Tracing the origin of the ERC20 Token, we start with the connotation of the word “token” in civilization, which goes back to the 13th century. The term was first mentioned in medieval European merchant practices, where merchants used physical tokens to represent value, credit, or proof of transaction.
Early economic tokens were often made of metal and served as primitive forms of currency or credit instruments in local markets. This allowed for more flexible trading systems beyond direct barter or coin exchange.
What Are Tokens? 
Tokens are a type of cryptocurrency that runs on a blockchain and has specific use cases. For example, you can create tokens to fund your projects, known as ICOs (Initial Coin Offerings), similar IPOs in the stock market, or you can use tokens to assign a specific digital asset with a particular value. Tokens can also be used to represent ownership of some type of data. How are they employed in government? An individual who owns a specified quantity of a company’s token can vote on its decisions. There are several such use cases. All you need is a blockchain-deployed Smart Contract.
Now, there is an issue with interoperability since there are billions of individuals with various ideas, making it impossible to use those tokens if everyone creates a new kind of token. This is because, under the hood, tokens are really smart contracts running on the blockchain, and developers write smart contracts. If various developers were to implement smart contracts differently, there would be anarchy throughout the network. For instance, if plumbers had no standard size for pipes and fittings, it would be impossible to have fittings match exactly when shipped for construction projects in different parts of the world.
So, in the blockchain scenario, wallet providers and exchanges will need to create customized code compatible with multiple contracts with varying levels of functionality. Simply put, creating different codes for each contract is difficult.
What is the Difference Between Cryptocurrencies and Tokens?
Cryptocurrencies and tokens are related but separate concepts. The terms cryptocurrency and token should not be used interchangeably. Cryptocurrencies are the latest, and thus far the most successful, form of digital money. They are digitized currencies encrypted through cryptography. Copies of their ledgers exist in distributed form on decentralized blockchains. Cryptocurrencies run on their blockchains.
Tokens, however, represent an asset or utility on a blockchain. They are tradeable goods representing coins, loyalty points, in-game assets, etc. They can even be redeemable for a service an issuer will provide later. Tokens can be issued on blockchains like Ethereum. The most widely used token standard is Ethereum’s ERC20. Ethereum also has other standards, including ERC223 and ERC721.
What is the ERC20 Token?
In 2015, Ethereum defined technical specifications for tokens on the Ethereum blockchain. Tokens that conform to these standards are referred to as ERC20 tokens.
At their core, ERC20 tokens are smart contracts that run on the Ethereum blockchain. While ERC20 tokens function within the framework set by the Ethereum team, the framework is designed to accommodate flexibility in their design and function. Most tokens created through ICOs on Ethereum are ERC20 compliant.
The standard has six functions and two events. This unified standard was defined to facilitate interoperability between different applications, exchanges, and interfaces. Therefore, in creating an eRC-20 token, developers must define the token’s characteristics within the defined functions and events. Functions describe the tokens’ functionalities, how they can be moved around, and how data about them can be accessed. Smart contracts on Ethereum, including all ERC20 contracts, are written in Solidity.
Tools and Testing
To better understand the ERC20 framework and how it can be adapted to various uses and strategies, it is helpful to experiment on Testnets by creating and testing tokens with different attributes. A great place to start is Etherescan.io, which allows users to visualize Ethereum’s blockchain and review various ERC20 tokens. Etherscan users can create their tokens on one of three Testnets: Ropsten, Kovan, or Rinkeby.
Customization
ERC20 tokens can be customized to enable to following features:
1. Automatic buying and selling: you can peg the token’s value to that of another token or currency by creating a fund that automatically buys or sells tokens to maintain the balance.
2. Auto refill: transactions on the Ethereum blockchain require payments to miners in ‘gas.’ You can program your token to auto-refill gas for future transactions once it falls below a certain level.
3. Adding a central mint that can change the number of tokens in circulation could be useful if your token mirrors or simulates government currencies.
4. Freezing tokens: If a regulatory body instructs you to do so, you can freeze a user’s tokens and unfreeze them when required.
5. Proof of work: you can tie your token supply to the supply of Ether by writing a contract to run “merged mining” with Ethereum. A miner who finds a block in Ethereum also gets a predetermined number of your tokens as a Block Reward.
The ERC223 and ERC721 Proposals
In some situations, ERC20 tokens can pose difficulties for users. For instance, if someone uses an ERC20 token to send 5 ETH to a contract that is not ERC20 compatible, the transaction will not be rejected because the contract will not recognize the incoming transaction. The ETH could, therefore, get stuck in limbo and essentially be lost by the user.
A new token standard (the proposed ERC223) solves this problem by rejecting a transaction if it is not ERC-compatible.
Tokens conforming to another new token standard (the proposed ERC721) will be non-fungible, unique, and not interchangeable during utility and exchange. (For example, a chocolate bar is non-fungible with a pizza because their differing characteristics result in each having a different value.) An ERC721 token will have value due to its uniqueness and rare qualities (think limited edition baseball gloves autographed by Jordan).
The upshot: the ERC20 Token
Ethereum released ERC20 token guidelines after increased interest in Initial Coin Offerings. The primary benefit of an ERC20 token is interoperability with other compliant tokens and decentralized applications on Ethereum. ERC20 tokens can also be traded on all platforms that support Ethereum standards. Some popular ERC20 tokens are Augur, Bancor Network, Civic, Gnosis, and Golem. Given that most ICOs on Ethereum have been ERC20 compliant, thought leaders and entrepreneurs in the blockchain space should seek to understand ERC20 and other Ethereum token standards.
