The cryptocurrency market is home to a wide variety of digital assets, each differing in various parameters, including the standard on which they are built. The ERC-20 token standard has become a cornerstone of the crypto industry. Its creation led to the emergence of numerous coins that are now essential to the existence of the industry.
In this comprehensive guide, we’ve explored what the ERC-20 token standard is, how it works, and how it differs from other token standards.
What is the ERC-20 Token Standard?
Definition and Importance of ERC-20
Let’s begin by answering the question: What is ERC-20?
ERC-20 is a technical standard that defines the rules for creating tokens on the Ethereum blockchain. The "20" in ERC-20 refers to the proposal number within the Ethereum Request for Comments (ERC) process, which allows developers to suggest improvements to the Ethereum network.
This token standard sets the basic rules, functions, and methods for creating and circulating tokens, ensuring their compatibility with wallets, exchanges, and services across the ecosystem. In this guide, we’ll explore how ERC-20 works and what makes it unique compared to other standards.
Top 10 ERC-20 token list (in terms of market capitalisation). Source: etherscan
History and Evolution of ERC-20
The ERC-20 standard was proposed by Fabian Vogelsteller and Vitalik Buterin, co-founder of Ethereum, in 2015. After being accepted by the Ethereum community, it became the most widely used standard for creating tokens on Ethereum.
The proposal outlined the core concept and technical details, marking a significant step towards the growth of the Ethereum ecosystem. You can learn more about the development of ERC-20 and its specifications via the official documentation.
How Does ERC-20 Work?
Key Functions of ERC-20 Smart Contracts
The ERC-20 standard is the foundation of most tokens created on the Ethereum blockchain. These tokens are represented by smart contracts — digital counterparts of traditional contracts, designed to automate operations with digital assets by defining clear token rules. For a deeper dive into Ethereum smart contracts and how to interpret them, check out our detailed guide.
What does a smart contract look like? Source: Hyperledger
Standard Methods
ERC-20 smart contracts include a set of key functions that govern token behaviour. These standardised methods ensure the transparency and predictability of all ERC-20 tokens:
⚙️ totalSupply: Displays the total number of tokens in circulation.
🔨 balanceOf: Shows the token balance of a specific address.
🔧 transfer: Facilitates the transfer of tokens between addresses.
Each of these functions is strictly defined, meaning they always perform their designated role. This standardisation makes ERC-20 tokens highly adaptable for use in a wide range of decentralised applications (dApps) and across various sectors of the crypto market.
Gas Fees and Costs
One important characteristic of ERC-20 tokens is the requirement to pay gas fees for transactions. Gas fees cover the computational resources needed to process operations on the Ethereum network.
The cost of gas fees depends on:
🧩 The complexity of the transaction: For example, a simple transfer costs less than a transferFrom operation.
🛜 Network congestion: Higher demand leads to increased fees.
Users should carefully consider these costs, especially when transferring small amounts, as fees can represent a significant portion of the transaction value.
ERC-20 vs. Other Token Standards
The evolution of tokens in the Ethereum ecosystem extends beyond ERC-20. Other token standards address different needs, providing flexibility for developers.
ERC-20 vs ERC-721
While the ERC-20 standard is designed for fungible tokens, ERC-721 is used for non-fungible tokens (NFTs). Each ERC-721 token is entirely unique and cannot be replaced with an equivalent, unlike ERC-20 tokens.
Non-fungible tokens are particularly appealing to investors and collectors due to their unique characteristics. They represent specific objects or rights, such as digital artwork or in-game items. For a deeper dive into NFTs and whether they are worth investing in, check out our dedicated guide.
In essence, ERC-20 suits mass economic transactions, while ERC-721 is ideal for unique digital assets.
ERC-20 vs ERC-404
The ERC-404 standard combines the properties of ERC-20 fungible tokens and ERC-721 non-fungible tokens. Its purpose is to expand the utility of NFTs within the decentralised finance (DeFi) ecosystem. Technically, ERC-404 is a smart contract template that integrates the functionalities of both ERC-20 and ERC-721.
The concepts behind ERC-404 were also employed in the development of a similar token standard known as DN-404, introduced in February 2024.
ERC-20 vs ERC-1155
The ERC-1155 standard offers the ability to create multiple token types within a single smart contract, enhancing its versatility. This feature simplifies the management and exchange of blockchain assets by consolidating them within a unified framework.
ERC-20 vs. Future Token Standards
Several emerging token standards aim to address existing challenges in the Ethereum ecosystem, such as security and scalability:
☝️ ERC-223: Minimises the risk of losing tokens sent to incompatible addresses.
✌️ ERC-777: Enhances functionality and smart contract interactions while maintaining compatibility with ERC-20.
The implementation of these innovations has the potential to make Ethereum even more user-friendly and appealing, both for casual users and developers.
