Even those not enthusiastic about cryptocurrencies will probably have heard at least three words emanating from the digital realm – “Bitcoin,” “Ethereum” and “ICO”. While Bitcoin is the archetype and current celebrity project, having seen its currency rocket up the charts over the last two years, Ethereum is hard at work in the background, slowly rising in investment value. Its value as an ICO token, however, has never been contested by Bitcoin nor, for that matter, any other project to date.
Generating company growth capital through crowdfunding was once reserved for businesses that had attained a certain size. Now, any legitimate project can take a concept to market in order to generate the cash needed for development. In the world of cryptocurrency, this is done through an initial coin offering (ICO) where interested parties buy tokens that act as shares in the company. But why do most ICOs employ Ethereum’s ERC20 protocol in their token issue?
What is the ERC20 token standard? Ethereum Request for Comments (ERC) is a protocol that enables improvement and interaction on the Ethereum network. It is a way to provide the collection of definitive commands any token adheres to when interacting with the Ethereum network.
In practice, it has become a cloning mechanism to some extent, meaning that any business can roll out their own decentralized ideas with their own token issue, all on the back of the Ethereum blockchain. As long as the token standard is compatible with Ethereum (i.e. conforms to the ERC20 build), a company can step into a turnkey setup.
Professionally raising funds and managing ownership and market dynamics is capably sorted as a given by employing the existing ERC20 protocol. ERC20 isn’t a hardware device, an app nor even a snippet of code. It’s a technical specification that any new Ethereum platform token implements. In other words, ERC20 is a set of rules that applies to any token on Ethereum, and very importantly, allows every such token to interact with one another.
In the simplest terms, ERC20 refers to common rules that all Ethereum tokens must follow. It gives anyone launching an ICO an existing, liquid and effective method of predicting how their token will interact with other tokens, wallets and even exchanges.
In a nutshell, Ethereum’s architecture for global business’ purposes is flexible, malleable and eliminates the need for sidechains, where there is a “fiddle” to utilize the Ethereum blockchain with a wholly distinct token. By employing ERC20, businesses enjoy the equivalent of walking into fully-furnished and equipped premises. And it’s the intuitive openness of Ethereum’s architecture that has made ERC20 the default token for ICOs.
As an analogy, it’s akin to choosing USD over, for example, the West African CFA franc. Any business hoping for a global reach would avoid the CFA franc as its chosen currency and go with USD. It’s the same in the ICO realm – projects launching on the back of ERC20 simply have massive scope and malleability, with an already-extant blockchain that is rolling out seamless use cases daily. ERC20 is a luxury sedan, appealing to almost anyone. Bitcoin might be a Ferrari in comparison, but it costs to drive it, forming a barrier to entry that no self-respecting CFO would condone.
Ethereum’s ERC20 token standard also encapsulates the needed modalities for a token’s subsequent behavior, post-ICO. By employing ERC20, a company knows that their token trading on exchanges, token transfers, token analysis of total supply and even balance inquiries on particular users are all in place.
Before the firm establishment of ERC20, a myriad of developers would build off the Ethereum network, yet employ highly individualized protocols that made it difficult to present seamless interactivity and ultimately good UX.
As opposed to countless tokens all with their own rules trying to coexist seamlessly on the Ethereum chain, ERC20 emerged as a logical improvement that gave all of the benefits yet took nothing of a company’s individuality. Users couldn’t draft contracts between tokens, and the speedy and savvy promise of the industry seemed dimmed without a token standard.
The ERC20 protocol has enabled the seamless deployment of smart contracts. These are a basic, essential component of blockchain build. In a sentence, “smart contracts” mean that transactions are concluded by trading on inbuilt and latent intelligence that will only open, sign and seal a contract if it is recording a genuine transaction. By employing ERC20, it means that any ICO’s smart contracts can interact with any other network in the world, by employing the same protocol.
Some practical implications for end users are that global token exchange involving many different tokens has not just become eminently possible, but standard expectation. Moreover, wallets that recognize ERC20 can support any and all ERC20-compliant tokens, no matter the diversity of businesses and other projects that issue them. Any business issuing a new token on the back of ERC20 is not only guaranteed the widest possible audience, it also trades on the security and secure behavior of its token, trading on embedded ERC20 smart contracts that enable uptake and deployment of their token.