an ICO. If the process of primary placement was simpler, we would not see this situation.
• Another vulnerability is the impossibility of changing smart contracts after their launch. In other words, it is not so easy to fix when detecting a bug.

Results

Their are vulnerabilities and shortcomings to various technical solutions — the problem is not new, they are known more or less to all competent developers. Quality projects use many tricks to help make their projects more reliable. Therefore, when choosing a startup for investment you should not be solely influenced by the support of ERC-20 alone. You should carefully understand all of the details and study the roadmap and white paper of the project. And only then make a decision.