What Crypto Users Need to Know: The ERC20 Standard

The cryptocurrency world may seem daunting to the average investor, especially for those without technical knowledge of blockchain and smart contracts. However, the prospects of many new digital currencies have drawn in all types of investors, including those who might have otherwise been cautious about investing in a digital token or cryptocurrency.

While investors can certainly be successful in the cryptocurrency space without having under-the-hood technical knowledge, a basic understanding of some of the most important properties of many of the current digital currencies is undoubtedly helpful in guiding an investor toward the safest and soundest financial decisions. One of the major concepts that govern a large portion of the space, and which is especially relevant to smart contracts and smart property, is what is known as the ERC20 token standard.

"ERC20" refers to a scripting standard used within the Ethereum blockchain. This technical standard dictates a number of rules and actions that an Ethereum token or smart contract must follow and steps to be able to implement it. It is perhaps easiest to think of ERC20 as a set of basic guidelines and functions that any new token created in the Ethereum network must follow.

Prevalence and Importance of ERC20

ERC stands for "Ethereum request for comment," and "request for comment" is a similar concept to that devised by the Internet Engineering Task Force as a means of conveying essential technical notes and requirements to a group of developers and users.

The ERC20 standard has been a dominant pathway for the creation of new tokens in the cryptocurrency space for some time. It has been particularly popular with ICOs and crowdfunding companies. There have now been tens of thousands of distinct tokens that have been issued and are operating according to the ERC20 standard.

While many ERC20 smart contracts are used to execute various routines and functions in digital space, many of them have been used to create non-fungible tokens (NFTs) for the purpose of an initial coin offering (ICO). An ICO is essentially the cryptocurrency industry’s equivalent to an initial public offering (IPO) in the stock market. A crypto company looking to raise money to create a new cryptocurrency, decentralized app, or service launches an ICO as a way to raise funds from investors and early adopters.

A report by Yahoo! News suggests that ERC20 tokens almost single-handedly dominated the ICO bull market back in 2017, and that many successful cryptocurrencies are founded according to the ERC20 protocol. EOS, for example, remains a popular ERC20-based token that raised more than $185 million in its five-day ICO launch. Bancor (BNT) is another, having earned $153 million in crowdfunds during its ERC20 token sale. Multiple other ERC20-compliant tokens have raised in the several millions of dollars each in ICOs.

History of ERC20

ERC20 was created by Ethereum developers on behalf of the broader Ethereum community in 2015 and was officially recognized by September 2017. To create a standard of this type for Ethereum, a developer or group of developers must submit what is known as an Ethereum Improvement Proposal (EIP) which describes the new functionality along with its specific protocols and standards. A committee then reviews, approves, amends, and finalizes that EIP—at that point, it becomes an ERC.

Smart contracts and other features within Ethereum are then obligated to conform to one of the approved standards. While ERC20 is perhaps the most important and best known of all of these ERC standards, it is not the only one in existence.

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