What are ERC-20 tokens?

What are ERC-20 tokens?

ERC-20 runs on the Ethereum network and stands for Ethereum Request for Comment (ERC), with the “20” representing the proposal identifier number within the blockchain. Any cryptocurrency operating on the Ethereum blockchain is considered an ERC-20 token.

To understand ERC-20 tokens, you must understand the Ethereum network and its ecosystem. Let’s quickly break it down.

What is Ethereum?

You’ve probably heard of Bitcoin (BTC) and Ethereum (ETH), but there is actually quite a big difference between them. While Bitcoin is a cryptocurrency mostly known as a store of value, Ethereum is a decentralized, open-source blockchain platform that enables the creation of decentralized applications, also known as “dApps.” These dApps are built using smart contracts.

Sounds complex? It is. But it’s also revolutionary. I’ll quote the creator of Ethereum, Vitalik Buterin.

“When I came up with Ethereum, my first thought was, “Okay, this thing is too good to be true.”

Smart contracts are programs stored on a blockchain that run when predetermined conditions are met. The evolution of smart contracts arose when the popularity of Ethereum grew, and it became necessary to find a way for these smart contracts to interact with each other. The answer was the ERC-20 token.

So, what are ERC-20 tokens?

Look at ERC-20 as a set of rules or a standard way of working that makes it easy for smart contracts to interact. The ERC-20 token standard allows developers to create their tokens on the Ethereum network that are interoperable with other products and services, as it sets the rules that all Ethereum-based tokens must follow.

There are several ERC standards on Ethereum, all standards with different use cases. These standards were created to optimize the Ethereum ecosystem in different ways. The ERC-20 is the most well-known standard within the whole crypto space, and most tokens on top of the Ethereum platform are based on the ERC-20 standard.

Let’s simplify it. You’re going to create a token on the Ethereum network. In the process of doing this, you’re handed some rules or guidelines that you have to follow when writing the code. These rules ensure your token functions properly on the network and are compatible with other tokens on the network. These rules are the ERC-20 token standard. Therefore, when deploying - you’re deploying an ERC-20 token.

Why are ERC-20 tokens important?

ERC-20 serves a key role in the Ethereum network. It provides technical guidelines (the ERC-20 token standard) for the developers to follow, simplifying the process of creating a new token or building a product for the blockchain.

Now, why is that important?
If you're going to create your token on Ethereum with the idea that other people will use it, you need it to be compatible with everything else running on the blockchain, right? You would want it to work with dApps, wallets, and other services designed for Ethereum tokens.

That’s where the value of ERC-20 tokens comes into play. Ethereum developers can ensure their new token will be compatible with other products and services on the blockchain.

Before the ERC-20 token standard was defined, everyone who created a token basically had to reinvent the wheel. Every token was different, and it was a very difficult and complicated process to have anything compatible with each other.

Examples of ERC-20 tokens

ERC-20 tokens quickly became the most used token on the Ethereum network, and the amount of token contracts has surpassed 500,000 since the standard was finalized. Here are some leading examples that can be bought on cryptocurrency exchanges.

  • Tether USD (USDT)
  • USD Coin (USDC)
  • Shiba Inu (SHIB)
  • DAI Stablecoin (DAI)
  • Uniswap (UNI)

Disadvantages with ERC-20 tokens:

We can all agree that the ERC-20 token standard is pretty great for the Ethereum ecosystem, but are there any disadvantages with ERC-20 tokens? It sure is.

  • Low scalability due to Ethereum network congestion
  • The simplified creation process makes it easy to launch scam tokens

Other ERC standards

While ERC-20 is the most used Ethereum standard, there are many more ERC standards with different use cases. Let’s take a look at some of the most popular ones.

The NFT standard. As non-fungible tokens (NFT) can’t be transferred using the ERC-20 standard, ERC-721 was developed.

The ERC-1155 standard provides an efficient solution allowing the transfer of both fungible and non-fungible tokens in a single transaction.

If you send tokens to the wrong address using ERC-20 tokens, they’re lost forever. ERC-223 is the solution to that. Sending ERC-223 tokens to the wrong smart contract will result in the transaction failing, and you’ll get the tokens back.

Even Bergan Bugge

Even Bergan Bugge

Account Executive at Presail