What Are ERC20 Tokens? A Guide to Ethereum’s Most Popular Token Standard

Prior to the introduction of ERC20, Ethereum tokens had significant compatibility issues. Without a standard, tokens couldn’t work smoothly across wallets, exchanges, and DApps. Then, ERC20 changed this by introducing a universal set of rules that made seamless interaction possible within the Ethereum ecosystem.

Today, ERC20 tokens are the most common digital assets on Ethereum. Thanks to these rules, they function smoothly across Ethereum wallets, exchanges, and apps. This means, ERC20 tokens can represent a wide range of assets— from digital currency to voting rights within an organization.

Key takeaways

• ERC20 is a widely adopted token standard on the Ethereum blockchain that ensures compatibility with wallets, exchanges, and decentralized apps (DApps). This standard makes it easier for tokens to interact seamlessly across the Ethereum ecosystem.

• ERC20 tokens enable seamless interoperability, allowing different tokens to work together smoothly. This ability has sparked innovation in decentralized finance (DeFi), tokenizing real-world assets, and supporting decentralized governance systems.

• The ERC20 standard simplifies the creation of new tokens, speeding up project launches. It has become a popular choice for Initial Coin Offerings (ICOs) and enables the tokenization of assets like stocks, real estate, and more.

What is ERC20?

ERC20, which stands for “Ethereum Request for Comments 20,” is a token standard introduced in 2015 by developer Fabian Vogelsteller. This standard provides a consistent set of rules for all tokens built on Ethereum, enabling ERC20 tokens to work seamlessly across wallets, exchanges, and decentralized applications (DApps) within the Ethereum ecosystem.

ERC20 tokens are fungible, meaning each token is identical and interchangeable—just like dollar bills. They operate through smart contracts, self-executing blockchain code that governs each token’s behavior and enforces the ERC20 rules. This standardization simplifies token interactions and ensures compatibility across platforms, making ERC20 a key building block of the Ethereum network.

The most important feature is its interoperability. By allowing different projects to create tokens that work together, ERC20 opened the door for tokens to be widely used across various Ethereum services with no extra complications. This breakthrough in ease of use changed the way people think about digital assets, fueling Ethereum’s growth in DeFi and more.

💡Pro-tip: ERC20 and Ethereum aren’t the same, but they’re closely connected! Think of Ethereum as the foundation that powers decentralized apps and smart contracts. Meanwhile, ERC20 is a set of rules specifically for creating tokens on Ethereum’s platform.

How ERC20 works

ERC20 defines how tokens are created, issued, and interact within the Ethereum network. In simpler terms, ERC20 is the blueprint behind many of the cryptocurrencies you’ll come across on the Ethereum blockchain. This standard makes token creation more efficient and paved the way for Initial Coin Offerings (ICOs), allowing projects to raise funds and issue tokens to backers quickly. Most likely, any token you’re using or investing in on Ethereum follows this ERC20 standard.

To qualify as an ERC-20, a token needs to be meet the following six specific requirements(mandatory functions):

• Total supply: Shows the total number of tokens in circulation.

• Balance of: Shows the token balance of a specified address.

• Transfer: Allows tokens to be sent from one address to another.

• Transfer from: Enables a third party to transfer tokens on behalf of the token owner.

• Approve: Grants permission to another address to transfer tokens.

• Allowance: Checks the amount that an address is allowed to withdraw from another address.

Additionally, other optional, but recommended functions include:

• Name: Returns the unique token name

• Symbol: Offers the token unique identifier symbol

• Decimal: number of decimal places the token uses

The role of ERC20 in the Ethereum ecosystem

ERC20 tokens are key players in Ethereum’s world. They set rules for how tokens work and talk to each other. This has opened up new ways to use blockchain tech.

1. Facilitating interoperability

With ERC20, different tokens can work together seamlessly. It’s like they all speak the same language, which simplifies things for developers who want to build products that utilize multiple token types. For instance, you can swap ERC20 tokens with ease, as they fit into wallets and exchanges without a hitch. This standard also makes trading faster and smoother.

