The online world is an alphabet soup of confusing abbreviations and acronyms. It can be easy to become lost among the NFTs and ABCs of the digital asset space. Thankfully, we are here to help sort out the confusion and bring clarity to the marketplace.
In its simplest terms, ERC stands for Ethereum Request for Comments. No, it isn’t just a comment box for the crypto marketplace giant. Instead, it is a document that those writing smart contracts (programmers) use to put the rules of each Ethereum-based token on, making them a fact the token must comply with at all times. In short, it is a list of rules.
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The Ethereum Network
To understand how this method of smart contracts, programmers, rules, and tokens operates, it is best to first comprehend the platform on which they all exist: Ethereum. If you aren’t familiar with the Ethereum Network, it is a decentralized platform based on blockchain technology. It was designed for the creation of, exchange of, and security of digital assets.
Its native cryptocurrency is simply called Ether, abbreviated (yes, more alphabet for your soup) ETH. With the technology behind a blockchain network, the distributed nature of the system allows for additional security, not to mention the ability for ETH to add to its value.
Not to be confused directly with ETH, the platform also uses an item called tokens. Tokens are smart contracts, and they are used to represent a wide variety of digital assets. From vouchers or IOUs, to real-world, tactile belongings, a token can be a placeholder of sorts for nearly any item or concept.
Tokens, therefore, require language or rules to be placed on them, so that they can be used as an equalizer of sorts. For example, if I have five oranges and you have ten apples, but we do not know the value of either, how can we exchange them? If tokens represented the fruits, we might understand a rule that states for every five oranges you have, you have one token. For every ten apples you have, you own one token. Thusly, we now understand the value of the two things and are able to, in fact, compare apples and oranges.
Before we sort out the mess of jumbled words and letters, we also want to make clear that a crypto token is not precisely the same thing as an Ethereum Token. A crypto token is a term used to describe the native cryptocurrency or coin on any given blockchain.
In this sense, a crypto token is used to store value, exchange, or denote the worth of the platform’s coin. Ethereum Tokens are just ONE type of crypto token, which exists only on the Ethereum Network.
Coins are not tokens. Crypto is not just Ether. But, Ether is a type of crypto. Following along? It is confusing, but understanding the difference in terms can mean everything. When investing or exploring your options to dive into the marketplace, doing your research on such terms is a crucial first step, and thankfully, you are in the right place.
As we further explain a token, and specifically its use on the Ethereum network, it is also crucial to understand a baseline idea of what a smart contract is. A smart contract is an automated process, thanks to technology, that operates on an “If/Then” programming.
In simple terms, if “X” occurs, then “Y” will happen. For example, if you give me one ETH, then I will release the NFT. The process eliminates the need for manual processing by a human, not to mention creating an error-free and streamlined route for actions to take place on the blockchain.
The ERC Token Standard
Now that you understand some of the underlying terms and concepts that make up its process, it is time to dive into the concept of the ERC Token Standard. The basic way to consider an ERC is as a document. Programmers write the document. Programmers use smart contracts to do so.
What is contained in these virtual documents are the rules that govern what a token can and cannot do. It is the standard by which the token must behave. The tokens on Ethereum’s platform must comply with all rules set forth within the document.
Once created by the smart contract programmers, these documents must be reviewed. In order to review an ERC, there is a process for that, too.
The Ethereum Improvement Proposal
The Ethereum Improvement Proposal (EIP) is the process in which the Ethereum community reviews the ERC documents. The EIP describes standards for Ethereum’s platforms. Some of those platforms include core protocol specifications, client APIs, and contract standards.
Network upgrades are not a part of the EIP process. These are instead discussed separately in what is known as the “Ethereum Project Management Repository.” That makes it all clear, right? We get it, it is a lot of technical mumbo jumbo to some, but we’ll keep breaking it down, one component at a time.
A Chance to Revise
Through the EIP process, the community will review ERC documents (or go over the rules, so to speak). Once reviewed, the community may comment on the document, and allow the programmer the prepared the document a chance to make revisions.
