What Is ERC-20: Streamlining Development on the Ethereum Blockchain

Ethereum pioneered open-source blockchain platforms by allowing developers to build and deploy decentralized applications (DApps). Although Ethereum offers robust capabilities, its network architecture poses challenges—such as congestion during peak usage—which leads to higher transaction fees and longer wait times. To address these issues, the ERC-20 token standard was developed to boost efficiency and make building on the Ethereum blockchain more accessible.

What Is an ERC-20 Token?

ERC-20 tokens are fungible digital assets that exist on the Ethereum blockchain. This technical standard simplifies smart contract development, enabling developers to create and launch tokens within Ethereum’s ecosystem. The ERC-20 framework sets strict rules developers must follow to ensure token compatibility. As a result, users and developers can participate seamlessly in any service, application, or protocol on the Ethereum network. Each ERC-20 token serves a specific function in the ecosystem and can be exchanged across Ethereum, streamlining development and enabling smooth interaction between applications and tokens.

ERC-20 Token Standard History

Fabian Vogelsteller first introduced the concept of ERC-20 tokens on Ethereum’s GitHub page, submitting a proposal titled “Ethereum Request Comment” that received the number “20” as the twentieth submission. After the Ethereum developer community approved the proposal, it was formally adopted as “Ethereum Improvement Proposal (EIP-20),” though it’s widely known as ERC-20. Since its rollout in 2015, all smart contract tokens on Ethereum must comply with these standards.

How ERC-20 Tokens Work

The ERC-20 token standard operates through smart contracts—automated agreements that execute once predefined conditions are met. Smart contracts powered by the Ethereum Virtual Machine (EVM) function like vending machines, carrying out programmed actions when triggered. Once the instructions are followed, ERC-20 tokens can be created and distributed. These tokens are fungible, meaning each token holds the same value as any other. Beyond facilitating frictionless asset transfers, ERC-20 tokens grant governance rights to holders. They can also be staked to support network operations, with stakers earning additional tokens as passive rewards.

Benefits of ERC-20 for Ethereum

The ERC-20 standard revolutionized Ethereum and the broader crypto industry. Its benefits include seamless interoperability, allowing compliant ERC-20 tokens to interact and exchange assets easily; robust security, leveraging Ethereum’s decentralized, immutable, and transparent infrastructure; full transparency, with every ERC-20 transaction recorded on the blockchain; high liquidity, enabling tokens to be traded on centralized exchanges and trading platforms; and flexible customization, empowering token creators to tailor ERC-20 tokens for specific uses, define total supply, add unique functions, set decimal precision, and select token symbols.

Drawbacks of the ERC-20 Token Standard

Despite its advantages, the ERC-20 standard has notable limitations. Its restricted flexibility prioritizes compatibility and stability but limits advanced functionality, preventing ERC-20 tokens from executing certain complex tasks. High transaction fees—especially during network congestion—can deter average users, as gas fees spike and make transactions costly. Limited universal acceptance further reduces liquidity, as not all crypto platforms support ERC-20 tokens. Additionally, if tokens are sent to smart contracts not programmed for ERC-20, permanent loss may occur since the recipient contract cannot recognize or process the tokens.

Popular ERC-20 Tokens

Since ERC-20’s introduction, the market has seen a surge in these tokens. Leading examples include Tether (USDT), a stablecoin pegged to the US dollar at a 1:1 ratio; Uniswap (UNI), the native token of a decentralized exchange built on an automated market maker model; Maker (MKR), the governance token for MakerDAO, an open-source protocol on Ethereum; and the native token of a major centralized exchange serving several key functions within its platform ecosystem.

Other ERC Token Standards

While ERC-20 is the most widely adopted token standard, several others exist: ERC-165, which verifies contract interface support; ERC-621, allowing authorized members to adjust token supply post-launch; ERC-777, enabling emergency recovery if private keys are lost; ERC-721, designed for non-fungible tokens (NFTs); ERC-223, proposed to recover tokens sent to incorrect addresses; and ERC-1155, which lets developers create more efficient transfer tokens, reducing transaction costs and supporting both NFTs and utility tokens.

Conclusion

The introduction of the ERC-20 standard marked a pivotal advance for Ethereum, making network development more straightforward. Created to alleviate congestion and high transaction fees, ERC-20 tokens also enhance interoperability, unlocking new opportunities for Ethereum and other blockchains. While ERC-20 is not the only token standard, it remains the backbone of the Ethereum ecosystem, driving innovation, accessibility, and efficiency in decentralized application and token development. ERC-20 tokens continue to play a vital role in blockchain, supporting the growth of decentralized solutions and broadening crypto use cases.

FAQ

What Are ERC-20 Tokens Used For?

ERC-20 tokens are used to create and manage digital assets on the Ethereum blockchain, providing a unified standard for token distribution and transactions. They are widely used in initial coin offerings (ICOs).

Is BTC an ERC-20 Token?

No, BTC is not an ERC-20 token. Bitcoin operates on its own blockchain as an independent cryptocurrency. However, tokenized BTC versions exist on Ethereum as ERC-20 tokens.

Is Solana an ERC-20 Token?

No, Solana is not an ERC-20 token. Solana is an independent blockchain with its native cryptocurrency, SOL, running on its own network—separate from Ethereum and ERC-20 tokens.