Additionally, ERC20 allows smart contracts to handle various tokens in the same way. This is a major time-saver for developers, as they don’t need to write unique code for each token type. As a result, the entire ecosystem benefits from increased efficiency and compatibility.

2. Impact on ICOs and tokenization

ERC20 significantly changed the landscape for fundraising in crypto. It made Initial Coin Offerings (ICOs) easier to launch, so projects could create tokens in minutes rather than months. Consequently, there was a surge in new crypto projects, with many startups using ERC20 tokens to raise funds quickly and more affordably than with traditional financing.

However, ERC20 isn’t just useful for launching new cryptocurrencies. It also enables the tokenization of real-world assets like stocks, real estate, or art. In this way, ERC20 has opened up fresh opportunities for trading and ownership beyond digital coins.

3. Spawning new use cases

ERC20 kicked off a wave of innovation by becoming the foundation for numerous decentralized finance (DeFi) applications. For example, it enables lending, borrowing, and interest-earning without banks. With ERC20 tokens, you can even use them as collateral for loans or stake them to earn rewards. Some tokens give holders voting rights in DAOs (decentralized autonomous organizations), making them integral to governance in decentralized ecosystems.

Additionally, ERC20 tokens have entered gaming, where players can earn or purchase in-game items with real-world value. This development has led to new virtual economies and further expanded the scope of blockchain technology.

4. Providing liquidity

ERC20 tokens are particularly beneficial for adding liquidity to markets. They’re easy to trade and transfer, which helps stabilize prices and keeps markets running smoothly. For instance, ERC20 tokens are commonly used in liquidity pools—large reserves of tokens that facilitate quicker trades. The higher the liquidity, the less price slippage occurs during buy and sell transactions.

Moreover, some projects offer rewards for contributing tokens to these pools, creating an opportunity for holders to earn additional income from their crypto assets. The simplicity of ERC20 also makes it easier for exchanges to list new tokens, giving emerging projects a faster path to growth and a broader user base.

Risks and limitations of ERC20

ERC20 tokens have some important drawbacks to consider. Before using them, you should know these technical issues and potential costs.

1. Technical limitations

ERC20 tokens bring some tricky technical issues. For example, if you accidentally send tokens to an unsupported wallet type, they could be lost permanently. Moreover, some exchanges may not support all ERC20 tokens, complicating liquidity and trading

Another limitation is the ERC20 standard itself—it lacks flexibility for upgrades or fixes. Once a token is created, adding new features or resolving bugs is difficult, which can be problematic for projects needing changes over time. ERC20 tokens also struggle to interact smoothly with specific types of smart contracts, causing potential issues when used in more complex decentralized applications.

2. Network congestion and high gas fees

The Ethereum network can become congested during peak times, slowing down ERC20 token transfers. When the network is busy, “gas fees” (transaction costs) rise, sometimes to levels higher than the transaction amount itself.

Network congestion and rising gas fees can make small or frequent ERC20 transactions uneconomical.Transactions may take longer to confirm or may fail altogether unless users set a higher gas price, which can further increase costs.

Related:What is the best time to buy Ethereum?

What are ERC tokens?

ERC tokens are digital assets built on the Ethereum blockchain that follow specific standards called Ethereum Request for Comment (ERC) guidelines. These standards define how tokens are created, managed, ensured and interacted with ensuring they work seamlessly with Ethereum wallets, exchanges, smart contracts, and decentralized applications (DApps). Thanks to this compatibility, ERC tokens can be easily integrated into the Ethereum ecosystem, making them a versatile tool for creating assets, managing value, and enabling innovative use cases.

Examples of popular ERC20 tokens

Some well-known ERC20 tokens include:

• Tether (USDT): A stablecoin pegged to the US dollar

• Chainlink (LINK): Used for providing decentralized oracle services.

• Dai (DAI): A decentralized stable coin

• Basic Attention Token (BAT): Reward users for viewing ads