Token Standard | Main Use | Token Type | Key Features | Compatibility | Notable Examples |
| ERC-20 | Mass economic transactions | Fungible | Allows mass token transactions and standard functions like transfer and balance checks. | Compatible with most platforms and wallets. | USDT, DAI, LINK |
| ERC-721 | Unique digital assets | Non-Fungible (NFTs) | Each token is unique and cannot be replaced by another token. | Primarily used for NFTs. | CryptoKitties, digital art |
| ERC-404 | Expanding DeFi and NFT integration | Hybrid (Fungible + Non-Fungible) | Combines ERC-20 and ERC-721 functionality for decentralized finance use cases. | Compatible with both ERC-20 and ERC-721. | New standard introduced in February 2024 |
| ERC-1155 | Multi-type token management | Multi-token (Fungible + Non-Fungible) | Allows creation and management of multiple token types under a single contract. | Efficient for projects with multiple asset types. | Enjin Coin, gaming assets |
| ERC-223 | Prevents token loss | Fungible | Reduces risk of token loss due to incompatible addresses during transfers. | Compatible with ERC-20. | None yet widely adopted. |
| ERC-777 | Improved token interaction | Fungible | Enhances functionality and interaction with smart contracts while maintaining ERC-20 compatibility. | Backward compatible with ERC-20. | No major examples yet. |
ERC-20 Use Cases and Applications
ERC-20 tokens have become an integral part of the cryptocurrency ecosystem, often without us even realising it. Among the most well-known tokens built on this standard are USDT (Tether), the most widely used stablecoin, and LINK (Chainlink), a token for oracle networks that consistently ranks among the top 15 digital assets by market capitalization.
Today, ERC-20 tokens are extensively employed across various sectors of the crypto market. Their widespread use and the simplicity of creating tokens using the ERC-20 standard have contributed to the continuous growth in their numbers.
ERC-20 Tokens in ICOs
The ERC-20 standard played a central role during the ICO (Initial Coin Offering) boom in 2017. Many startups adopted this standard to create and sell tokens to investors as a means of raising funds. This process allowed project teams to secure financing while providing the following benefits:
🙋 For investors: They receive tokens in exchange for ETH or other cryptocurrencies.
💰 For projects: Tokens could represent a share in the project, grant access to its products or services, or function as independent assets.
ICOs structure. Source: Investopedia
Introduced by Ethereum developers, the ERC-20 standard streamlined the ICO process, which serves as a blockchain-based equivalent to IPOs (Initial Public Offerings), enabling easier investment in crypto projects.
Decentralised Finance (DeFi) and ERC-20
Another prominent use case for ERC-20 tokens is decentralised finance (DeFi). This sector has revolutionised traditional financial services, with ERC-20 playing a pivotal role. Thanks to their compatibility with smart contracts, ERC-20 tokens are widely utilised in:
🫴 Lending and borrowing: Platforms such as Aave and Compound enable users to earn interest or take loans using ERC-20 tokens.
💱 Decentralised exchanges (DEXs): Protocols like Uniswap and SushiSwap allow for direct token swaps between users.
💸 Staking and yield farming: Investors can lock their tokens to earn rewards.
These applications make Ethereum tokens built on the ERC-20 standard a convenient and highly sought-after class of digital assets. Their simplicity and functionality have secured their popularity within the cryptocurrency industry.
Creating an ERC-20 Token
An ERC-20 token can be created by writing a smart contract that adheres to the ERC-20 standard using the Solidity programming language. While this may initially seem complex due to the need for coding, the process is manageable with the right guidance.
Solidity language. Source: DAppUniversity
Step-by-Step Guide to Writing an ERC-20 Smart Contract
1. Define Token Parameters
The first step in creating an ERC-20 token is defining its parameters. You will need to decide on the token's name (e.g., Ethereum), ticker symbol (e.g., ETH), and total supply (e.g., 1 billion tokens).
2. Write the Contract
An ERC-20 smart contract in Solidity typically includes a few fundamental functions:
- totalSupply
- balanceOf
- transfer
Each of these functions has been discussed in detail earlier in the text.
An example of a simple smart contract written in Solidity: Source: ChatGPT
3. Test the Contract
The final step is testing your smart contract on a testnet such as Rinkeby or Ropsten. This allows you to identify and fix any potential errors before deployment.
As an additional step, it’s highly recommended to conduct a smart contract audit. During the audit, cybersecurity experts evaluate the contract’s resilience against hacking, bugs, and errors. This process not only mitigates vulnerabilities but also boosts user confidence in your project.
Once you’ve confirmed everything is functioning correctly — congratulations! Your token is ready to launch on the blockchain.
Conclusion
The ERC-20 standard plays a pivotal role in the Ethereum ecosystem. It ensures token standardisation and compatibility, while also holding a significant position in the DeFi market.
Despite the emergence of more modern alternatives, ERC-20 remains one of the most widely used standards for creating tokens on the Ethereum blockchain.
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This article is not investment advice or a recommendation to purchase any specific product or service. The financial transactions mentioned in the article are not a guide to action. It’s not intended to constitute a comprehensive statement of all possible risks. You should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about making any operations with cryptocurrency.
