A Beginner’s Guide to the concept of ERC-20 Tokens

With the passage of time, the ICOs or Initial Coin Offerings have become highly popular as a way to raise funds without being subjected to various restrictions of the fiat financing process. As a matter of fact, the ICOs have managed to raise a behemoth amount of $6.5 billion in 2017 and they have already raised $2 billion in this year as of March 2018.

Most of the ICOs depend on Etherum as a stable platform and utilize Etherum’s smart contacts feature. Actually, the shares in the ICO project are generally sold in the form of BTC or ETH and are awarded in the form of ERC-20 tokens.

Though we are adept at dealing with ERC-20 tokens, very few people actually understand the functioning and concept of ERC-20.

An overview of ERC-20:

So, what is ERC-20? Well, the term ERC actually stands for Etherum Request Comment and 20 is nothing but an arbitrary number that has been added to the term. Though the basic currency of Etherum is Ether or ETH, ERC-20 also behaves as coins in the system of Etherum.

To be fair, Etherum can be called the soul of ERC-20 since it depends completely on the Etherum blockchain as well as virtual machine to power its transactions and smart contracts. Thus, you must remember that these tokens are not completely independent as they reside within Etherum’s blockchain and fully depend on the computing abilities of Etherum.

What is the need for ERC-20 standard?

The ERC-20 standardisation has proven to be very useful since its inception. Before the standardisation, the Etherum tokens faced a plethora of issues regarding compatibility. New codes had to be written for each token during exchanges or creating wallets for each token differently since they had different smart contracts. Thus, it was becoming very problematic for the Etherum system to support the wide range of tokens.

As a solution to the problem, the industry devised the ERC-20 standard protocol which is now followed by every token.

There are basically six compulsory steps which each token follows and they have allowed the exchanges as well as the providers to formulate a single codebase that has the ability to interact with any ERC-20 smart contract.

Application of ERC-20:

In reality, the ERC-20 tokens have a multitude of applications. They can function as loyalty points, a certificate of asset ownership, project shares and even as simple cryptocurrencies. Plus, the ERC-20 tokens are efficient enough to carry out multiple roles at the same time.

How are ERC-20 tokens created?

The thing that you need to understand is that every single token is created by the smart contracts. As a matter of fact, the smart contracts manage the account and transaction of each token in order to handle the balance of each individual holding tokens.

It is possible to receive back the tokens of an ICO at a certain exchange rate if you send your details as well as crypto funds to its smart contact when the ICO is active.

The problems faced by ERC-20 tokens:

Though it has helped the entire ICO environment greatly, the ERC-20 protocol is always not enough to fulfill the purposes of a token. Honestly, the ERC-20 protocol serves as a standard oh for creating tokens based on Etherum blockchain. However, it does not value, usefulness or the functionality of the token.

One of the main disadvantages of the ERC-20 tokens is that it makes the deployment of tokens completely insignificant on a technical level. Hence, many teams are now capable of releasing an ICO which was not possible before.

It leads to the creation of a sheer number of similar tokens which further complicated the process of selection very hard. Plus, if an ICO has not allowed you to send tokens to its smart contact then your tokens can get lost. As a result, a new protocol called ERC-223 is in development to get rid of all the problems that ERC-20 faces.


With the creation of ERC-20 standard, the ICOs have witnessed drastic growth since it has made it easier to for the ICO projects to create new tokens without hassle. Plus, it has established a harmonic relationship between the ICOs, exchanges and the wallets. Though there are few vulnerabilities and problems regarding the ERC-20 standard, it will be made more efficient in the near future.