The phrase ERC20 Token is all over the media these days thanks to the Initial Cryptocurrency Offering (ICO) craze. Unfortunately, it is rarely explained, which can make things very confusing for investors.
Every cryptocurrency investor should know what an ERC20 Token is because they are the basis of ICOs and much of the growth in altcoin prices. It is the growing number of ERC20 ICOs entering the market that has been driving up the price of Ethereum (ETH).
The easiest way to think of an ERC20 Token is that it is a cryptocurrency designed to be compatible with Ethereum. Ethereum is both a cryptocurrency and a blockchain operating system that a wide variety of applications can function in. An ERC20 Token is simply one of the applications that can operate in Ethereum.
ERC20 Means Ethereum Compatible
This means that the Token will work with solutions and applications built in Ethereum. That includes Ethereum blockchain platforms and marketplaces for equities and commodities, smart contracts, and operating systems for devices like robots.
It also means Tokens can be exchanged directly for Ethereum (ETH) or Ether cryptocurrency. That means it can be sold and traded on cryptocurrency exchanges.
This is why some tokens built on the WAVES platform, such as Prime-Ex’s PEX have been converted into ERC20 in recent months. It is also why Blockchain.aero, which held an ICO for a WAVES Token last year, is planning a second ICO for an ERC20 token in April.
The greatest advantage to Ethereum is that it can be easily converted into Bitcoin (BTC) and fiat currencies. That means people can spend money generated in Ethereum in the real world. Most altcoins still cannot be spent outside of a few platforms.
What Makes a Token ERC20?
Technically a token is an ERC20 if it meets a specific protocol standard called ERC20 – hence the name ERC20 Token. The protocol is designed to make the token highly compatible with Ethereum.
“Similar to how the HTTP protocol defined the internet, ERC20 is a protocol that defines a set of commands that a token should implement,” James Seibel wrote at Medium. “ERC20 is not a technology, software, or piece of code. It is a technical specification. If a token implements the spec, it is an ERC20 token.”
“The ERC20 protocol standard contains basic functions that any useful token should implement to enable trading,” Seibel added. “These include transferring tokens, inquiring the balance of tokens at a certain address, and the total supply of tokens.”
All an investor really needs to know is that the Token is ERC20. Unfortunately, that determination can be hard to make.
An ERC20 token uses the Ethereum blockchain to process its operations. All transactions happen through the Ethereum network. An ERC20 token does NOT have it’s own blockchain; it runs on the Ethereum blockhain. Most dApps are ERC20 tokens.
How to tell if a Token is ERC20
Determining if a token is ERC20 is often far harder than it should because of the way many ICOs are presented to the public.
Ideally, those behind the ICO should say if their token is ERC20 at their website, Telegram, Facebook page, and other places. Sadly, a lot of companies fail to do that and make investors guess.
There are some ways to tell what kind of token is being issued. The first is to read all the material the people behind the ICO put out. This material is often inaccurate because it is often written by freelancers that know little or nothing about cryptocurrency. To add to the confusion, some of it is very badly written.
Some ICO webpages will not even tell you what the token is called. Others will have the wrong dates and other misinformation. Generally, you can figure out what is going by simply reading the page carefully. Be prepared to read the material over several times because the important details are often buried under mountains of hype and technobabble.
If you see the words Ethereum, or Ether, or the acronym ETH, there is a good chance you are dealing with an ERC20. Beyond that you can always check out the media coverage of the ICO. Google and other searches should turn up news articles, press releases, and other media coverage that may reveal important details left out from the ICO page.
Another method to try is to go to Coin Market Cap. If the token is already on the market it should be traded there. Simply type the Token name into that website’s search feature. Coin Market Cap provides the Ethereum (ETH) value for ERC20 tokens, if no ETH value appears it is not an ERC20.
Finally, you can just ask the folks behind the ICO. Simply send an email or reach out them on Telegram or Facebook and ask “is this an ERC20 Token?” Since most ICO issuers are anxious to attract investors they will probably respond.
What are the Advantages of ER20 Tokens?
The organization behind it; the Ethereum Foundation, even offers what amounts to a build your own cryptocurrency kit at its website. The website offers visitors the chance to “create a tradeable digital token that can be used as a currency, a representation of an asset, a virtual share, a proof of membership or anything at all.”
Developers have the option to create a tradeable token with a fixed solution, build a central bank that can issue money, and even offer a puzzle-based cryptocurrency. Cryptocurrencies are only one example of the many decentralized applications (DApps) that can be created with Ethereum. Others include the extremely popular smart contracts, digital robots (digibots), operating systems for machinery, and even artificial intelligence (AI).
This flexibility has attracted many of the largest corporations in the world to Ethereum. Two large consortiums of corporations, and other organizations have been formed to use such apps. They are the Ethereum Enterprise Alliance and the Hyperledger Project.
Members of these groups include: British Petroleum (BP), Credit Suisse, ING, Intel, JPMorgan Chase, Hewlett Packard, Microsoft, MasterCard, Samsung, Bank of New York-Mellon, Banco Santander, American Express, Accenture, Airbus, IBM, Cisco Systems, Daimler (Mercedes Benz), Lilly, Wells Fargo, UCLA, and Thomson Reuters to name a few.
Why ERC20 Tokens are so popular
Finally, ERC20 Tokens can be easily converted into Ether (ETH) which is the world’s second most popular cryptocurrency after Bitcoin (BTC). On February 18, 2018, Ethereum had a market cap of $92.295 billion, more than double Ripple’s (XRP) market capitalization of $44.517 billion on the same day.
Many investors prefer ERC20 Tokens because they know that they can be converted into Ethereum (ETH) which is worth something. Persons seeking value in altcoins should search for ERC20 Tokens.