The ERC-20 standard has become the bedrock of Ethereum’s token ecosystem, setting a unified protocol for creating fungible tokens and enabling seamless interaction across decentralized applications.
Originating from an Ethereum Improvement Proposal (EIP) by Fabian Vogelsteller in 2015, ERC-20 defines the rules and functions that any Ethereum-based token must follow to integrate smoothly with wallets, exchanges, and other smart contracts on the blockchain.
Understanding ERC-20 and Token Standards
ERC-20, short for “Ethereum Request for Comments,” with “20” indicating the specific proposal, delivers a technical standard for generating fungible tokens on the Ethereum network.
This standard laid the foundation for the widespread use of Ethereum’s blockchain as a platform for tokenized assets, allowing any developer to create tokens with a shared set of functionalities.
Unlike exclusive non-fungible tokens (NFTs), fungible tokens are substitutable, meaning each unit holds the same value and is inarticulate from others.
The standardization introduced by ERC-20 was pivotal in the rise of decentralized finance (DeFi) and the initial coin offering (ICO) boom of 2017. It gave developers the ability to leverage Ethereum’s decentralized network without the need to design their own token frameworks from scratch.
As a result, this standard democratized token creation, enabling the rapid growth of the Ethereum ecosystem.
What Are Token Standards and Why Are They Important?
Token standards such as ERC-20 provide a framework that outlines how smart contracts should behave and interact on their underlying blockchain.
These standards define essential parameters for tokens, including rules for how transactions are approved, token supply is managed, and data is accessed.
The ERC-20 token standard, in particular, ensures that newly minted tokens are interoperable with third-party services, such as wallets and exchanges, allowing for a seamless user experience and efficient token transactions.
Without a universal standard, developers would need to create custom token codebases, potentially causing incompatibility issues with decentralized applications and wallets.
ERC-20 addresses this problem by specifying rules for token interoperability, enabling users to trade, hold, and exchange ERC-20 tokens easily across platforms.
By adhering to a consistent standard, tokens built on the ERC-20 framework can be immediately integrated with Ethereum’s ecosystem, creating a broad network effect.
How ERC-20 Tokens Work
ERC-20 tokens operate on Ethereum through a set of rules and functions embedded within smart contracts. An application programming interface (API) outlines the essential functions of ERC-20 tokens, providing compatibility with decentralized applications, wallets, and exchanges.
This API establishes six primary functions that every ERC-20 token must implement:
- Total Supply: Defines the maximum number of tokens that can exist within the smart contract.
- Balance Of: Retrieves the token balance of any Ethereum wallet, allowing users and applications to track token ownership.
- Transfer: Enables direct token transfers between users.
- Transfer From: Allows smart contracts to facilitate token transfers on behalf of an owner, which is useful for applications like decentralized exchanges.
- Approve: Sets a limit on the number of tokens that a smart contract can withdraw from an account.
- Allowance: Provides data on how many tokens an approved address can spend from another user’s balance.
These functions allow ERC-20 tokens to be flexible and programmable, supporting various use cases within the Ethereum ecosystem.
They can power decentralized exchanges, lending platforms, voting mechanisms, and reward systems. Each function ensures that tokens conform to Ethereum’s standards, enabling smooth interaction with the rest of the blockchain.
Popular ERC-20 Tokens in the Market
As of today, thousands of ERC-20 tokens exist, each serving unique purposes in the cryptocurrency ecosystem. However, some ERC-20 tokens have achieved widespread adoption and have become integral to decentralized finance, gaming, and governance on Ethereum.
Here are some notable ERC-20 tokens:
- Tether (USDT): The most widely-used stablecoin, USDT is pegged to the US dollar, providing a reliable store of value in a volatile market.
- USD Coin (USDC): Jointly developed by Circle and Coinbase, USDC is another USD-backed stablecoin, fully collateralized and transparent.
- Polygon (MATIC): MATIC is a utility token used for staking and securing the Polygon network, an Ethereum scaling solution.
