Tokens vs. Assets: The Magic Behind the ERC20 Highway
Over the last 12 months, we’ve introduced over a dozen Ethereum-based tokens to our exchange as well as send/receive support for over 80 additional tokens. To the untrained eye, assets like SALT and Civic likely seem just as unique as Ethereum and Bitcoin. But the truth is, these “ERC20” assets all operate on top of the same network, utilizing the Ethereum blockchain.
But how — and perhaps even more importantly, why — does each token operate under a different name? And how does Exodus — which uses the same receive address for all ERC20 tokens — properly identify which token you recieve? To solve this mystery, we’ll take a dive into the world of smart contracts, tokens, and Ethereum itself.
Crypto 101
To help us grasp the mystical world of Ethereum tokens, we first need to understand the underlying technology behind crypto itself. This topic alone could easily encompass a whole series of posts, and many authors have already done just that in a stellar fashion. With that in mind, for our purposes I will stick to the basics as a quick refresher.
Imagine you’re at your favorite local coffee shop and have reached the point where it’s time to pay for your double-triple-chocolate-caramel-macchiato. You reach for your wallet and dig out your credit card and insert it into the chip reader (or just “tap” it on the reader if you are somewhere fancy enough to allow such luxuries), and what follows is a magical changing of money that can be explained like so:
When you insert your card, a few things happen rapidly behind the scenes. The Point-Of-Sale terminal will communicate with the card issuer to verify both that the card itself is valid and that the account holder has access to the funds needed to complete the transaction. If both of these are true, the issuing bank will debit the appropriate amount from the cardholder's account and similarly credit that amount (minus any fees) to the merchant.
In this case, we are relying on the card issuer to verify the authenticity of the transaction and availability of funds, and move those funds between the two parties. Without this intermediary, the transaction doesn’t happen. This may seem like an outlandish possibility, but in reality, payment systems can (and do) go down all the time. In fact, just recently access to Wales via road was basically impossible due to an outage with Visa Europe’s network in the area. While payment processors spend billions each year creating the most robust possible network, centralized systems can and will fail — and can take businesses, governments, e-commerce, and more along with it.
Enter the world of cryptocurrency, which seeks to eliminate this intermediary and allow for instant, verifiable transactions between two parties without the need for any middleman. A lofty goal indeed, but one that, despite current shortcomings, has basically been achieved by existing crypto technologies. While mainstream adoption still has a ways to go, the technology exists and is getting better each and every day.
While assets such as Bitcoin, Bitcoin Cash and Litecoin exist to facilitate monetary exchanges, platforms like Ethereum look to take this a step further. By using the same cryptographic ledger technology found in the above examples, Ethereum allows anyone to build an application that sits atop it’s network, and uses this ledger to verify the execution of what is called a “Smart Contract”.
What is a Smart Contract?
Our friends over at Blockgeeks have penned an in-depth guide into the world of smart contracts, which is worth a read if you are intrigued by the nitty-gritty details. As with our brief cryptographic introduction above, I’ll try to keep things brief and in the context of the topic at hand.
In their simplest form, Smart Contracts exist to allow for agreements and transactions to occur between parties without the need for a middleman. Instead, the code of the contract itself ensures that everyone keeps their end of the bargain. In the same way that Bitcoin first allowed for the transfer of value without the need for an intermediary, Smart Contract platforms such as Ethereum open up this technology to virtually any type of agreement — in our case, the exchange of a “token” representative of a project, company or other store of value.
The ERC20 Standard
An ERC20 token functions as a type of Smart Contract sitting on top of the Ethereum blockchain that follows a protocol laid out in Ethereum Improvement Proposal 20 (EIP20). The contract in turn facilitates the exchange and movement of the associated token on that blockchain. When you receive an ERC20 token to your Exodus address, the wallet will look at the contract and cross-check it with assets that are available in Exodus. If the token you received is one of the over 80 ERC20 assets we support, you’ll see it seamlessly added to your portfolio balance. If not, your tokens are still safely stored at your Exodus ETH address — you’ll just need to do a bit of work to access them.
While the underlying protocol behind each ERC20 asset is the same, this doesn’t mean the projects built using the technology are. In fact, the ease of creation of tokens on the Ethereum network has led to literally thousands of unique tokens — from familiar faces like SALT and Civic to more... unique projects such as Useless Ethereum Token (UET). Literally anyone can create a token using the ERC20 protocol. In fact, there’s even online generators that will handle the heavy lifting for you. This makes it incredibly easy and often very fruitful for projects to use the ERC20 protocol as a launchpad for a project- however it can also open the door for less-than-polished projects to make their way to market.
Since these tokens are riding on top of the Ethereum newtork, they need a bit of Ethereum to help them get where they are going. This transaction fee, known as Gas, allows contracts to be executed and tokens to move between addresses. It is for this reason that ERC20 wallets such as Exodus require a small bit of Ethereum to move around your ERC20 assets.
In Closing
To sum things up, ERC20 tokens can be likened to cars on a highway. The Ethereum network functions as the system of roads, connecting various types of vehicles (your ERC20 tokens) across a unified network. The “Gas”, or transaction fees charged in ETH, are what keep these cars moving, powering transfers of tokens on the network. With Exodus, we do the heavy lifting for you:
Organizing these assets in your crypto-garage.
Eager to learn more? Check out the list below for more information on Ethereum and ERC20 smart contracts.
Beginner Resources
- ERC20 basics:
https://www.coindesk.com/ethereums-erc-20-tokens-rage-anyway/ - Vitalik Buterin on smart contracts: https://www.youtube.com/watch?v=WSN5BaCzsbo
Technical Resources
- Anatomy of ERC20:
https://medium.com/blockchannel/the-anatomy-of-erc20-c9e5c5ff1d02 - Understanding Token Contracts:
https://medium.com/@jgm.orinoco/understanding-erc-20-token-contracts-a809a7310aa5
Please reserve the Medium comments section for lively and honest discussion about the article! If you have technical issues with Exodus, our Community Support team will be happy to speedily assist you if you send a descriptive email to: support@exodus.io
