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ERC Tokens: What Are They & How Do They Work?

Initial Coin Offerings (ICOs) and airdrops have made ERC tokens quite popular. In 2017 alone, ICOs raised around $6.5 billion. And as at March of this year, they had already raised $2 billion in funding. If you have ever bought an ICO or engaged in an airdrop, then you’d agree that majority of them are based on Ethereum, particularly, Ethereum smart contracts. But the irony is that despite the wide spread distribution of ERC tokens, most people have absolutely no clue what they are or how they work. By the end of this read, you will have a basic understanding of what ERC tokens are.

What are ERC tokens?

You may have come across the term ERC20 tokens. It is important to clear the air on this. Ethereum blockchain is the pioneer of smart contracts. And Ethereum based tokens are otherwise referred to as ERC20 tokens – the original standard. There are other standards trying to improve on the original and this has given birth to ERC223 and ERC777 tokens.

Bonus Tip #1: ERC means “Ethereum Request for Comment”

Before the advent of the ERC20 standard for Ethereum, developers had to create custom-built implementation standards for developing tokens and launching them on the Ethereum network. The coding of ERC20, simplified the entire process, streamlining the protocol, and smart contract standards in general.

Bonus Tip #2: ERC223 is trying to solve the security problem of ERC20 tokens which has led to the loss of millions of dollars. ERC777 is focused on wider set of transaction event handling function and mass adoption.

ERC tokens can represent anything from a physical object to a native currency used to pay for transactions. Going by how fast blockchain and its adoption is growing, it won’t come as a surprise if tokens are used to represent financial instruments such as stocks and bonds in the future. In general, the features and functions of each token are subject to what its developer wants it to do – this could be as a form of payment within a network (as in the case of most cryptocurrencies), or as a tool for decentralized governance, amongst others.

Bonus Tip #3: There were over 65,000 ERC02 token contracts as of April 08.

How Do They Work?

Tokens are usually of two varieties; usage tokens and work tokens.

Usage tokens acts like local or rather native currencies in their respective decentralized apps. Golem is a perfect example of a usage token. In order to use the services in Golem, you need to pay with the Golem Network Token, GNT. Usage tokens do not give their users any right or privilege within the network, even though they may have some monetary value.

Work tokens on the other hand gives users some sort of voice within the network, similar to shareholders. One of the examples of this is the DAO token, which gives holders the right to vote on whether a DAPP could get funding from DAO or not.

In general, ERC tokens are issued to willing investors through a general sale, otherwise known as an Initial Coin Offering (ICO). The creators of these tokens give them out in exchange for Bitcoin or Ether, similar to an initial product offering in the stock market.

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