ERC-20 is a foundational technical standard used for creating and issuing tokens on the Ethereum blockchain. It defines a common set of rules that Ethereum-based tokens must follow, ensuring compatibility across various decentralized applications (dApps), wallets, and exchanges. This standardization has played a critical role in the growth of the crypto economy, enabling everything from utility tokens to governance assets.
What Is Ethereum?
Ethereum is an open-source, decentralized blockchain that enables developers to build and deploy smart contracts and dApps. Unlike traditional systems controlled by central authorities, Ethereum operates on a distributed network of nodes that collectively maintain a public ledger of all transactions.
The native cryptocurrency of the Ethereum network is Ether (ETH). It is used to pay for transaction fees, computational services, and miner incentives. Ethereum’s programmability allows it to host a variety of token standards, with ERC-20 being the most widely adopted for fungible tokens.
Crypto Tokens vs. Cryptocurrencies
Although the terms are sometimes used interchangeably, cryptocurrencies and crypto tokens differ significantly:
- Cryptocurrencies like Bitcoin and Ether (ETH) function as native digital currencies on their own blockchains. They are primarily mediums of exchange and stores of value.
- Crypto Tokens are digital assets built on top of existing blockchains, such as Ethereum. They rely on the underlying network’s infrastructure and can represent assets, utility, or access rights within specific dApps.
What Is the ERC-20 Standard?
ERC-20, which stands for Ethereum Request for Comments 20, is a technical standard that governs the creation and behavior of fungible tokens on the Ethereum blockchain. It establishes a uniform set of functions and events that tokens must implement to ensure consistency, interoperability, and ease of integration.
This standard allows developers to create tokens that can be seamlessly used across wallets, exchanges, and dApps within the Ethereum ecosystem.
How Does the ERC-20 Standard Work?
ERC-20 tokens are implemented as smart contracts. These self-executing contracts contain code that defines the token’s characteristics and operations. Below are the core mechanisms:
- Token Contract Deployment: A developer writes and deploys a smart contract on Ethereum that adheres to ERC-20 rules.
- Mandatory Functions & Events: The standard requires functions like transferring tokens, checking balances, and approving spending allowances. Events log important actions such as transfers or approvals.
- Fungibility: Each ERC-20 token is identical in type and value to another, making them interchangeable—much like traditional currency.
- Metadata: Tokens include details such as name, symbol, and decimal places to define their identity and divisibility.
- Token Ownership: Balances are tracked within the contract and mapped to user addresses. Transfers update these balances after validating the sender’s funds.
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What Is Gas?
Gas is the unit that measures the computational effort required to perform operations on the Ethereum network. Every transaction or smart contract execution consumes gas, which is paid for in ETH.
- Gas fees are calculated as: Gas Used × Gas Price (in Gwei).
- During network congestion, gas prices rise as users compete to have their transactions processed faster.
- Gas ensures that network resources are allocated efficiently and that miners are compensated for their work.
Key Functions of ERC-20 Tokens
For a token to be ERC-20 compliant, its smart contract must include these six functions:
- totalSupply(): Returns the total number of tokens in existence.
- balanceOf(): Returns the token balance of a given address.
- transfer(): Allows a user to transfer tokens to another address.
- transferFrom(): Enables delegated transfers—e.g., letting a smart contract transfer tokens on a user’s behalf.
- approve(): Sets a spending allowance for a third-party address.
- allowance(): Returns the amount of tokens a spender is allowed to withdraw from an owner.
Two essential events—Transfer and Approval—are also required to log transactions and approval actions on the blockchain.
Benefits of ERC-20 Tokens
The ERC-20 standard offers numerous advantages:
- Global Adoption: ERC-20 is supported by a vast majority of wallets, exchanges, and dApps.
- Standardization: Provides a consistent framework that simplifies development and integration.
- Interoperability: Tokens can be used across different services within the Ethereum ecosystem.
- Security: Leverages Ethereum’s robust and battle-tested blockchain infrastructure.
- Liquidity: High adoption rates lead to better market availability and trading volume.
- Community Support: Benefits from extensive developer resources, tools, and documentation.
Wallet Support for ERC-20 Tokens
Most modern Web3 wallets support ERC-20 tokens. When choosing a wallet, consider security features, user experience, and compatibility with other tokens and blockchains.
It’s essential to use a non-custodial wallet that gives you full control over your private keys. Always verify that a wallet explicitly supports ERC-20 tokens before transferring funds.
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Frequently Asked Questions
What is the purpose of ERC-20 tokens?
ERC-20 tokens enable the creation of standardized digital assets on Ethereum. They are used in crowdfunding, governance, in-app currencies, and as representations of real-world assets.
How are ERC-20 tokens different from Ether (ETH)?
ETH is Ethereum’s native currency, used for transaction fees and staking. ERC-20 tokens are custom assets built on top of Ethereum using smart contracts. They rely on ETH for gas fees but serve separate purposes.
Can I store ERC-20 tokens in any Ethereum wallet?
Most Ethereum-compatible wallets support ERC-20 tokens, but it’s always best to confirm. Popular options include MetaMask, Trust Wallet, and Ledger hardware wallets.
Are all Ethereum tokens ERC-20 compliant?
No. Other standards like ERC-721 (for NFTs) and ERC-1155 (multi-token standard) serve different use cases. Always check a token’s standard before interacting with it.
How do I buy or trade ERC-20 tokens?
You can buy them through decentralized exchanges (DEXs) like Uniswap, centralized exchanges like Coinbase, or through fiat on-ramp services integrated into some wallets.
What does 'gas' mean in ERC-20 transactions?
Gas refers to the fee required to process transactions or execute contracts on Ethereum. All ERC-20 transactions require gas, paid in ETH, to be processed by the network.