ERC-20 is a standard for creating and deploying smart contracts on the Ethereum blockchain. ERC-20 tokens are digitized tokens that live on that blockchain and adhere to those standards.
The Ethereum blockchain was built specifically for smart contracts, virtual agreements that can be programmed to execute automatically when certain conditions are met. This functionality allows the creation of many new decentralized applications, so many other platforms and their tokens are built on top of the Ethereum blockchain.
Several popular utility tokens and decentralized finance (DeFi) applications are built on Ethereum. But developers must follow specific standards (ERC-20) if they want their tokens to be accepted by the network.
In this crypto guide, we will answer the question, What is ERC-20?, as well as how it relates to tokens issued on the Ethereum blockchain.
What Is ERC-20?
ERC-20 is a standard for creating and deploying smart contracts on the Ethereum blockchain. ERC-20 tokens can be issued on Ethereum (and only Ethereum), representing a set of standards that cryptocurrencies can adhere to.
The primary purpose of ERC-20 tokens is to work with smart contracts and define a standard list of rules that all tokens on the Ethereum blockchain abide by.
While Ether (ETH) is the native cryptocurrency of the Ethereum network, the ERC-20 token represents a specific standard — or set of rules — that developers can follow to make Ethereum-based tokens. In the truest sense, they are the standard-bearer of the Ethereum network.
This token standard is only for fungible tokens, not non-fungible tokens (NFTs). As such, one ERC-20 token can be exchanged with another, as they’d have equal value.
ERC-20 smart contracts use ERC-20 tokens to facilitate transactions when its protocol calls for it. Any smart contract with transaction functionality will pay the user as an ERC-20 token. Many popular stablecoins, like USDC and DAI, are ERC20 tokens.
Which Tokens Are ERC20?
ERC-20 has enabled the creation of many new tokens. These are the ten most prominent and most popular ERC-20 tokens by market cap as of September 2022:
• Multi-Collateral Dai (DAI)
• Polygon (MATIC)
• SHIBA INU (SHIB)
• UNUS SED LEO (LEO)
• Cronos (CRO)
• ApeCoin (APE)
The largest, by both trading volume and market cap, is Binance USD, a stablecoin pegged to the U.S. dollar. Stablecoins are popular among traders looking to lock in profits quickly without converting to fiat currency and those seeking to earn a yield on their crypto. They aim to be more “stable,” as the name implies, than other, often volatile cryptos.
Several decentralized finances (DeFi) and metaverse tokens are ERC-20 tokens.
Decentraland (MANA) and Enjin Coin (ENJ) help users perform functions or create items in video games and virtual or augmented realities. Uniswap (UNI), the native token of one of the largest DeFi platforms, allows users to borrow and lend funds to one another.
How Does ERC-20 Work?
ERC-20 is a standard protocol, not a program or piece of software. The ERC-20 protocol governs the creation of new tokens, ensuring they meet the required technical specifications. If a token doesn’t conform to the appropriate technical standards defined by ERC-20, it won’t fit the definition of an ERC-20 token and, therefore, won’t be issued on Ethereum.
It may help to think of ERC-20 as similar to HTTP, the Hypertext Transfer Protocol used for websites. HTTP defines how messages on the internet are formatted and transmitted and how servers and browsers should react in response to various commands.
Similarly, ERC-20 specifies the essential features of Ethereum-based tokens and how they should function. Tokens that don’t comply cannot be issued, traded, or listed on exchanges.
The ERC-20 Standard
Smart contracts that want to use ERC-20 tokens have to follow the appropriate ERC standards. There are currently nine rules in total, and six of them are mandatory. The other three are optional. These include:
| Mandatory rules | Optional rules |
|---|---|
| Allowance | Token Name |
| Approve | Decimal (Max: 18) |
| TransferFrom | Symbol |
| Transfer | |
| BalanceOf | |
| TotalSupply |
Here’s a brief rundown of how the mandatory standards apply to creating tokens.
TotalSupply: Outlines the total number of tokens to be created.
Approve: Helps to eliminate the possibility of counterfeit tokens being created by requiring the approval of smart contract functions.
Balance of: Allows users to check their balances by returning an address’s total number of tokens.
Transfer from: Allows for the automation of transactions when desired.
Transfer: Allows for transferring tokens from one address to another, like any blockchain-based transaction.
Allowance: When a smart contract wants to execute a transaction, it has to be able to see the balance held by the Ethereum wallet trying to transact. The allowance function allows the contract to carry out the transaction if the user has sufficient balance or cancel the transaction if they do not.
These six rules must be programmed into a token to be considered ERC-20. Without clear instructions for these rules or standards, the token wouldn’t be able to interact with smart contracts effectively, which could cause numerous issues.
History of ERC-20
“ERC-20” stands for “Ethereum Request for Comments” and was first proposed by Fabian Vogelsteller, a blockchain developer and programmer, back in 2015. At the time, a proposed standard outlined common rules that could be implemented into the Ethereum network to ensure that new projects or coins would function correctly when utilized.
That goal came to fruition as the Ethereum network officially adopted the standards in 2017. Since then, ERC20 has served as a guiding light for Ethereum developers.
The Importance and Impact of ERC-20
The ERC20 standard made many initial coin offerings (ICOs) possible in recent years, making it easy for developers to create decentralized applications (dApps) on Ethereum.
To be more explicit, the standard makes implementing new tokens simpler for developers of decentralized applications (dApps) since there is a standard protocol to follow. ERC-20 tokens can offer high liquidity, and smart contract transactions are considered low-risk if the programming is done correctly.
How to Store ERC-20 Tokens
To hold ERC-20 tokens, users need an ERC-20 wallet, as with any other crypto. But what’s important is to ensure that the crypto wallet in question supports tokens of this nature. Fortunately, some wallets have been designed explicitly to store ETH and ERC-20 tokens, including:
• MetaMask
• MyEtherWallet
• Trust Wallet
• Mist Wallet
• Atomic Wallet
Wallets like these can also interact with other blockchain-based platforms, such as DeFi apps and NFT marketplaces.
Storing crypto in any wallet is generally considered good practice to back up your private keys and seed phrase. Giving someone else access to your keys or phrase could allow them to take ownership of all the crypto in that wallet.
The Takeaway
ERC-20 represents a set of standards and rules used on the Ethereum blockchain and is also used to create tokens issued on Ethereum. Many popular utility tokens are also ERC-20 tokens, a list that includes Basic Attention Token (BAT), Shiba Inu (SHIB), and Crypto.com Coin (CRO).
The critical thing to know about ERC-20 is that it provides a set of standards on the widely-used Ethereum network. That, in some ways, helps the crypto space self-manage and operate efficiently.
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FAQ
What is an ERC20 wallet?
An ERC-20 wallet is a crypto wallet that is either compatible with or specifically designed to hold and secure ERC-20 tokens. Numerous ERC-20 wallets on the market may come in various forms, such as hardware, mobile, or desktop wallets.
What’s the difference between ETH and ERC-20?
ETH, or “Ether,” is the native cryptocurrency of the Ethereum network and is used to facilitate transactions on the Ethereum blockchain. ERC-20 is the protocol standard for creating Ethereum-based tokens, which can be utilized and deployed in the Ethereum network.
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