For creating tokens on Ethereum, the ERC-20 standard is the de facto standard. It was created in 2015 by Vitalik Buterin and Fabian Vogelsteller, who saw a mess developing: wallets and exchanges had to perform unique work for every new token because developers were coding their tokens differently. Not scalable.
Thus, ERC-20 was adopted as the standard. It is just a set of features that each token must support, such as the ability to transfer tokens, verify balances, authorize spending, and so on. Developers’ tokens can be instantly integrated with the current infrastructure when they adhere to these guidelines. Your MetaMask wallet? Because they all speak the same language, it already understands how to handle any ERC-20 token.
The majority of well-known tokens, such as USDT, LINK, and UNI, use this standard. ERC-20 is the way to go if you want your token to function globally without having to persuade each platform to endorse you separately. It made Ethereum’s wild west of tokens more consistent, which was badly needed.
Why was ERC-20 Created?
Initially, before the launch of ERC-20, the Ethereum network faced several difficulties. Developers built these wrapped tokens with different implementations, making it nearly impossible for platforms to support them all.
For each wallet and exchange, early tokens required unique integration work. Adoption was hampered by this fragmentation, which also made the network more vulnerable to security threats.
The Problem It Solved
Token incompatibility created barriers to entry for both developers and users. Exchanges struggled to list new tokens because each required unique integration code.
Wallets encountered comparable difficulties. Building distinct systems for every implementation was necessary to support numerous token types, but this was neither sustainable nor scalable.
Unified Token Behavior
Ethereum tokens now have a unified language thanks to ERC-20. Platforms may handle hundreds or thousands of tokens with a single integration because all tokens that adhere to this standard act reliably.
The standard brought uniformity to the tracking, approval, and transfer of tokens. Decentralized apps and smart contracts can now communicate with any ERC-20 token without bespoke coding.
DeFi systems grew more quickly as a result of this interoperability. Applications that function with any compliant token could now be created by developers from the start.
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How ERC-20 Tokens Work
The Ethereum blockchain’s smart contracts are the only way ERC-20 tokens function. The logic of the token, including guidelines for its production, distribution, and transfer, is contained in these contracts.
You don’t have actual coins when you own ERC-20 tokens. Rather, the smart contract maintains your balance in a ledger. All transactions update this ledger according to predefined rules.
The Six Mandatory Functions
To ensure compliance with standards, each ERC-20 token must implement six essential features. All tokens behave consistently thanks to these functions.
Function | Purpose |
totalSupply() | Returns the total number of tokens in existence |
balanceOf() | Shows the token balance of a specific address |
transfer() | Moves tokens from sender to recipient |
transferFrom() | Allows approved third parties to transfer tokens |
approve() | Grants permission for token spending |
allowance() | Checks how many tokens an address can spend on behalf of another |
How Transactions Execute
You engage with the smart contract of ERC-20 tokens when you send them. After confirming that you have enough funds, the contract withdraws tokens from your address and adds them to the recipient’s balance.
More intricate interactions are made possible by the authorize and transferFrom functions. They enable features like automatic trading and staking protocols by enabling smart contracts to transfer tokens on your behalf.
All ERC-20 transactions incur gas fees because they require processing power on the Ethereum network. Miners or validators who handle transactions receive these fees in ETH from users.
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Common Use Cases of ERC-20 Tokens
Numerous applications across the blockchain ecosystem have been enabled by the ERC-20 standard. Because of its adaptability, it can be used for more than different types of cryptocurrencies.
Businesses and developers have leveraged this standard to create innovative financial products. The token economy has expanded dramatically thanks to the accessibility and reliability of ERC-20.
ICOs and Fundraising
In 2017 and 2018, initial coin offerings transformed startup financing. To attract capital from international investors without using conventional middlemen, projects issued ERC-20 tokens.
The standard simplified the fundraising process. After purchase, investors could store tokens in any wallet compatible with ERC-20.
Utility Tokens for DApps
Decentralized exchanges and applications use ERC-20 tokens to power their ecosystems. These utility tokens facilitate governance, provide access to services, or incentivize user involvement.
For lending, borrowing, and trading, DeFi platforms mostly rely on ERC-20 tokens. Protocols like Aave and Compound built entire financial systems around these tokens.
