You probably know about Ethereum, the second strongest cryptocurrency after Bitcoin. What many people do not realize is that Ethereum is actually a platform. The currency that powers the platform is called Ether (ETH).
As a platform, Ethereum allows other cryptocurrencies to run on its platform. This is achieved by the ERC20 Standard. Before the standard, every new token reinvented the wheel by having own functions of working and transferring the tokens. Currency exchange was very complex between the coins. ERC20 standardizes everything on a single frequency.
In effect, any cryptocurrency that is ERC20 compliant can use the Ethereum network, be hosted by its addresses and sent through Ethereum transactions.
The acronym stands for Ethereum Request for Comments 20. The number 20 represents the unique identification of the proposal.
ERC20 is not a new form of technology or a piece of code. It is just a technical specification to standardize tokens. The ERC20 defined a list of rules that all tokens and coins running on the Ethereum must follow. This allows developers of cryptocurrency that will utilize the Ethereum network to know and design how the tokens will function on the platform.
This releases the developers of Ethereum to redesign the environment for each knew coin launched on its network.
ERC20 defines six functions and two events that need to be followed:
- Transfer of tokens by owner.
- Transfer of tokens on owner’s behalf.
- Name of token.
- Total Supply.
- Account balance.
Having all the tokens and coin developers on the same frequency, it helps exchanges to quickly add new tokens and no matter how many different tokens are out there, as long as they are ERC20 compliant, the system can support trading of two tokens directly.
This reduces complexity, risk and enhances the liquidity of tokens.
Another thing to know is that ERC20 is technically a proposal as of yet and not approved as a standard, but the beauty it creates has appealed to developers and every new coin is now declaring itself as ERC20 compliant. ERC20 is now at a stage that it has become a crucial aspect of Ethereum platform.