Beginner’s Guide to ERC-20 Tokens: Digital Assets Built on Ethereum

Pinterest LinkedIn Tumblr

If you’re reading this article, you’re probably doing your homework on the cryptocurrency space. Which also means that you’ve likely ran into the words “token” and “tokenization” more than a few times already during your research.

What you may not know is that the vast majority of this so-called tokenization is created though ERC-20 — otherwise known as the Ethereum token standard.

In layman’s terms, an ERC-20 token is simply a cryptocoin that’s built atop Ethereum – the smart contracts platform powered by ether, the current #2 cryptocurrency by market cap that’s flirting with unprecedented all-time price highs at press time.

ERC-20 Tokens

ERC-20 tokens can be built any time, anywhere, and for pretty much any reason you can possibly imagine, too. And the vast majority of the Initial Coin Offerings (ICOs) we see today use Ethereum’s token standard to create their tokens.

The point? ERC-20 tokens are surging in significance. So here’s a quick 101 guide to help you better understand how these tokens work.

Understanding ERC-20

Consider the ERC-20 standard as a set of rules: In order for a token to be created and transacted on the Ethereum network, it must follow these rules. There’s no wiggle room. Within these rules, though, is a great deal of freedom for developers. That means that the ERC-20 standard is very adaptable and can be used to make a limitless variety of tokens, each with varying functionalities.

Currently, the most popular use for ERC-20 tokens is ICOs. How about an example:

A new blockchain project will need funding, so they develop an ERC-20 token to crowdfund from investors. These tokens are released and investors have an opportunity to make gains while the original project keeps developing their own blockchain.

If you’ve heard of the OmiseGo (OMG) token, they’re taking exactly this approach so they can go ahead and get the ball rolling while they finish creating OMG’s own native blockchain.

This is just one major way in which an ERC-20 token can be used. And the nitty-gritty details are where things get really interesting. These tokens are held and distributed by ERC-20 smart contracts on the Ethereum blockchain.

In this sense, you can understand these smart contracts as if they were accountants — they track and define all the main data associated with a given token, e.g. the addresses of token owners, or the amount of tokens in existence.

Who Can Build ERC-20 Tokens?

Anyone – from teams focused on revolutionary projects to scammers who are looking to pull a Confido – crypto’s most recent exit scam on the space.

That’s because both Ethereum and its ERC-20 token standard are open-source, free to anyone to use. But that’s just regarding accessibility, in that anyone can access the tools and resources needed to create a token.

Having the requisite technical skills needed to actually program a token is a whole different question. To do this, you need to have a technical competency in Ethereum smart contracts and their associated programming language, Solidity.

To that end, very few people in the world can interact with and code on the ERC-20 standard right now simply to the extent that the crypto space is still young and Solidity is still relatively unknown.

But it’s certainly not impossible to learn Solidity, and the number of programmers comfortable with the language is already swelling right before our very eyes and will surely continue to swell in the years ahead.

Accordingly, perhaps one day in the not so distant future the many — and not the few — will be able to make their own ERC-20 tokens.

What They Do

In the first place, you have to understand Ethereum itself as engendering programmable money. In extension, since ERC-20 tokens are built atop Ethereum, they’re programmable tokens: their customization potential is limited only by their designers imaginations.

Their use-cases are significant and varied, indeed, as these tokens can facilitate:

  • Collateral deals
  • Securities dividends
  • Token-based voting systems
  • Native currencies for decentralized apps
  • Tokenized assets (e.g. gold, silver)
  • Staking platforms

And these are just a few possibilities. Thus there are currently more than 5,000 ERC-20 tokens in existence for good reason. Their applications are seemingly endless.

Coinbase Looks To Add ERC-20 Token Listings Soon

Coinbase — one of the world’s most popular Bitcoin and Ethereum exchanges — just announced the creation of Coinbase Custody, a new platform that will provide enterprise-grade security so as to entice institutional hedge fund investors to join the ongoing crypto boom.

And within this announcement, the exchange declared they’re looking to begin listing ERC-20 tokens in the near future:

“We plan to offer support for all major digital assets, including Bitcoin, Ethereum, Litecoin, ERC-20 tokens, and more.”

Yet just because Coinbase is interested in adding ERC-20 tokens to its marketplace doesn’t mean they’re willing to add any token just because it’s ERC-20.

Indeed, Coinbase recently released its new Digital Assets Framework, wherein the exchange listed out stringent guidelines for what kind of assets they’d list going forward.

Tokens that will be considered include ones that:

  • emphasize economic freedom
  • engender cutting-edge tech
  • comply with applicable laws
  • have sufficient market supply
  • have sufficient market demand

Look for new Ethereum-based altcoins to be hitting Coinbase in the coming weeks, then. Which could also mean that ERC-20 tokens and altcoins in general may soon be entering a bull phase boosted by institutional investors.

ERC-20 Tokens Wallets

You are able to store any ERC-20 tokens in MyEtherWallet, which is an easy and free way to generate an Ethereum wallet address. Once you have created your wallet and logged in to the site, you will see any tokens you have listed on the right hand column.

Send Ether

We would recommend that you purchase either a Trezor or a Ledger hardware wallet if you are storing a non-trivial amount of Ether or ERC-20 tokens, both of these wallets can store these tokens and interact with MyEtherWallet which adds an extra layer of protection as your private keys are never exposed to your computer.

Trezor vs Ledger

Some Interesting ERC-20 Tokens To Consider

Each of these projects bring something very different to the table. But together they comprise the most dominant and arguably the most interesting ERC-20 tokens in the top 100 cryptocurrencies by market capitalization as of today, November 24th, 2017.

If you’re interested in taking a deeper dive into Ethereum-based tokens, the aforementioned tokens would be a great place to start. Be sure to do your own homework; some will naturally appeal more to your personal sensibilities than others. But if you’re fascinated with Bitcoin and Ethereum and looking to get into other promising cryptos, these top ERC-20 projects may certainly pique your interest.

Watch Out, Scammers Can Make ERC-20 Tokens Too

Consider the recent case of Confido — a supposed escrow-related token. Investors bought up droves of CFD, only to see the project’s developers pull an exit scam, cashing out untold fortunes while everyone else’s CFD holdings became worthless over a matter of hours.

Where there’s money to made, scammers will always play. That’s why it’s really important to do your own homework and research ERC-20 projects before you do anything further. The entire crypto space is exciting right now because things are still early on, but this excitement can be a double-edged sword if it leads to rash decision.

The Confido team used the ERC-20 standard as a vessel for their scam. More will try the same, as well. Be ever vigilante.

ERC-20 Tokens Will Only Become More Dominant

As Ethereum grows in influence and promising projects like OmiseGo and Raiden continue to take off, ERC-20 tokens are only going to continue becoming more popular and more entrenched in the top 20 cryptocurrencies by market cap.

This is what tokenization is all about — and we’re all lucky enough to have first-row seats.

Important Note: There have been reports of scammers approaching companies via Telegram, LinkedIn and Other Social platforms purporting to represent Blockonomi and offer advertising offers. We will never approach anyone directly. Please always make contact with us via our contact page here.


William M. Peaster is a professional writer and editor who specializes in the Ethereum, Dai, and Bitcoin beats in the cryptoeconomy. He's appeared in Blockonomi, Binance Academy, Bitsonline, and more. He enjoys tracking smart contracts, DAOs, dApps, and the Lightning Network. He's learning Solidity, too! Contact him on Telegram at @wmpeaster

Beanstalk Gaming & NFTs
As Featured In
As Featured In