- Shiba Inu (SHIB): Originally created as a meme coin, SHIB has grown into a decentralized experiment with a large supply and strong community.
- Uniswap (UNI): As the governance token for the Uniswap protocol, UNI allows holders to participate in decision-making for one of the largest decentralized exchanges.
- Cronos (CRO): The native token of the Cronos blockchain, CRO is recognized for its low transaction fees and high speed.
- Chainlink (LINK): LINK is used as a payment token within Chainlink, which enables the integration of real-world data with smart contracts.
- Dai (DAI): A decentralized stablecoin, DAI is soft-pegged to the US dollar and managed by the MakerDAO community.
- Render Token (RNDR): A utility token on the Render Network, RNDR facilitates decentralized GPU-based rendering for digital content creation.
- Arbitrum (ARB): The governance token for the Arbitrum blockchain, ARB plays a key role in enhancing Ethereum’s scalability.
These tokens represent only a small fraction of the ERC-20 ecosystem, which includes a variety of projects ranging from stablecoins to governance and utility tokens.
Why ERC-20 Became the Gold Standard for Crypto Tokens
Before ERC-20 was introduced, Ethereum developers faced significant challenges in building compatible tokens and protocols. Each new token required custom infrastructure and, often, bespoke blockchain bridges to facilitate exchange, making development costly and complex.
ERC-20 eliminated these obstacles by introducing a unified token framework, significantly lowering the barrier to entry for developers and fostering a vibrant ecosystem of interoperable tokens and decentralized applications.
ERC-20’s widespread adoption can be attributed to its fungibility, which makes it particularly suitable for digital assets like cryptocurrencies. Additionally, ERC-20 tokens are customizable, allowing developers to introduce unique features and utilities.
For instance, ERC-20 tokens can incorporate voting rights or rewards systems, adding value to token holders and encouraging community engagement.
By creating a common standard, ERC-20 fostered an environment where tokens could interact seamlessly across platforms.
This interoperability sparked the ICO boom of 2017, during which developers leveraged the ERC-20 framework to raise billions of dollars for blockchain projects.
The ICO era marked a defining moment in cryptocurrency, with numerous projects launched that have since become pillars of the blockchain industry.
ERC-20’s Role in the Ethereum Ecosystem
As Ethereum’s original token standard, ERC-20 paved the way for decentralized finance (DeFi), gaming, and other blockchain-based applications.
However, the success of ERC-20 also inspired the creation of new token standards designed to meet specific use cases. These alternatives include:
- ERC-777: A fungible token standard that builds upon ERC-20 with enhanced interoperability features and backward compatibility.
- ERC-721: A non-fungible token (NFT) standard that facilitates unique assets on the blockchain, popular in digital art and collectibles.
- ERC-1155: A multi-token standard combining fungible and non-fungible tokens, enabling developers to create tokens with diverse attributes and functionalities within a single contract.
Each of these standards builds upon ERC-20’s framework, expanding the possibilities of decentralized technology on Ethereum and catering to new industries and use cases.
Buying ERC-20 Tokens
With the popularity of ERC-20 tokens, acquiring them has become straightforward. Platforms like Crypto.com make it easy for users to purchase ERC-20 tokens and other cryptocurrencies using various payment methods, including credit cards, Apple Pay, and Google Pay.
Within these apps, users can access a wide array of ERC-20 tokens, enabling participation in the Ethereum ecosystem.
Final Thoughts on ERC-20’s Legacy
The ERC-20 standard has become a foundation of the Ethereum network, enabling the development of new projects and escalating the opportunity of blockchain applications.
While newer token standards continue to emerge, ERC-20 remains foundational, powering a majority of the Ethereum-based tokens in circulation today.
Its role in driving the ICO boom and popularizing decentralized applications demonstrates the value of a shared standard for token creation.
As Ethereum’s ecosystem continues to evolve, ERC-20 will remain a testament to the power of open-source development and the potential of blockchain technology.