By Matt Hussey and Stephen Graves
6 min read
To understand how the Ethereum network functions, you need to understand these three elements: ETH (Ethereum or "ether"), gas, and ERC-20 tokens.
Collectively they help power the network, incentivize miners, and allow others to build their own tokens on top of Ethereum’s blockchain.
The cryptocurrency ETH (or "ether") is the digital fuel for Ethereum. To power your car, you need to buy gasoline. To power your transactions on the Ethereum blockchain, you need ETH.
On Ethereum, that ETH is an amount of computer power required in order to make your transaction work. To return to the car analogy, it’s how much gasoline is required to make the engine work and power the car to the destination you’re looking to get to.
And in order to calculate how much ETH is needed to make a transaction work, the developers behind Ethereum created gas.
Gas is the cost the network charges in order to process your transaction.
In the car analogy, it’s how much a gas station will charge you to fill your car—normally a part of the cost per gallon or liter. If you want to send ETH, interact with a smart contract, or anything else that needs to be recorded on the Ethereum blockchain, you have to pay for it.
That payment is calculated in gas, and paid in ETH.
Bitcoin miners charge transaction fees to process people’s transactions; a similar process applies on Ethereum. An incentive is created to encourage an Ethereum miner to process your transaction quickly.
That gas price rises and falls, depending on how busy the Ethereum network is, i.e. how many transactions need to be verified.
Ethereum is not just a blockchain, like Bitcoin; it is a platform. This means that other tokens can run on top of it, and decentralized applications (dapps) can be built atop it using smart contracts.
As Ethereum’s popularity grew, and people started creating their own smart contracts, a problem arose: How do you get these different contracts to interact with each other?
The answer was ERC-20. This is a standard, or set of rules that make it easier for contracts to interact.
The ERC-20 token standard allows developers to create their own tokens on the Ethereum network. It has provided an easier route for companies to develop blockchain products instead of building their own cryptocurrency.
Some tokens, like Uniswap's UNI token, are set to remain ERC-20 tokens; other cryptocurrencies, such as Binance Coin, have since jumped over to their own blockchains.
ERC-20 tokens are the most commonly used tokens on the Ethereum network. They are designed to be used for paying for functions and are known as utility tokens. They can also be used to pay for goods and services.
These tokens are:
Many ERC-20 tokens are tradable on cryptocurrency exchanges such as Coinbase and Binance.
You’ll also need a cryptocurrency wallet that can store Ethereum tokens; either a software wallet such as MetaMask, or a hardware wallet.
Since the ERC-20 token standard was finalized, over 500,000 tokens compatible with ERC-20 have been issued. Some of the leading ERC-20 tokens include:
Vitalik Buterin
Other Ethereum standards have been created for different reasons, including:
Many blockchain platforms have been hyped as the next “Ethereum killer,” but Ethereum has managed to keep its No. 2 ranking just behind Bitcoin.
ERC-20 tokens are widely used and their traction will continue as long as Ethereum maintains its status. If anything, their biggest threat is from the enemy within: new Ethereum standards. When it comes to natural selection, they’ll need to be the fittest to survive.
Decrypt-a-cookie
This website or its third-party tools use cookies. Cookie policy By clicking the accept button, you agree to the use of cookies.