What is ERC-20 token standard & why you shouldn’t use it?

Mateusz Raczyński
19 May 2021 · 6 min read

As the primary enabler of Decentralized Finance (DeFi), Ethereum has become one of the most popular blockchains out there, reaching extreme valuations as of Q2 2021. Given its vast scope, developers and users can derive immense value from this platform. From simple transactions to complex smart contracts, Ethereum finds relevance in a wide range of use cases.

The ease of creating tokens, as well as their broad compatibility, are the major reasons why most tokens circulating in decentralized economies have some dependence or the other on Ethereum. ERC-20 is the most popular token standard in the blockchain industry, but it’s not the whole picture. Ethereum offers multiple token standards, for non-fungible assets too.

Despite all that, there are few serious problems at work that the ERC-20 standard inherets from its blockchain. Congestion is one of them, leading to common spiking transaction fees.

Let’s dive deeper into the issues of ERC-20 tokens.

Outline

  1. What is an ERC-20 token?
  2. Functions of ERC-20 tokens
  3. Why shouldn't businesses use ERC-20?
  4. What is the best alternative?
  5. Can you create tokens on Algorand?

What is an ERC-20 token?

ERC stands for Ethereum Request for Comments, which are basically proposals posted by community members. In November 2015, Fabian Vogelsteller made the 20th proposal on the list, which we now refer to as ERC-20.

ERCs can generally relate to wide-ranging matters, but in this case, it defines a set of rules for creating fungible tokens. Aiming for compatibility and interoperability, ERC-20 standardizes the token’s functionalities.

In doing so, it proposes six key elements.

  • Total Supply: Designates the maximum supply of a token.
  • Balance Of: Displays the total number of tokens at a particular address.
  • Transfer: Sends tokens from a primary address to individual recipients.
  • Transfer From: Sends tokens from one user to another.
  • Approve: Checks tokens in the smart contracts and sets the top limit for withdrawal.
  • Allowance: Proves that the sender’s address has enough tokens for the transaction.

Functions of ERC-20 tokens

In the simplest terms, we can say that various blockchain development companies create these tokens to meet specific functions. Depending on the intended use case, the token’s characteristics can vary, although the basis remains the same.

More often than not, ERC-20 tokens are created as stores of value. In this sense, each token denotes a certain amount of a given cryptocurrency. Naturally, users can buy, sell, store, transfer, and trade these tokens on centralized and decentralized marketplaces. However, these interactions suffer from the peril of high volatility, which dampens their reliability to a great extent. Stablecoins are a purported solution to this problem, but that’s beyond our point for now.

ERC-20 tokens also serve to facilitate decentralized governance. In networks adopting Proof-of-Stake (PoS) or similar consensus mechanisms, users often have to stake their ERC-20 tokens to gain voting rights. This gives individuals a say in the platform’s future while restricting malicious or fraudulent behavior.

In decentralized exchange (DEX) protocols, ERC-20 tokens can be pooled together to represent liquid markets for assets. Apart from facilitating trade, these pools enable projects to bootstrap liquidity for their ERC-20 tokens—Initial DEX Offerings (IDOs). Alternatively as well, ERC-20 tokens have been used for funding projects through Initial Coin Offerings (ICOs), Security Token Offerings (STOs), and so on.

Why shouldn't businesses use ERC-20?

Ethereum’s low scalability results in high gas fees, and therefore, transactions are very costly. Even micro-transactions become so expensive that, as a whole, using Ethereum for business purposes is unsustainable. Moreover, substantially slow transactions are another direct outcome of Ethereum’s scalability shortcomings.

Apart from scalability issues, ERC-20 tokens also have security concerns that are related to Solidity, Ethereum’s programming language. The underlying contract of these tokens is prone to have bugs as it’s complex to develop and read, which increases the risk of hack, malfunction, and downtime. Every serious Ethereum application and ERC-20 token should be audited which raises R&D costs siggnificantly. As it is, hacks have been quite recurrent in Ethereum’s history—the DAO Attack, Parity’s MultiSig Wallet hack, and ‘User-Triggered’ Wallet freeze are only prominent examples.

How investors lost billions of dollars to scam ICOs hosted on Ethereum in 2017 is common knowledge by now. However, the nightmare didn’t end there—users continue to lose money, even today. In fact, bugs are so common on Ethereum that a developer named Dexaran furnished a detailed piece on this subject.

Finally, with Ethereum, the threat of a hard fork looms forever. It has happened in the past when the fork created legacy Ethereum Classic and Ethereum, and will happen again soon. Hard forks leave a part of the chain open which poses threats to, for example, NFTs–the hard fork will create a duplicate of the ownership rights.

Phase 0 of Ethereum 2.0 is already live and it’s only a matter of time before the launch is complete. This will have its benefits no doubt, but from a business perspective, this results in an uncertainty taround the ecosystem. After all, developers demand consistency from the underlying platform and Ethereum is not that good in this regard.

What is the best alternative?

What could solve the problems of ERC-20? We believe it might be using Algorand, or it’s one of the best solutions, to say the least. Here is why:

  1. Algorand is a forkless blockchain, designed as the ground for the ‘Future of Finance’ or FutureFi. Everything that Ethereum does, Algorand aims to do better. Plus, it does more by maintaining optimal CPU usage for a minimal carbon footprint. In combination, Algorand brings forth an unprecedented experience of creating, storing, and transacting crypto assets.
  2. Transactions are extremely cheap on Algorand, costing only around $0.011, despite assuring rapid finality and settlement. Furthermore, atomic, peer-to-peer exchanges enhance the security and speed of Algorand-based interactions while the network processes over 1,000 TPS–and soon should up the numbers to 46,000 TPS.
  3. Creating new tokens is seamless, as developers can leverage the robust Algorand Standard Assets (ASA) framework. Unlike Ethereum, smart contracts on Algorand are highly sophisticated, which in turn, reduces the risks of manipulation and failure. Moreover, it allows for more complex and multi-dimensional functionalities. To this end, Algorand works with specialized development partners, like Ulam Labs, that assist developers and end-users in their journey with secure and safe tokens.

After all, developing decentralized solutions on Algorand is simply more efficient as its framework is more developer-friendly and speeds up the development.

Can you create tokens on Algorand?

You can, but whether you should, depends on your needs. Just like Ethereum, building tokens on Algorand, as such, is rather straightforward. But there’s a subtext here, which is easy to miss. Unless you are an expert developer, you can only build very simple tokens on your own. Be it on Ethereum or on Algorand, even though the latter is simpler to use.

From a business perspective, simple tokens are not enough in most cases. They can work fine as collectibles or hobby tokens, but not when we are looking at, say, enterprise-grade processes and transactions. In such scenarios, you need more than just the basics. This requires experience that only professionals from leading blockchain development companies can have.

At Ulam Labs, we excel in building multi-faceted tokens for Algorand-based projects and businesses. Backed by a deep knowledge pool and expertise, we build tokens that enable you to unlock the full potential of Algorand.

Want to build a new decentralized solution but procrastinate on choosing the technology? Get a free consultation!

Contact us

Related blogposts:

Non-Fungible Token (NFT): A comprehensive guide

Best AML Software - Comparison for Crypto Businesses

Bespoke Software Development - Advantages and Disadvantages

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