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Tokenized Assets and Rights
Businesses use the ERC-20 framework to tokenize tangible goods. There are now blockchain currencies for membership perks, gift cards, and loyalty points.
Voting rights in decentralized organizations are often represented by ERC-20 tokens. In proportion to their holdings, token holders participate in governance decisions.
Stablecoins
Stablecoins pegged to fiat currencies predominantly use the ERC-20 standard. These tokens use blockchain technology to enable transparent transfers while maintaining stable prices.
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Popular ERC-20 Tokens
The ERC-20 standard has been used to launch thousands of coins. Some have become household names in the cryptocurrency space due to their enormous market value and popularity.
The following tokens represent successful implementations of the standard:
- Tether (USDT): The US dollar-pegged stablecoin with the most market capitalization.
- USD Coin (USDC): A completely reserved asset-backed regulated stablecoin.
- Shiba Inu (SHIB): A meme token that attracted a lot of community support.
- Uniswap (UNI): The top decentralized exchange’s governance token.
- Chainlink (LINK): Enables decentralized oracle networks for smart contracts.
- Maker (MKR): Oversees the DAI stablecoin system and the MakerDAO protocol.
- Basic Attention Token (BAT): Rewards users for viewing digital advertisements
These tokens fall into several categories, including governance tokens and stablecoins. Their accomplishments show how adaptable and dependable the standard is.
Benefits of ERC-20
Platforms, users, and developers all benefit greatly from the ERC-20 standard. Its dominant position in the token ecosystem can be explained by these advantages.
Knowing these advantages makes it easier to see why ERC-20 is still the preferred option for new coin launches.
Interoperability
ERC-20-based tokens function flawlessly throughout the Ethereum network. Thousands of distinct tokens can be stored in any wallet that supports the standard without any changes.
Because the integration code is already in place, exchanges list new ERC-20 tokens fast. This compatibility accelerates market access for new projects.
Cross-platform functionality extends to DeFi tokens and protocols. Platforms can handle any compliant cryptocurrency with a single integration, facilitating intricate financial transactions.
Simplicity
The standardized framework makes token creation straightforward. Instead of weeks or months, developers can release new tokens in a matter of hours.
Current libraries and tools drastically reduce development time. OpenZeppelin offers certified smart contract templates that guarantee compliance and security.
This accessibility has democratized token creation. Individual developers and small teams can now compete with larger companies.
Transparency
The public Ethereum blockchain displays all ERC-20 token transactions. Without specific authorization, anyone can check balances, supplies, and transaction history.
The code for smart contracts is usually auditable and open source. This openness fosters trust and enables the community to spot problems before they become serious.
Security
Automated smart contract execution reduces human error in token transfers. Once deployed, the code adheres to predefined guidelines that cannot be altered at will.
The standardization itself provides security benefits. Wallets and exchanges minimize integration vulnerabilities by knowing exactly how to interact with any ERC-20 token.
Limitations of ERC-20
The ERC-20 standard has many shortcomings despite its widespread use. Users and developers are better able to make judgments when they are aware of these restrictions.
All tokens created on the Ethereum network are impacted by its limitations. Alternative solutions have been innovatively developed in response to these issues.
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Network Congestion and Speed
Ethereum uses sequential blocks to process transactions. Transaction delays occur due to network congestion during periods of high demand.
During peak hours, users could have to wait minutes or even hours for confirmations. Time-sensitive transactions face difficulties due to this uncertainty.
Gas Fees
Gas fees must be paid in ETH for each ERC-20 transaction. These costs can become unaffordable and vary according to network demand.
During congestion, the cost of simple token transfers might range from a few dollars to more than $50. Small transactions become economically unfeasible as a result.
Complex operations involving multiple smart contract interactions incur higher fees. DeFi users often pay substantial amounts to execute trades or claim rewards.
Token Transfer Risks
There may be an irreversible loss if ERC-20 tokens are sent straight to a smart contract address. The standard does not include built-in safeguards for this situation, unlike native ETH transfers.
This design error has resulted in the loss of tokens worth millions of dollars. Before confirming transactions, users must thoroughly check the destination addresses.
Scalability Concerns
The throughput capacity of the Ethereum foundation layer is constrained. The network struggles to manage rising transaction volumes as usage grows.
