However, when digital tokens are used to represent physical objects, maintaining the connection between the two presents difficulties.Ĭonsider the example of ERC-20 tokens that represent US dollars - as in one of the most-used and most widely distributed ERC-20 tokens, Tether (USDT). Importantly, the points (tokens) could also be traded with other people, a feature that endows them with value beyond just the ecosystem in which they were created.įinally, ERC-20 can be used to represent physical objects like gold or real estate. They could also provide holders with additional benefits like VIP service, a share of the fees generated by the booking platform, or even a say in how the platform is governed. These points could be used to pay for future bookings.
Imagine, for example, an online travel agency that issues points to users every time they make a booking through the platform. Note that this feature means such tokens may be considered securities by financial regulators, potentially subjecting the issuers to a range of legal obligations depending on the jurisdiction.ĮRC-20 tokens can also be used to represent things like loyalty rewards and reputation points. Some, like in our example above, represent financial assets that are arguably similar to a share in a company. There are a huge variety of ERC-20 tokens. In this example, Bob might be the CEO of the ABC token "project." People sending ETH to the contract, then, are effectively paying Bob to do work on ABC token's protocol in the hopes that the value of ABC token will rise in the future thanks to Bob's initiative. For example, we can say that 10% of the ETH received in the contract is immediately sent to Bob's Ethereum address.
We can also specify other details in the contract. It's worthwhile noting that this process has similarities to an initial public offering of stock, where shares in a company are issued and distributed to people who have purchased them with dollars. This would "create" 100,000 ABC tokens and distribute them amongst anyone who sent ETH to the contract.
For example, consider a contract written such that it can receive a maximum of 1000 ETH (that is, a total of 1000 ETH can be sent to the contract), and for every one ETH sent into the contract, the contract automatically 'mints' and sends 100 ABC tokens back to the sender. The logic of smart contracts allows for some interesting use cases, even just for the creation of a set of tokens. Read more: What is gas and how do fees work in Ethereum?ĮRC-20 tokens are created by deploying smart contracts. For example, if you want to send 100 ABC tokens to Alice, you'll need to attach a small amount of ETH to pay for the transaction. Interacting with ERC-20 tokens requires the use of ETH. The ERC-20 standard arose from a 2015 proposal that was merged into the Ethereum protocol via an Ethereum Improvement Proposal (IEP-20). Some, however, are worth billions.ĮRC-20 refers to a technical standard that defines a common set of rules such as how the tokens can be transferred, how transactions are approved, and the total supply of tokens. For this reason, most sets actually have very little value. The barrier to entry for creating ERC-20 token sets is low (it's really just a matter of deploying a relatively simple 'contract' to the Ethereum network), so the number of sets is measured in the thousands. There may be, for example, a set of 1 million ABC tokens, and another set of 10 million XYZ tokens. When it comes to ERC-20 tokens, each set is differentiated by a ticker symbol like ABC or XYZ. This is analogous to how one US dollar is effectively indistinguishable from every other US dollar (at least in the digital realm). Fungible here means that each token in the set is indistinguishable from every other token in the set. ERC-20 tokens are sets of 'fungible' digital tokens that live on the Ethereum network.
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