What are Ethereum's ERC20 Tokens and how do they work?
To understand the concept of token of Ethereum , one must begin by first understanding some fundamental concepts.
Ethereum is a decentralized platform on which smart contracts are executed . So, the above definition makes it clear that Ethereum is not a digital coin (the native cryptonet of Ethereum is called ether). In other words, Ethereum is a piece of code that could automatically transfer ownership of the home to the buyer and funds to the seller after reaching an agreement, without the need for a third party.
For its part, Token is generally defined as a thing that serves as a representation of something else. In blockchain , a token often represents a financial value or a digital asset , similar to how casino chips symbolize or represent fiduciary money just to be able to use them in different machines and games of chance.
Having these clear concepts, it turns out that Ethereum tokens are simply digital assets that are built on top of the Ethereum block chain . Developers benefit from Ethereum's existing infrastructure to build their applications, unlike developers who choose to build a brand new block chain. At the same time, tokens strengthen the Ethereum ecosystem by boosting the demand for ethereum's native ether, which is needed to drive the smart contracts on which tokens are issued.
Ethereum tokens can represent anything from a physical object like gold (Digix) to a native currency used to pay transaction fees (Golem). In the future, tokens can even be used to represent financial instruments such as stocks and bonds. The properties and functions of each token are completely subject to the use that is established for them: they can be used as payment to access a network or for decentralized governance over an organization, among many other possibilities.
Tokens are often issued to the public through a general or open sale called the Initial Currency Offer (ICO). The creators of the ICO will issue tokens to others in exchange for ether or bitcoin and also of other criptomonedas. They may have a fixed supply, a constant rate of inflation, or even an offer determined by a sophisticated monetary policy. There have been many ICOs recently and in a short time they have completely changed the way projects are funded. There is no mandatory distribution requirement, although if you are building a decentralized application ideally you would want the tokens to be owned by as many people as possible.
TOKEN ERC20
ERC20 is a standard interface that guarantees interoperability between tokens. The ERC20 tokens are simply a subset of ethereum tokens that conform to certain parameters. In order to fully comply with ERC20 standards , the developer must incorporate a specific set of functions into his / her smart contract which, at a high level, will allow him / her to perform the following actions:
Obtain the total supply of tokens
Get the balance of the account
Transfer the token
Approve to spend the token
ERC20 enables seamless interaction with other intelligent contracts and decentralized applications in the Ethereum block chain. Tokens which with some (but not all) of the standard functions are considered partially compatible with ERC20 and could still interact depending on what functions are missing.
In general, an ERC20 token is not unlike any other token , but also fits the standard token of Ethereum.
WHY DOES ETHEREUM NEED A STANDARD TOKEN?
Interoperability. If all tokens created in the Ethereum network use the same standard, those tokens will be easily interchangeable and will be able to work immediately with Dapps using the ERC20 standard .
What makes a "standardized" token is that it uses a certain set of functions. If developers know in advance how a token will work, they can easily integrate it into their projects with less fear of making mistakes. If several tokens behave similarly, calling the same functions in the same way, then a Dapp can interact more easily with different sub-currencies.
Like bitcoin and ether, ERC20 tokens can also be tracked in the blockchain, which is the general ledger of all transactions that have occurred. This is because Ethereum tokens are just a specific type of smart contract that "lives" in the Ethereum block chain.
At present, there are many projects that leverage the Ethereum blockchain and the ERC20 standard to issue the necessary chips to operate their platforms. It is very likely that this market will continue to grow with new and better applications that meet this standard in order to interact with each other.