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Connecting blockchain protocols and collaborating on applications is essential to achieving the promise of decentralised finance (DeFi) and providing an alternative to the traditional banking system.
According to DefiPulse 1, which is a Defi project tracking website, a total value of more than $75 trillion is locked up in Defi platforms on Ethereum. Last year, the total was $700 million. Most of this value is in the form of cryptoassets based on the ERC20 token standard.
But Ethereum's PoW infrastructure faces the challenge of rising costs. This problem was foreseen by us, and offering an alternative was one of the core principles we established for Cardano. This is about to become a reality.
To expand the range of use cases for application developers and enterprises, Cardano will enable the migration of ERC20 tokens to its platform. The Alonzo hard fork and Plutus smart contracts are on their way. Once implemented, users of compatible Ethereum tokens will be able to bring them off the congested Ethereum network and take advantage of Cardano's transaction capabilities and lower fees, while enjoying improved security, reduced cost and interoperability.
Why ERC20?
Let's take a closer look at the nature of ERC20 to understand why this standard fits the market trends in terms of business needs. First, of course, Ethereum brought the concept of smart contracts and "programmable money" to the blockchain in 2015. Since then, tokenisation and the ERC20 token have gained popularity due to their usefulness in everyday business transactions. Applications created on a blockchain can provide tokens that can serve as:
Unit of payment
Unit for transactions
Access to digital services
Rewards or incentives
Voting rights
Investment mechanism
Well-designed ERC20 tokens address and solve many needs, and the more useful they become, the more demand grows and therefore their value grows accordingly. That is why these tokens are widely used and so well supported by wallets and Exchanges.
Ethereum Vs Cardano
The ERC20 standard was invented for Ethereum, and as of today, there are over 400,000 contracts based on that standard, with examples including the BINANCE coin (BNB), Tether (USDT), Uniswap (UNI), and Dai (DAI), to name a few.
Ethereum is a popular and functional blockchain platform, but it is slowing down and becoming more expensive. As more network participants interact with decentralised applications, the "gas" fees paid for transaction validation are rising sharply (Figure 1).
Figure 1. Increasing gas fees on Ethereum.
The problems being experienced by Ethereum users have also been identified by a survey conducted by Cointelegraph, cited in Defi 2020 Adoption 1.
45% of platforms built on Ethereum have scalability issues and large gas costs, and these are among the top three issues limiting mass adoption of DeFi.
Ethereum has not yet solved these challenges, and is unlikely to do so in the near term. Many companies will want to consider other options.
In enabling the migration of ERC20 tokens to Cardano, we are focused on delivering a value proposition that leverages the advantages of Cardano over Ethereum. In particular, Cardano's greater capacity for transaction processing and lower fees compared to Ethereum's high cost and often congested traffic.
Enabled by Ouroboros
The key to solving the problem of network congestion and high fees is Cardano's Ouroboros PoS consensus mechanism. Compared to Ethereum's PoW protocol, Ouroboros requires much less energy to process network transactions. It operates using amounts of electricity on the scale of a large house, rather than a small country. Because of this, Ouroboros is not only environmentally friendly, but also requires much lower fees to process transactions.
In addition. Cardano does not need costs for executing smart contracts for tokens, as the blockchain supports native token functionality with its developed accounting model. This means that the tracking, transfer and ownership of different types of assets are managed by the blockchain itself, rather than by smart contracts. While the creation and transfer of ERC20 tokens on Ethereum require manual modification of the standard contract type, the logic for this is built into Cardano, which also eliminates the risk of errors and vulnerabilities.
How does the ERC20 converter work?
Cardano currently supports ADA and native 1 tokens, which have been successfully tested with more than 160,000 tokens already created. We are now launching the ERC20 converter to ensure better interoperability in the future, as well as to establish a solid foundation for extended commercial opportunities.
Our ERC20 converter is a tool that will allow issuing organisations and their users to handle the migration of ERC20 tokens to Cardano. It is designed for token issuers (organisations wishing to enable migration of their tokens to Cardano) and their users (token holders) to use the tool to move their ERC20 tokens to the Cardano network.
Users can convert their Ethereum tokens with a few clicks, and when they move to Cardano, these tokens will be "translated" into a special native token in Cardano that has the same value and functions as an ERC20. In addition, if the user wishes to do so at a later stage, he can move his tokens back to the home network by burning them in Cardano. Bi-directional convertibility is built in.
We will soon be launching a version of the ERC20 converter tool on a dedicated test network. IO Global is currently working with partners for the migration to Cardano, and SingularityNET 1 will be the first of them. The ERC20 converter will introduce a new SingularityNET AGIX token, the implementation of which marks the first milestone in SingularityNET's migration plan to Cardano. The initial test network will allow users to evaluate the migration process, while working with AGIX tokens on both the Cardano and Ethereum Kovan test networks.
It will be possible to authenticate an account using METAMASK (a Chrome browser extension) with more options to come later. Users will also need to add the address of their test Daedalus wallet so they can migrate their tokens to Cardano, and easily track their balances and transactions.
When users log into their ERC20 converter account, they will see the SingularityNET tokens listed and available for migration and, when they click on a token, they will see details such as the balance of the token. They will only need to select the token, indicate the amount they would like to convert and then migrate them by specifying a Cardano address. When the tokens are migrated to the address, it will be possible to use them for payments and transactions from the Daedalus wallet. All activities will be visible in both Etherscan and Cardano Explorer.
Figure 2. ERC20 Converter main panel
In later stages, users will see different types of tokens within the main panel. The tokens available for migration will be listed first and, if they are not yet eligible, it will be possible to subscribe to receive updates on any changes.
A look ahead
As the number of partnerships with the ERC20 converter increases, the range of token types supported will increase. Currently, our partners must be custodians of their tokens, however, we will achieve greater interoperability by incorporating organisations when Plutus smart contracts operate on the main network.
Our goal is to support many tokens to create possibilities for commercial deals. Then, further down the line, with a large variety of tokens, the ERC20 converter will act as a bridge between blockchains, and this will promote effective cross-chain communication.
The ERC20 converter test network is now in the final stages of QA testing before the public launch. This stage will allow us to test the user journey and improve the user experience, as well as troubleshoot any issues that occur. We will also soon provide the dedicated test network environment, documentation and relevant instructions on how users can test the converter's performance.
