ERC-20 is a framework for creating new tokens on the Ethereum blockchain.
In Ethereum, an ERC is an "Ethereum-Request for Comments. These are technical documents that outline standards for programming on Ethereum. ERCs try to establish rules that make it easier for applications and contracts to communicate with each other.
ERC-20, written by Vitalik Buterin and Fabian Vogelsteller in 2015, is a relatively simple format for Ethereum-based tokens. By following the scheme, developers do not have to reinvent the wheel. Instead, they can build on a foundation that is already being used and working across the industry.
Once new ERC-20 tokens are created, they automatically work with services and software that support the ERC-20 standard, for example wallets. Thus, any ERC-20 token can be deposited to an Ethereum address that has implemented the contract. This saves developers a lot of time and users a lot of hassle because they do not have to create a specific wallet.
However, an ERC-20 token does differ from Ether (ETH), the Ethereum network's own cryptocurrency. For example, ERC-20 tokens are not held by accounts but exist only within a contract.
A contract is a standalone database that specifies the rules for the token, such as its name and total stock.
A major advantage of ERC-20 tokens is flexibility. The rules outlined do not limit development, so parties can implement additional features and set specific parameters to meet needs.
In addition to ERC-20, there are other standards for creating tokens on the Ethereum network. These standards are often enhancements to ERC-20 or focus on a specific purpose for a token. For example, Security tokens can use ERC-20, but the ERC-1404 standard was developed specifically for Security tokens.
Basically, anyone can start a project on Ethereum and launch their own ERC-20 token. Some different types of tokens include stablecoins, security tokens and utility tokens.
Stablecoins are tokens that have a value linked to that of a fiat currency. The largest stablecoin today is Tether (USDT), whose value is linked to that of the U.S. dollar. Tether also uses the ERC-20 token standard.
The value of a stablecoin typically holds a reserve of dollars or euros as a backup. A token is then issued for each unit stored. Thus, when 1 billion physical dollars are stored by Tether, 1 billion USDT can be issued. In Ethereum, this is relatively easy to implement. An issuer (in this case Tether) launches a contract with 1 billion tokens. The tokens are then distributed to users who can later redeem the tokens for a commensurate amount of real dollars.
The contract applicable to this scenario is technically relatively simple. However, launching a stablecoin does require a lot more work on external factors such as logistics and regulatory compliance.
Security tokens are similar to stablecoins. Security tokens are designed to represent full or partial ownership interests in assets and/or entities. While utility tokens have no restrictions on who can transmit or receive the token, security tokens are subject to many restrictions based on identity, jurisdiction and asset class.
Utility tokens are the most common type of tokens in existence, about 95% of all tokens are utility tokens. Unlike stablecoins and security tokens, they are not backed by anything. If asset-backed tokens are like shares in an airline, then utility tokens are like frequent flyer programs: they have a function, but they have no external value. These tokens simply offer users a product and/or service. Utility tokens are suitable for a wide range of usage scenarios and serve, for example, as in-game currency, "gas" for decentralized applications, loyalty points and more. There is always an upper limit to the maximum availability of tokens. This allows the value of tokens to increase due to supply and demand.