To Become an ERC
Once a revision is submitted, the Ethereum community will accept or deny the programming document. Some of them are accepted after the EIP process. If it is, it is then passed on to be finalized. From there, Ethereum developers implement it.
Once the document is fully implemented on the platform, it is officially an ERC. An ERC is, thusly, first and EIP. Still with us? We weren’t joking about the alphabet soup!
Types of ERC Token Standards
Now that you have some idea of the purpose of an ERC token, it is time to review what some of the currently accepted Ethereum platform documents exist today. Each of the ERC tokens starts with a simple concept, which was established by the first token we will review: The ERC-20.
This is the most popular and well-known of the ERC token standards. It is such because it is the token standard for a fungible token to operate. This ERC contains the rules pertaining to transfer and balance tracking functionalities.
The ERC-20 token is used in most initial coin offering (ICO) transactions. It also allows for the standard API within a smart contract to be implemented.
The purpose of the ERC 223 token is to protect Ethereum platform users from accidental contract transfers. These are sometimes called a “burn” of tokens and were a bug of the early versions of the ERC 20 tokens.
This process allows developers to accept or decline the transfer of tokens into a smart contract. If the transfer is declined, however, instead of burning the tokens, they are considered “failed.”
The standard token for the NFTs (non-fungible tokens) is the ERC 721. This token discusses non-fungible tokens, as they cannot be divided. Fungible tokens can be.
NFTs can be owned and transacted by individuals, as well as consigned to third parties, but cannot be split. The NFT also can represent nearly any digital file, not to mention some “real-world” physical assets, too.
The ERC-721 is necessary for the functionality of NFTs to be transferred and tracked securely and accurately. Like the ERC-20 does for the fungible side of tokens, ERC-721 also allows for the standard API within a smart contract to be implemented (but for non-fungible tokens instead).
This ERC, the ERC-1238, revolves entirely around tokens that are non-transferable. These are typically known as “badges.” These are issued from an owner to a particular identity, so are not part of the transaction marketplace.
And the List Goes On …
There are long lists of applicable ERC token standards for the Ethereum platform. Some other popular numbers you might see alongside the ERC label include the ERC-809 pertaining to “rival” NFTs, ERC-827 allowing wallets to reuse tokens, and ERC-165, which is a standard for a method, and not a token, which discusses how interfaces are identified.
As you can see, there are (and continue to be) many ERC tokens out there, and more are made on a regular to further define, smooth, and rectify the Ethereum marketplace.
Pros of ERC Token Standards
The use of ERC tokens is helpful in that it streamlines the process of programming codes. It creates a standard way for it to be done, that all programmers can understand.
The use of ERC tokens has also allowed for things like “wizards” to be added to already existing smart contracts. These updates provide a better interface and improve transactions on the platform for all users.
Cons of ERC Token Standards
Unfortunately, due to the nature of the process, some ERC tokens are created that do not, in fact, respect the standards. While this may sound minor, it means that depending on the gaps or irregularities in a smart contract, a token could be lost forever.
Having the token applied to unique uses also creates a risk that users miss out on the fine print. Historically, these technical misses have caused major havoc, such as assets not being exclusively owned by an individual. While it is an expectation that application developers have some rights to control the actions of an individual app, it is not acceptable for them to take over, freeze, or retain ownership of assets you assume are yours.
The Ethereum Future
As with most new technology, the ERC process is ever-changing and always growing. As new ERC proposals are presented, they will represent new changes on the platform, as well as work out current and future bugs and challenges.
No one knows what the precise future of Ethereum or its ERCs will be, but there are plenty of eyes watching the Ethereum Token Standard, and its process for token transactions. In our alphabet soup of smart contracts, new tokens, non-fungible tokens, and the always volatile market of the crypto ecosystem, there is always something new and different to learn.
Stay informed with FLOLiO‘s resources, informative articles, and researched, trend-following tips of the digital assets world. The cryptocurrency space can be a confusing and wild ride, so stay in the driver’s seat with the information you can rely on, no matter how many more alphabet jumbles come to the forefront.