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March 21, 2018 -- ADVFN Crypto NewsWire -- Initial Coin Offerings (ICOs) have become an extremely popular way to crowdfund cryptocurrency and other projects while avoiding fiat financing rules and regulations. ICOs raised around $6.5 billion in 2017 and $2 billion so far in 2018. The Ethereum smart contract ERC20 standard made this all possible and almost too easy to do.

ERC20 tokens are sold in ICOs in exchange for ether (ETH), the native currency of the Ethereum blockchain. “ERC” stands for Ethereum Request Comment, and “20” is an arbitrary number assigned to the technical standard.

ERC20 standardizes functions that make it easy for ICO projects to develop and deploy tokens. The standard also creates cross-project synergies that enable the fast and secure function of cryptocoin wallets holding ERC20 compliant coins and cryptocurrency exchanges listing ERC20 compliant coins for trade.

Among the largest ERC20 tokens by market cap are EOS, TRON, VeChain, OmiseGO, ICON, Binance Coin, DigixDAO, Walto, Populous, Maker, Status, RChain, and Augur.

Before the ERC20 standard was formalized in 2015, there were compatibility issues among the various forms of Ethereum tokens. Each cryptocoin created on top of another token had a unique smart contract which required the writing of new code for each exchange or wallet that wanted to accept a new token, which was risky and time-consuming. A smart contract cannot be changed once it is initiated by the ICO developers. If a smart contract contains vulnerabilities or bugs, investors could lose their funding or the tokens they bought with their funds, like with what happened with the $55 million DAO hack. The industry came up with the ERC20 standard as the solution to these problems for all tokens that followed.

ERC20 defines a common list of rules ("functions and signals") which, all working together, ensure that different types of ERC20 tokens will be cross-compatible within the Ethereum system. This ERC20 compliant functionality can be used, for example, to set the total amount of tokens in circulation to either a simple fixed amount or to a fluctuating amount based on a programmed ruleset. This way, developers have the ability to program how new tokens will function within the Ethereum ecosystem.

The Ethereum blockchain processes ERC20 token transactions. Your Ethereum wallet is your gateway to the Ethereum blockchain, allowing you to secure and hold ether and ERC20 tokens. MyEtherWallet.com (MEW) is often used to manage ether and ERC20 tokens. The tokens can be secured from theft by pairing MEW with a hardware wallet.

ERC20 tokens use 'gas' to process transactions on the Ethereum blockchain. Gas is not a cryptocurrency or a token. It is a payment to the Ethereum network, paid in ethers, and proportional to the amount of work needed to perform the associated computation. Transactions with more gas will go to the "front of the line" on the Ethereum blockchain network and thus be processed more quickly.

One downside of the ERC20 standard is that it makes deploying a token too easy on a technical level. ERC20 does nothing to ensure valuable, useful or even functional tokens. Case in point: CoinLaunch’s CoinCreator (www.coinlaunch.market/coincreator) lets you create your own ERC20 token.

ICO teams who would have been otherwise incapable of launching an ICO are now able to, creating a “Wild West” environment. This has led to a plethora of very similar tokens, which in turn has created a lot of confusion and danger for prospective investors.

What does this mean for anyone considering investing in an ICO or an altcoin? Investor due diligence and a very healthy dose of paranoia are essential for any chance of success.

By: BGN Editorial Staff