For those of you who have been in the crypto world for a long time, you must be familiar with the term ERC20 token. However, beginners will still feel strange and wonder what the ERC20 token is. In short, ERC20 tokens are the most well-known standard tokens in the world of cryptocurrencies, especially the Ethereum blockchain.
So actually, what kind of token is the ERC20 token? What is the purpose and function of this token? To find out the answer to this question, you can listen to the full discussion in the article below. But before that, it’s good if you know in advance what an ERC20 token is.
Definition of ERC20 Tokens
The ERC20 token is a token standard on the Ethereum blockchain that functions to make it easier for its users to create fungible tokens. Meanwhile, ERC itself stands for Ethereum Request for Comment while the number 20 is used as an identity or identification of the proposal.
As well as serving as a standard, the ERC20 token is the token used in all smart contracts on the Ethereum blockchain. That way, implementing tokens can be easier. Meanwhile, this standard token has now reached almost all segments in the crypto ecosystem.
Therefore, it is not surprising that the ERC20 token is a token that is often seen as a blueprint for crypto assets that anyone can make. Even today, most of the existing crypto assets on the trading market are created by companies and organizations that utilize ERC20 tokens.
The Importance of Knowing the ERC20 Token Standard
Traders and investors can develop by having technical knowledge about blockchain or smart contracts. Even so, still the ERC20 token standard is the opening of a strategic path in creating a new token, so you can’t just ignore it.
When analyzing cryptocurrencies from a blockchain perspective, each new token struggles to interact properly. For this reason, Ethereum has set its own standard in every new token on the network so that it can comply with standard ERC rules or protocols.
From there, each new coin is required to submit comprehensive Ethereum Improvement Proposal information. Meanwhile, the parameters of the ERC20 token include name, decimal, symbol, and the total supply of tokens to be issued. As a result, anyone who complies with these rules can issue their own tokens.
Purpose and Functions of ERC20 Tokens
The main purpose of the existence of the ERC20 token is as an option for trading and sending Bitcoin which does require a gas fee. On the other hand, ERC20 tokens are tokens that are built on smart contracts so they have very diverse functions, including:
- Serves as a payment transaction and can be easily transferred. So, it can be said that the function of the ERC20 token is actually almost the same as other crypto assets.
- All history of transaction activities can be easily tracked even though the code of each token is quite identical and unique.
- You must have a supply of tokens that have passed the identification process. That way, the ecosystem can find out how many tokens are already in circulation.
In general, ERC20 tokens are tokens that can be sold, exchanged, bought and traded. In fact, you can also store this one token in a crypto wallet.
Pros of ERC20 Tokens
The ERC20 token is a well-known type of token. There are a number of reasons and factors that make this token attractive. Meanwhile, the advantages of the ERC20 token are:
2. Flexible in terms of customization
This flexibility, of course, also depends on the business logic and interaction of the users. This is because the ERC20 token is a token that is basically programmed with various features needed. For example, to refill gas fees, etc.
3. Standardization of tokens
Ethereum provides token specifications which include various rules regarding interaction between tokens to rules regarding purchasing tokens. With this universal standard, it will certainly be easier for users to transfer new tokens to crypto wallets and exchange them all at once.
4. Widely accepted
ERC20 tokens are tokens that can be easily recognized by most ERC20 wallets and exchanges. This is due to the nature of the protocol which is indeed universal so that it is compatible with any exchange. The functionality of the ERC20 token can also make trading platforms or applications better.
5. Removing fake tokens
Another function of the ERC20 token is to further assist in conducting audits because transactions are monitored and must follow existing agreements. Apart from that, this token can also help ensure that there are no duplicate tokens or counterfeit tokens in circulation.
The ERC20 token has a great opportunity to maintain its position as the most well-known and frequently used standard by developers. Even so, this token is not perfect and still has flaws. In fact, maybe one day a better standard will emerge than this token.
Cons of ERC20 Tokens
Apart from the advantages mentioned earlier, the ERC20 token is a token that also has weaknesses. Meanwhile, the weaknesses of this token include:
1. Expensive gas costs
ERC20 fees are very dependent on Ethereum in completing each transaction activity, where each activity or transaction requires a gas fee. When transaction activity is busy, the gas fee will automatically be more expensive.
2. Slow transaction
You need to know that when the network is congested, all transfer activities on ERC20 will be very slow. As a result, all transaction activities on the Ethereum blockchain are hampered.
3. Transactions cannot be changed
There is no way to get a refund when a user sends ERC20 tokens to the wrong address. Your token will remain trapped in the contract forever as it cannot be changed. This issue can also occur with tokens that have been stolen by hackers
4. Low entry point
One critic stated that ERC20 tokens are tokens that are easy enough for anyone to create without having a strong sense of purpose. This of course will make it easier for developers to exploit policies in the ICO (Initial Coin Offering) development process and counterfeit tokens.
5. Transferring bugs
Of course, you already know that there are two types of accounts in Ethereum. The first account is an EOA or externally controlled account with a private key. Meanwhile, the second account is called a contract account where this account is generally held by the contract code.
Tokens sent from fellow EOA accounts to other accounts for transfers will not cause any problems. However, this is different from a contract account. When you make a transfer, it will generate bugs that can cause large nominal losses.
The ERC20 token is a token intended to address standard technical issues. Unfortunately, there are some people who use this token to do hacking. For this reason, as an investor, you must also consider the advantages and disadvantages when assessing an ERC20 project so that it remains safe and does not lose.