Ethereum’s ERC-20 Tokens Explained, Simply

There’s a lot of acronyms in the cryptocurrency space. This intimidates newcomers. The fact that acronyms in this space are sometimes even combinations of letters and numbers confounds that level of intimidation. But there’s nothing fancy about it. Long story short, an ERC-20 token is just a cryptocurrency that’s built on the Ethereum platform. Don’t worry, I’ll explain what that means.

Review this image again after you read this article, and it’ll make much more sense to you if it doesn’t already.

Many people know Ethereum because it’s a cryptocurrency that you can trade on Coinbase. One unique feature that sets itself apart from Bitcoin (at least, as of now) is that it includes the ability to program smart contracts. Smart contract is just marketing-speak for code that you can run on a blockchain. In essence, you can write code into the Ethereum blockchain. So instead of just storing historical transactions of money, you can also store logic. And combinations of logic create the programs and apps we know and love.

Cryptokitties has arguably been the most popular Dapp on Ethereum. You just breed and trade them.

But, staying true to lingo, we can’t just call them apps. After all, they’re not like normal apps — these apps that are written into the Ethereum blockchain are decentralized by nature because Ethereum itself is decentralized. So instead, we call them decentralized apps, or Dapps for short (some people say d-apps, others just pronounce it phonetically as dapps).

With a majority of these Dapps, creators want to make their own coins (generically referred to as tokens), which means users must use their specific coin when interacting with Dapps — whether that’s a good thing or bad thing is up for debate, but I’m not here to answer it in this introductory article.

ERC-20 Is a Standard Describing Ethereum Tokens

People quickly started realizing that creating your own coin required certain standards. It’s like making a credit card. Each card has a black strip on the back to swipe, and most modern cards have a chip on the front. The expiration date, security code, and owner’s name are present on the card in positions that are so standard that smartphone cameras can quickly recognize them by scanning them.

But imagine if someone decided to create a credit card that had no information but a QR code. Sure, it sounds sleek and minimalist, but no stores would accept it because it doesn’t conform to standard credit-card design rules and just looks plain shady.

ERC-20 is just that standard applied to the creation of smart-contract tokens on the Ethereum blockchain. There’s a list of rules that the tokens must conform to but I won’t get into the details in this explanation. If you’d like to explore more into the details of ERC-20 token standards, take a look at the Wikipedia article.

Storing and Trading ERC-20 Tokens

Because ERC-20 tokens are built on the Ethereum blockchain, they can be exchanged on it as well. You can use your Ethereum wallet to store them, and you can send to other Ethereum wallets. One thing you should be cautious of, though, is to never use exchange addresses.

Without getting into the intricate details of why not, just understand that exchanges generate unique addresses for each coin. In other words, your Ethereum address and your ERC-20 token addresses will be different. If you try to send an ERC-20 token to your exchange’s Ethereum address, the exchange will not recognize it and you will not be credited the ERC-20 tokens. On your own wallet, though, you’re able to hold any Ethereum-based currencies that you want. You might’ve noticed I used both the terms wallet and address. If you think they’re the same, then you’re wrong. Learn more about them in my article Crypto Wallet Vs. Address.

Why Build Dapps On Ethereum?

Well, that’s a good question. The simple answer is, you don’t have to. Since Ethereum launched with smart contracts in 2015, many other blockchains have emerged with their own take on smart-contract functionality. For example, NEO is a blockchain that uses traditional programming languages like Java for scripting contracts, while Ethereum has its own language, Solidity. But if what I just said doesn’t make sense to you, don’t worry — just know that there are other blockchains that can host smart contracts other than Ethereum.

Ethereum has first-mover advantage, though, and continues to have the largest market cap of any smart-contracts-enabled blockchain. Boil it down, and what that essentially means is that there’s more support in the industry for Ethereum than for other competitors. If you’re trying to build a Dapp and company around it, you’d probably want to go for the safest option — the one that might still be around in a few years.

Of course, this isn’t to say that the competitors won’t be around. I certainly believe in and have investments in many of them, especially because Ethereum does come with its own set of drawbacks. But with thousands of Dapps built and tons more money already invested into Ethereum, it is still far ahead of competitors in terms of adoption.

Whenever someone says “Ethereum Token” or “ERC-20 Token” or something else along those lines, I hope you’re now not immediately intimidated and spinning the loading screen in your brain trying to decipher what your just heard. It’s just a cryptocurrency that’s built on the Ethereum blockchain.

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