ERC 20, also known as the ERC 20 token standard, is a set of rules launched in 2015 which tokens launched on top of the Ethereum protocol must follow to operate within the Ethereum network and ecosystem. Through the usage of the ERC 20 token standard, Ethereum-based blockchain projects can issue unique and independent tokens that are able to function as proper cryptocurrencies in the global cryptocurrency market.
Since early 2016, the concept of initial coin offering (ICO) has been popularized by companies and blockchain projects within the cryptocurrency sector. Consequently, over time, the premature ICO market evolved into an established industry, wherein projects are able to raise hundreds of millions of dollars within a relatively short period of time by distributing ERC 20 tokens to an open ecosystem and market of investors.
Venture capital firms and billionaire investors have started to back blockchain projects based on the ERC 20 token standard, due to the compatibility between the projects and the main Ethereum blockchain network. The rapid growth rate of the ICO market and industry contributed to the increasing popularity of Ethereum as the blockchain network for decentralized applications. Since 2016, the market valuation of Ethereum rose from $100 million to $30 billion.
Developers of ERC 20 token contracts are given the flexibility to alter many of aspects of tokens. The name, monetary supply, symbol, and decimals. News publications refer to ERC 20 contracts and tokens based on the individual symbol and name established by the respective developers and companies.
The Wall Street Journal, for instance, refers to Tezos, the largest ICO to date that raised $232 million, simply as Tezos, not as the Tezos token or its symbol, TEZ. But, the company itself, the Tezos Foundation, refers to its token as tezzies, rather than TEZ or Tezos, because of the flexibility that is granted to the developers by the ERC 20 token standard.
Developers of ERC 20 token contracts can also alter preset functions and provide new definitions for most of the options. For example, as Ethereum developer Jim McDonald at Orinoco Payments explained, developers often define small aspects of the token’s monetary supply to address the token’s use cases and applicability.
Unlike the majority of cryptocurrencies like bitcoin, the developers of LicenseToken defined the “decimals contract” to 0, because users of LicenseToken cannot hold a fraction of the token, given that each token represents software license assignment.
McDonald noted, “the first example uses LicenseToken, a token contract that represents software license assignment for a given software product; users holding a LicenseToken have access to the software. It makes no sense for a user to hold a fraction of a license, so the token creator sets decimals to 0.”
As such, the definition and terminology of different aspects of ERC 20 tokens may vary depending on each project.
The ERC 20 token standard provides a high level of flexibility for the issuers of ERC 20 tokens. Still, there exists a certain standard or set of functions which ERC 20 tokens must satisfy in order to be compatible with the main Ethereum blockchain and most importantly, with other tokens within the Ethereum ecosystem.
In essence, the standard can be divided into four main criteria:
This criteria ensures that every ERC 20 token launched on top of the Ethereum protocol is compatible with the network, allowing the project behind the token to operate seamlessly as a decentralized application within the Ethereum network.
The applicability of ERC 20 tokens with the criteria and the standard is absolutely necessary because it allows existing Ethereum service providers to provide the same infrastructure for ERC 20 tokens. For example, an Ethereum wallet platform such as MyEtherWallet, is able to provide wallet service to any ERC 20 tokens like Tezos and LicenseToken, because they are already compatible with the main Ethereum blockchain and other tokens within the Ethereum ecosystem.
Basic functions of an ERC 20 contracts allow users to execute two crucial activities: transferring an ERC 20 token from one account or wallet to another and discovering the balances of their ERC 20 token accounts.
Since ERC 20 tokens are launched by independent blockchain projects build on top of the Ethereum protocol, each ERC 20 token serves a specific purpose. In most cases, an ERC 20 token represents the entitlement of the token holder to a certain service or a product developed by the ERC 20 token issuers and developers. In some cases, ERC 20 tokens operate as the native currency on a network that is not solely dependent on the ERC 20 token.
