The New Tokenized Economy: Understanding ERC-20 Compliance

The New Tokenized Economy: Understanding ERC-20 Compliance

Ethereum Logo

When we initially set out in the field of ICO research, we here at ICO Examiner very quickly began to make two, specific recurring observations:

  • The vast majority of ICO tokens are derived from Ether
  • The vast majority of ICO tokens derived from Ether are ERC-20 compliant

 

The second observation was initially confusing to us. “What does ERC-20 compliancy mean exactly?” we would ask. The replies that came back were generally along the line of something like this: “An ERC-20 compliant token means that you can view the token’s transactions on the Blockchain and transfer the token with any Ethereum wallet.

The Revolution Will Be Tokenised

That, we thought, was a satisfactory explanation. And in practice, as it happens, that is good enough. But there is another aspect to ERC-20 compliancy which has important ramifications which need to be appreciated for anyone who is paying close attention to developments in Crypto-land generally.

To understand those ramifications, we need to develop on a third observation which quickly emerged as we found ourselves further and further immersed in the world of cryptocurrencies and ICOs. And that observation is as follows:

  • Every ICO is now seeking to offer a product or service that is token-based

The implications are profound. If today’s ICOs – and those of the near future – do undergo mass adoption, and if the numbers of ICOs that undergo mass adoption is large, that means the general economy in which we find ourselves engaging will migrate from a single-currency context (e.g. as a US citizen living in the United States, for instance, today you pay for all your goods and services in US dollars) to a multi-currency context (i.e. many of the Blockchain-leveraging products and services of the future will only be accessible through means of the digitial currencies that are attached to them).

Where Does ERC-20 Fit In…?

So, we anticipate a vast variety of tokens in the future which will be required in order to access the goods and services associated with them. So where exactly does ERC-20 compliancy into the equation?

Firstly, as mentioned above, an ERC-20 token can be held and managed by an Ethereum wallet. So that simplifies things already – you won’t require a separate wallet for each token, and therefore won’t require a separate wallet for each of those goods and services.

Secondly, however, and perhaps more importantly, those tokenised goods and services will give rise to new goods and services that will be underpinned by a combination of these underlying tokens. And this second layer of goods and services, let’s call it, will be managed by its own set of smart contracts.

The smart contracts of this second layer, then, will need to implement code where, for example, token X collaborates with or leverages token Y, and perhaps either or both of X and Y also need to collaborate with another token Z.

For a developer writing the smart contract code and who will need to implement these collaborations, it helps to have tokens X, Y and Z implementing a common set of functions and behaviour – a standard protocol, in other words – that will allow him or her to avoid having to research how each of X, Y and Z are implemented in a world where no such protocol existed.

That, in a nutshell, is ERC-20 compliancy. If we do move towards a tokenised economy, and it appears that might well be the case, then we also look set to see this new tokenised economy being underpinned by the ERC-20 protocol. And who knows, maybe even other Blockchain networks will adopt the same set of standards.

On a side note, this is why, as it happens, we believe that Ether has more inherent functional value than Bitcoin. And it is our belief that Ether stands every chance of one day out-pricing Bitcoin. Time will tell.