These problems are intended to be resolved by Ethereum updates and Layer 2 solutions. However, scalability characteristics are absent from the basic ERC-20 standard.
The Future of ERC-20
Alongside the larger Ethereum ecosystem, the ERC-20 standard is still developing. All tokens created on the platform will perform better due to the upcoming network updates.
ERC-20 coins are already supported by Layer 2 scaling solutions such as Optimism and Arbitrum. These networks preserve Ethereum’s security while enabling faster transactions and lower fees.
Role in DeFi Expansion
ERC-20 tokens are essential to decentralized finance. Complex financial primitives such as yield farming, lending protocols, and automated market makers are enabled by the standard.
On Ethereum, new DeFi ideas are still being developed. ERC-20 tokens can now travel across several blockchain networks thanks to cross-chain bridges, increasing their usefulness.
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Coexistence with Newer Standards
Since the introduction of ERC-20, more sophisticated token standards have emerged. While ERC-1155 supports both fungible and non-fungible tokens in a single contract, ERC-777 adds functionality such as transaction hooks.
Because of its ease of use and broad support, ERC-20 remains dominant despite these alternatives. For the launch of fungible tokens, most projects continue to use them.
The standard will likely remain useful for many years to come. Strong incentives for ongoing adoption are created by its established network effects.
Integration with Tokenized Economies
Traditional assets are increasingly moving onto blockchain rails. Established standards such as ERC-20 are being used to tokenize stocks, commodities, and real estate.
Regulatory clarity around digital assets will accelerate this trend. Expect more real-world assets to use ERC-20 for transparent ownership and transfer as regulatory frameworks develop.
Conclusion
Since 2015, ERC-20 has significantly changed the cryptocurrency market. By transforming Ethereum into a platform for a variety of digital assets, this technical standard allowed for previously unheard-of innovation in tokenized economies and decentralized finance.
The standard’s strong interoperability and exquisite simplicity are key factors in its success. An environment where thousands of assets coexist and communicate without issues was created by ERC-20, which defined consistent guidelines for token behavior. Whether you’re managing bitcoin portfolios, participating in DeFi protocols, or researching tokenized assets, knowing ERC-20 makes it easier for you to navigate the blockchain world.
For comprehensive tax reporting and portfolio tracking across all your ERC-20 tokens and crypto assets, KoinX provides the tools you need to stay compliant and informed in the ever-evolving digital asset landscape.
Frequently Asked Questions
What Makes A Token ERC-20 Compliant?
An ERC-20-compliant token must include specific features in its smart contract to produce a standardized, fungible token that works seamlessly across wallets, exchanges, and dApps on the Ethereum network. In addition to optional features such as name, symbol, and decimals, these functions have six required functions: totalSupply, balanceOf, transfer, transferFrom, approve, and allowance.
Can ERC-20 Tokens Be Converted To Other Standards?
No. It is not possible to convert ERC-20 tokens directly to other standards, such as ERC-721 or ERC-777. Projects can, however, design wrapper contracts that mint similar tokens on various standards while locking ERC-20 tokens. While the fundamental standard stays the same on the original chain, bridge protocols also allow tokens to be moved across blockchains while retaining value.
Why Do ERC-20 Transactions Require ETH For Gas?
On Ethereum, ERC-20 token transfers occur via smart contract interactions that require processing power. Gas costs are paid in ETH to validators who process these transactions. This system encourages validators to include your transaction in a block and stops network spam. ERC-20 coins cannot be moved without native ETH.
Are ERC-20 Tokens Safer Than Other Crypto Assets?
If smart contracts are properly audited, ERC-20 tokens, which inherit Ethereum’s security paradigm, are comparatively safe. However, external factors like exchange security and the quality of implementation determine security. Strong protection is provided via audited contracts from reliable developers, but users still need to follow security best practices, such as using hardware wallets and confirming contract addresses.
What Happens If I Send ERC-20 Tokens To A Wrong Address?
Sending ERC-20 tokens to the wrong address usually results in permanent loss, as blockchain transactions are irreversible. Tokens transmitted to a legitimate wallet address are accessible only to the owner of the private key. Since most smart contracts lack the ability to recover tokens delivered in error, sending tokens directly to a smart contract address without the necessary handling mechanisms results in irretrievable loss.