What is ERC-20? Why is the ERC-20 standard used?

The set of rules and standards to develop and distribute tokens on the Ethereum blockchain is called ERC-20. The number at the end of the term ERC, which stands for “Ethereum Request for Comments”, determines the type of the standard.

Developed by Vitalik Buterin and Fabian Vogelsteller in 2015, ERC-20 forms the framework for tokens developed and distributed on the Ethereum network. Since every developer acts according to these rules, the interaction between the decentralized application (DApp) and smart contracts takes place in a healthy manner.

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Those who develop tokens on the Ethereum blockchain network save time and reduce their workload by applying specified standards instead of building from scratch. Instead of writing everything from scratch, the developer can build his own project on the basic code structures that have long been used in the ecosystem.

Thanks to the ERC-20 token standard, applications that run directly on many software and hardware wallets currently in use can be developed. Likewise, it will be easier to integrate with crypto money exchanges.

ERC-20 token standard

While independent cryptocurrencies such as Bitcoin (BTC), Cardano (ADA), Polkadot (DOT) have their own blockchain networks, tokens that adopt the ERC-20 standard do not have their own chains; they always run on the Ethereum blockchain network.

Transfer transactions of ERC-20 tokens are not kept with the accounting book logic. These tokens pass in smart contracts running on the Ethereum blockchain network. In other words, when users want to send their ERC-20 standard tokens to another user, the line of code containing this transaction request is added to the other transactions in the smart contract.

ERC-20 token – ETH relationship

In transactions of tokens that adopt the ERC-20 standard, it is always necessary to keep some Ether (ETH). Since these tokens operate on the Ethereum blockchain network, the Gas fee for each transfer transaction is paid in Ether.

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As a reminder, while ETH cryptocurrency can be mined, ERC-20 tokens are not produced this way. They are printed in a certain number of times (mint) and released to the market, in accordance with the plan in the roadmap determined at the beginning of the project.

Pros of the ERC-20 standard

In the past, each enterprise or decentralized application operated on its own standards. This made the integration between software difficult. With ERC-20, projects started to work on a certain standard and every token application that adopted this standard began to interact with each other. ERC-20 tokens, which can be adapted to almost any type of project, offer more developer support, as they are often preferred in the ecosystem.

Cons of the ERC-20 standard

Scalability, which is a common problem of the Ethereum blockchain network, is also a major hurdle for ERC-20 tokens. Congestion occurs in the network due to decentralized finance (DeFi) protocols and new generation projects such as unique tokens (non-fungible tokens, NFT) using this standard. This congestion causes increased transaction fees and delays.

As in every popular area, the ERC-20 standard is becoming a target of malicious people as it is used more and more every day. Strong developer support and easy token generation makes it possible for malicious people to easily uncover harmful projects.

DISCLAIMER: The statements contained here are not investment advice. Never trade without researching the markets thoroughly and without comments from different circles. Read the comments of the investors you trust and consult their opinions. Remember that every trading transaction involves risk. Make your own decision when taking any action. Cointelegraph cannot be considered directly or indirectly responsible for any damages or losses arising or allegedly arising from investment products or services.

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