For instance, TenX, the multi-cryptocurrency wallet which provides Visa debit card service to cryptocurrency users, use the PAY token as the native currency of the TenX network for token holders to purchase the TenX Visa debit card or use the TenX cryptocurrency wallet for other cryptocurrencies such as bitcoin, Ethereum, Bitcoin Cash, Ripple, and Litecoin.
To allow ERC 20 token holders to freely and transparently transfer tokens from one account to another, the ERC 20 token standard triggers the “transfer()” function, one of the two basic functions, to enable ERC 20 token-based applications.
Although the ERC 20 token standard was finalized and formalized by the end of September 2017, it still has underlying issues in terms of scaling and efficiency in executing contracts.
The open source development community of Ethereum is currently working on the ERC 223 token standard, which is set to be first major update to the ERC 20 token since its launch in 2015. The official ERC 223 token standard Ethereum Improvement Proposal (EIP) revealed that it will solve the following problems of the current version of the ERC 20 token standard:
The successor or the ERC 20 token standard is expected to provide a more efficient and secure environment for Ethereum-based blockchain projects to operate in.
Within a relatively short period of two years, the ICO market evolved into a mature and well established industry, with third party service providers, consultancies, and blockchain projects raising billions of dollars in Ether annually.
In quarter 2 of 2017, ICOs raised a record $800 million within three months, surpassing the amount of capital raised by venture capital by over $560 million. By the end of 2017, the ICO market is expected to bring in $3 billion, an amount that is substantially and exponentially higher than the capital raised by the blockchain sector and bitcoin industry from venture capital firms, angel investors, and conglomerates in the finance industry.
ICOs raised $800 million from April to July, but in September, merely 37 ICOs raised nearly $850 million, surpassing the amount raised by hundreds of ICOs in a span of three months. In spite of the nationwide ban of ICOs imposed by China and South Korea, two major regions that account for a large share of the global cryptocurrency exchange market, ICOs are continuing to raise large sums of capital from individual investors within the cryptocurrency sector.
Major benefits of using the ERC 20 token standard for blockchain projects are the ability to leverage their applications onto the main Ethereum blockchain that possesses significant hashing power to secure the network, active open-source development community, and also the support from the conventional finance and technology sectors.
Through the Enterprise Ethereum Alliance (EEA), an Ethereum blockchain consortium established by the Ethereum Foundation, some of the world’s largest conglomerates including Intel, JPMorgan, Microsoft, BBVA, Accenture, Credit Suisse, BNY Mellon, ING, UBS, Thomson Reuters, CME Group, and Santander are actively developing enterprise-grade applications and platforms with the Ethereum blockchain.
The Ethereum blockchain network, market, and industry are growing at an exponential rate and as a result, utilizing the ERC 20 token standard to launch decentralized applications compatible with Ethereum naturally brings significant exposure to blockchain projects from both the cryptocurrency sector. the finance and technology industries.
A notable example of an ERC 20 success story is Omise. For many years, Omise has led an innovative fintech movement in Thailand, introducing China’s most widely utilized fintech network Alipay to Thai conglomerates. Still, it continued to struggle appealing to the Thai and Japanese finance industries, until it pursued the ERC 20 token standard, built a platform that is compatible with the Ethereum blockchain, and introduced the newly built Ethereum-based OmiseGo blockchain platform to clients.
In a matter of months, OmiseGo secured a contract with McDonald’s Thailand and engaged negotiations with Google, as it evolved into a $700 million blockchain network.
Given the rapid growth rate of the ICO, there currently are thousands of projects that use the ERC 20 token standard to operate decentralized applications on top of the Ethereum protocol.
Over the past 12 months, companies in the conventional technology industry have started to rely on the ERC 20 token standard to conduct ICOs and release token compatible with the Ethereum network. Most notably, Kik, a popular messaging app used by 300 million active users, raised $100 million in an ICO and released an ERC 20 token called Kin. 10,026 individuals from 117 countries participated with 168,732 Ether in a campaign that was backed by Pantera, Blockchain Capital, and Polychain Capital.
In the upcoming months, the development team behind Kik and the Kin token are expected to focus on creating an interoperable platform that will allow users to exchange messages and services across blockchain networks through the Ethereum blockchain.
