ERC-20

Thousands of tokens live on Ethereum, from stablecoins to governance tokens. Yet almost any Ethereum wallet can hold them, and almost any decentralized exchange can trade them. That's thanks to ERC-20, a shared standard that makes tokens speak the same language.

What Does ERC-20 Mean?

ERC-20 is a standard that sets out the basic functions every fungible token on Ethereum should support. ERC stands for Ethereum Request for Comments, and 20 was the number assigned to the proposal. It was proposed in 2015 and has become the most widely used token standard in crypto.

Think of ERC-20 like the standard shape of a power plug in your country. Because every plug follows the same design, you can use any appliance in any socket without a special adapter. ERC-20 does the same for tokens: as long as a token follows the standard, wallets and apps can support it without custom work.

What Fungible Means

Fungible means every unit is identical and interchangeable. One dollar bill is worth the same as any other dollar bill, and one unit of an ERC-20 token is the same as any other unit of that token. This makes ERC-20 different from NFTs, where every token is unique.

How ERC-20 Tokens Work

An ERC-20 token is created by deploying a smart contract on Ethereum. The contract keeps a record of how many tokens each address holds and contains the rules for moving them. Your wallet doesn't actually store the tokens. It reads your balance from the token's contract and shows it to you.

The Core Functions

The standard defines a small set of functions that every compliant token must include:

• totalSupply: Shows how many tokens exist in total.
• balanceOf: Returns how many tokens a specific address holds.
• transfer: Moves tokens from your address to another address.
• approve: Gives another address, such as a dApp, permission to spend a set amount of your tokens.
• allowance: Shows how many tokens an approved address is still allowed to spend.
• transferFrom: Lets an approved address move tokens on your behalf, up to its allowance.

How Approvals Work in Practice

The approve and transferFrom functions are what make DeFi possible. When you swap a token on a decentralized exchange for the first time, your wallet asks you to approve the exchange's contract to spend that token. Once approved, the contract can pull the agreed amount from your wallet when you confirm the trade. This two-step process is why some swaps need two transactions the first time and only one afterward.

Most tokens also include optional details like a name, a ticker symbol, and the number of decimals, which tells wallets how to display balances correctly. The standard also defines events that announce every transfer and approval, which is how wallets and blockchain explorers keep track of token movements.

Paying for Transactions

Even though you're sending a token, every ERC-20 transaction runs on Ethereum, so you pay the gas fee in ETH. If your wallet holds tokens but no ETH, you won't be able to move them until you add some.

Examples of ERC-20 Tokens

Many of the best-known tokens in crypto are ERC-20 tokens, including:

• Stablecoins: Major dollar-pegged stablecoins such as USDC are issued as ERC-20 tokens on Ethereum.
• Oracle tokens: Chainlink's LINK token is a widely used ERC-20 token.
• Governance tokens: Tokens like Uniswap's UNI let holders vote on protocol decisions.
• Wrapped assets: Wrapped ether (WETH) turns ETH into an ERC-20 token so it can be used in the same way as other tokens.

Interestingly, ETH itself isn't an ERC-20 token. It's Ethereum's native currency and existed before the standard. That's why many DeFi apps use wrapped ether behind the scenes, so they only have to handle one type of asset in their smart contracts.

Why ERC-20 Matters

Before ERC-20, every new token could work in its own way, which meant wallets and exchanges had to add support for each one individually. The standard made tokens predictable. Today, a new project can launch a token and expect it to work with existing wallets, exchanges, and DeFi apps right away. This played a major role in the growth of token launches, stablecoins, and decentralized finance on Ethereum.

ERC-20 Compared With Other Standards

ERC-20 is just one of several Ethereum token standards. ERC-721 is used for NFTs, where each token is unique, while ERC-1155 lets a single contract manage both fungible and non-fungible tokens. Many other blockchains that are compatible with the Ethereum Virtual Machine use the same ERC-20 design, sometimes under a different name.

Risks and Things to Watch For

• Wrong network: The same token can exist on several networks. Sending it on a network the recipient doesn't support can make the funds hard or impossible to recover.
• Fake tokens: Anyone can create a token with any name. Always verify the contract address from an official source.
• Unlimited approvals: Approving a dApp to spend unlimited tokens can be dangerous if that dApp is compromised. Review and revoke old approvals regularly.
• Sending to contract addresses: Tokens sent directly to a token's own contract address are often lost permanently.

Useful Links

• Ethereum token standards explained
• What is Ethereum?
• What are cryptocurrency addresses?
• What is a wrapped token?