NEP-5 and ERC20 are both commonly used terms but many people are unclear on what exactly they mean. So, what is NEP-5 and how does it work?
ERC20 led to an explosion of new cryptocurrencies and NEP-5 is NEO’s equivalent. The term is thrown around a lot but many cryptocurrency investors and users don’t fully understand what the terms mean.
In essence NEP-5 tokens and ERC20 tokens aren’t cryptocurrencies proper but rather the protocols necessary for a cryptocurrency to piggyback of another’s blockchain, generally either Ethereum or NEO. The protocol is necessary in order to ensure that tokens maintain a certain level of security and are able to interact with both the parent blockchain and other cryptocurrencies on that blockchain.
What is NEP-5 and how does it differ from ERC20?
Previously anybody who wanted to create a cryptocurrency needed to have the technical knowledge to either build a blockchain from scratch or to fork from an existing one. This raised a certain technical barrier to the creation of new cryptocurrencies and they were far less common. That all changed with the creation of the ERC20 (Ethereum Request for Comments) protocol in 2015.
The ERC20 protocol is essentially an agreed set of rules which most popular Ethereum smart contracts abide. It allows smart contracts to act similarly to a conventional cryptocurrency like Bitcoin or Ethereum itself without building its own blockchain. A token hosted on the Ethereum blockchain can sent, received, have its total supply confirmed and check the amount available on an individual address (or wallet). This is essentially the same as sending a cryptocurrency like Bitcoin or Ether and any smart contract that follows this standard can be called an ERC20 token.
In short an ERC20 token at a minimum defines the functions: BalanceOf, TotalSupply, transfer, transferFrom, approve, and allowance. There are also a number of optional fields like symbol, token name, and the number of decimal points by which a token will be measured. Any token that fulfills the above criteria can be considered an ERC20 token.
NEP-5 doesn’t differ significantly from the above and is analogous to the ERC20 token. It acts as an agreed protocol that allows smart contracts to act like cryptocurrencies on the NEO blockchain.
Like ERC20 a NEP-5 token needs to be able to define a minimum number of functions to be in compliance: TotalSupply, Name, Symbol, Decimals, BalanceOf, and Transfer. There are also some optional functions: Allowance, TransferFrom and Approve. If you want to implement one optional function you must implement all of them. A full description of each NEP-5 function can be found on GitHub
If a token fulfills all of the criteria they will then be able to piggyback on the NEO network and their smart contract will work similarly to a normal cryptocurrency. While ERC20 and NEP-5 achieve much the same thing there are some key differences. The most important is that while it is almost free to create ERC20 tokens NEP-5 tokens require a significant layout in GAS before they can be forged. This creates a significant financial barrier to creating new NEP-5 tokens and is designed to act as a form of quality control.
What projects use NEP-5?
ERC20 ushered in a flood of new projects and while NEP-5 hasn’t yet made the same impact it has already produced some incredibly promising offerings. Some of these were custom built for NEO and others have migrated over from Ethereum.
Narrative, or NRVE is designed to democratize the way users are paid for the content they create. Somewhat similar to Steemit or Reddit this cryptocurrency makes it easier for content creators and contributors to the discussion to see the bulk of their reward. The overall aim of Narrative is to reward all users who add value to the Network.
Originally an ERC20 token Narratives creator decided to make the switch over to NEP-5 after the Ethereum blockchain started to see significant slowdowns during December and January. He did this because NEO offers faster and cheaper transaction times and the NEO blockchain is arguably easier to scale than Ethereum’s. Another reason for shifting over to NEO was actually the barrier to entry to creating a token. It costs around $25,000 to create a new token for NEO and this ensures that anybody on the platform has already put some skin in the game.
RedPulse was the first token created using the NEP-5 protocol. It was created to act as a blockchain based content platform for the Chinese financial market. Users are able to contribute information about Chinese companies or the market and receive RPX (Red Pulse Tokens) in exchange for their efforts.
— NEO News (@NEOnewstoday) August 8, 2017
When the RPX initial coin offering (ICO) went live in October 2017 it took just 2 hours for it to reach its hard cap, raising over 405,000 NEO tokens.
Ontology is a NEP-5 platform designed to make it easier for businesses to implement blockchain solutions. An advanced suite of tools make it simple even for businesses with no blockchain expertise to create projects using Ontology (and therefore NEO’s) platform.
Ontology is fairly unique because it is directly linked with the Co-Founder of NEO’s company OnChain. Da Hongfei plans to closely link the development of both OnChain and NEO in order to provide a wide ranging solution to a huge variety of industry problems.
There is a more complete list available here.
Can NEP-5 compete with ERC20?
The short answer to this is, yes, probably. The projects built on the NEP-5 protocol have broadly been very promising and NEO is arguably a more stable platform to build on than Ethereum. Additionally there have been a number of events that have cast doubts over the security of ERC-20 smart contracts. Most troublesome are the revelations that over 3,000 Ethereum smart contracts contain major exploits.
The key to NEP-5s success will be getting exchanges to list NEP-5 compatible tokens. This has already begun and NEP-5 compatible coins are already listed on the popular Chinese exchange Binance. If NEO is able to continue getting more tokens listed on popular exchanges then NEP-5 will be a true competitor to NEO.
Nep5 coming soon.
— CZ (@cz_binance) February 7, 2018
That being said Ethereum and ERC20 has a distinct first mover advantage and more and more cryptocurrencies are attempting to build their own smart contract solutions. Only time will tell whether NEP-5 is the future. That being said I certainly think that it has a chance to compete strongly with the likes of Ethereum.