The largest project using the ERC 20 token standard to date is Filecoin, which has raised more than $257 million in its ICO campaign. The distribution of Filecoin ERC 20 tokens was unique in the sense that it was only made available to accredited investors.
The ERC 20 token standard has consistently been praised by some of the most influential investors in the technology industry including billionaire angel investor Tim Draper. But, several developers and experts such as Ethereum co-founder Vitalik Buterin criticized the centralization issue of ICOs, because the development of ERC 20 tokens and projects surrounding the tokens are conducted by a central entity or a closed group of developers.
Buterin explained, “ICOs are a powerful tool and one that in many cases is an important aid in funding protocol development. In general, open-source protocols are very hard to monetize, and so the fact that in this particular area, we actually do have a way to monetize protocol development is something that we should be thankful for. However, they also have their flaws, and I think many of these flaws arise from the fact that even though the ICOs are happening on a decentralized platform, the ICOs themselves are hardly centralized; they inherently involve many people trusting a single development team with potentially over $200 million of funding.”
The criticism and concerns of experts like Buterin are demonstrated in the recent legal conflict between the founders of Tezos. The threat of lawsuit and an ongoing conflict amongst the three founders of Tezos has delayed the launch of the TEZ token and the Tezos network, failing to deliver on the promise to the investors of Tezos.
The centralization problem of ICOs is not a systemic issue and therefore, cannot be resolved through network updates or improvements. As the ICO industry matures, it will inevitably become more difficult for projects to appeal to the general public and receive large investments.
Ethereum’s infrastructure is a key component that directly impacts the success of ICOs and decentralized applications launched on top of the Ethereum protocol. Blockchain projects using the ERC 20 token standard is leveraging the security and immutability of the main Ethereum blockchain network to develop independent sub-blockchain networks with unique monetary supplies, policies, structures, and philosophies.
Still, the ERC 20 token standard-based projects are based on the Ethereum network and as a result, it relies on Ethereum for scalability as well, amongst other important elements. As of current, there is a shortage of developers working on the main Ethereum protocol and scaling solutions that are necessary for Ethereum to improve in the long-term.
As former Goldman Sachs trader and Coinbase co-founder Fred Ehrsam noted in a research paper, Ethereum is required to improve by a factor of 100 to serve or power decentralized applications with 1 to 10 million users. Ehrsam explained, “Large apps can’t run solely on chain and likely never will. They need off-chain scaling solutions. While it’s tricky to make accurate estimates when combining scaling improvements, it’s conceivable we could see a 100x improvement by the end of 2018, which would allow a 1–10 million user app.”
For both on-chain and off-chain scaling solutions to be implemented onto the main Ethereum blockchain and create an efficient environment for decentralized applications, Ethereum co-founder Buterin revealed that it will take at least two to five years. In terms of scalability, it is expected to take around three years for the Ethereum network to provide a flexible platform for ERC 20 token standard-based projects.
Since mid 2017, government agencies, central banks, and authorities began to impose strict regulations on the distribution of ERC 20 tokens to commercial markets and the ICO industry. In September 2017, the Chinese government became the first to impose a nationwide ban on ICOs, describing ICO as an illegal method of fundraising. A Chinese venture capital partner stated the Chinese government pursued the nationwide ICO ban to prevent the ICO market extending from the cryptocurrency market to mass markets in the country.
The partner, whose identity remains confidential due to the uncertain nature of ICOs and cryptocurrencies in China, explained, “One of the reasons regulators stepped in was that the ICO fever extended beyond the traditional crypto community. The timing was an attempt to preempt this before it goes into a much broader mass market in China.”
Shortly thereafter, the South Korean government also imposed a nationwide ban on domestic ICOs, stating that the government, central bank, and financial regulators cannot protect South Korean investors from the ICO market and the risk involved in investing in a new unregulated asset class.
Consequently, blockchain projects and ERC 20 token-issuing companies started to relocate to regions with flexible regulatory frameworks, such as Switzerland and Hong Kong.
