What is ERC-20?

Introduction

The Ethereum blockchain introduced a widely adopted token standard known as ERC-20, which has played a major role in Ethereum’s growth by acting as a universal and interoperable framework for fungible tokens. First proposed in 2015, ERC-20 quickly captured attention for its ability to redefine how digital assets are created and managed on a blockchain.

One of the biggest advantages of ERC-20 is that developers can issue tokens without building everything from scratch. By following a shared set of rules, tokens created under this standard can interact seamlessly with decentralized applications (dApps), wallets, and exchanges across the Ethereum ecosystem. This interoperability has been a key driver behind the explosive growth of Ethereum-based projects.

Another critical factor in ERC-20’s popularity is its wide acceptance by exchanges and wallets. This broad recognition increases liquidity, lowers technical barriers for new projects, and makes ERC-20 tokens a natural choice for fundraising and experimentation in a competitive crypto environment.

In short, ERC-20 has become a cornerstone of Ethereum, simplifying token creation through standardization and shaping modern digital asset issuance and management.

How Does ERC-20 Work?

ERC-20 defines a set of rules and functions that tokens must implement to operate correctly on Ethereum. These rules ensure that tokens can be transferred, approved, and tracked in a consistent way, allowing different tokens and applications to work together smoothly.

Core ERC-20 Functions

Every ERC-20 token must support the following functions:

• totalSupply – Returns the total number of tokens in existence

• balanceOf – Shows the token balance of a specific address

• transfer – Sends tokens from one address to another

• approve – Allows one address to authorize another to spend tokens on its behalf

• transferFrom – Executes a transfer using an approved allowance

• allowance – Displays how many tokens a spender is still allowed to use

ERC-20 Events

In addition to functions, ERC-20 requires events that notify applications of activity:

• Transfer – Emitted when tokens move between addresses

• Approval – Emitted when spending permission is granted

These events enable wallets, exchanges, and dApps to react in real time to token activity.

Token Interaction and Compatibility

ERC-20 solves the compatibility problem between different tokens. Because all ERC-20 tokens follow the same interface, wallets, exchanges, and decentralized applications can support many tokens with minimal effort. This consistency greatly improves usability and accessibility across the Ethereum ecosystem.

Advantages of ERC-20 Tokens

Interoperability
Because ERC-20 tokens follow a shared standard, they can be easily traded and used across multiple platforms that support Ethereum.

Simplified Development
Developers benefit from predefined rules, allowing them to focus on innovation rather than low-level compatibility issues.

High Liquidity
Widespread exchange support means ERC-20 tokens are generally easy to buy and sell.

Smart Contract Automation
ERC-20 tokens leverage Ethereum’s smart contracts to automate processes securely and transparently.

Limitations of ERC-20 Tokens

Scalability Challenges
As Ethereum usage increases, congestion and higher fees can impact transaction speed and cost.

Dependence on Ethereum
Any technical or security issue affecting Ethereum can also impact all ERC-20 tokens.

Standard-Wide Risk
Because many projects rely on the same standard, a flaw or limitation in ERC-20 can have ecosystem-wide effects.

Popular Use Cases for ERC-20 Tokens

Tokenized Assets
Real-world assets such as real estate or artwork can be represented as ERC-20 tokens, enabling fractional ownership.

Decentralized Finance (DeFi)
Many DeFi protocols rely on ERC-20 tokens for lending, borrowing, trading, and liquidity provision.

Initial Coin Offerings (ICOs)
Startups often issue ERC-20 tokens during ICOs to raise capital and distribute value to early supporters.

Governance
Some projects use ERC-20 tokens to grant voting rights on protocol upgrades and policy decisions.

Loyalty and Rewards Programs
Businesses can reward users with ERC-20 tokens for engagement, purchases, or referrals.

Well-Known ERC-20 Tokens

Popular examples of ERC-20 tokens include:

• Uniswap (UNI)

• Chainlink (LINK)

• Tether (USDT on Ethereum)

Frequently Asked Questions

Are all Ethereum tokens ERC-20?
No. ERC-20 is the most common standard for fungible tokens, but others exist, such as ERC-721 for NFTs.

Can ERC-20 tokens be exchanged for other cryptocurrencies?
Yes. Most major exchanges support ERC-20 tokens, providing liquidity and multiple trading pairs.

Disclaimer

This article is for informational purposes only and does not constitute financial or investment advice. Cryptocurrency markets involve significant risk, including price volatility and regulatory uncertainty. Always conduct your own research and consult qualified professionals before making investment decisions.