ERC-20 Explained: Streamlining Development on the Ethereum Blockchain

Ethereum stands as one of the first open-source projects empowering developers to build and deploy decentralized applications (DApps). While the Ethereum network delivers substantial benefits, it also faces limitations. For instance, the network can struggle during periods of high activity, causing transaction fees to spike and wait times to lengthen.

To address these challenges, the ERC-20 standard (Ethereum Request for Comment 20) was introduced. This token standard enhances efficiency and significantly streamlines development on the Ethereum blockchain. It establishes a set of rules that Ethereum tokens must follow to ensure compatibility with decentralized applications and other products and services across the ecosystem.

The standard simplifies the development process within the network, allowing developers to focus on innovation rather than foundational technical details. ERC-20 tokens are created and issued once smart contracts fulfill predefined conditions. Beyond just compatibility, the ERC-20 standard guarantees secure and transparent transactions. These tokens are highly liquid and can be tailored for specific use cases.

Nevertheless, ERC-20 has its drawbacks, including limited flexibility, comparatively high transaction fees, incomplete adoption, and potential issues when receiving tokens.

What Is an ERC-20 Token?

ERC-20 tokens are fungible digital assets on the Ethereum blockchain. This technical standard streamlines the development of smart contracts and enables the consistent creation and deployment of tokens on Ethereum. Developers must strictly adhere to the ERC-20 rules to guarantee token compatibility.

This standardization empowers users and developers to engage seamlessly with any service, application, or protocol on the Ethereum network without compatibility concerns. ERC-20 tokens are interchangeable across the network, each serving a distinct role in the ecosystem.

The standard greatly simplifies the development phase by providing a clear, predictable framework. It ensures interoperability between applications and tokens, creating a cohesive environment for the entire Ethereum ecosystem. Developers can focus on building innovative features instead of solving basic compatibility challenges.

History of the ERC-20 Token Standard

The ERC-20 concept was first proposed by Fabian Vogelsteller on Ethereum's GitHub. He submitted his proposal as an "Ethereum Request Comment," which became number 20—the twentieth comment on the page. The Ethereum development community approved Vogelsteller’s idea, which was adopted as Ethereum Improvement Proposal (EIP-20), now widely known as ERC-20.

Since its implementation in 2015, all smart contract tokens developed on Ethereum must comply with this standard. This standardization marked a pivotal moment for Ethereum, enabling a surge in new projects and decentralized applications. Over time, ERC-20 has become the industry standard for token creation on Ethereum, fueling the growth of a diverse and dynamic ecosystem.

How ERC-20 Tokens Work

The ERC-20 token standard is designed for use with smart contracts—self-executing agreements that trigger when specific conditions are met. Smart contracts, powered by the Ethereum Virtual Machine (EVM), function like automated vending machines programmed to perform actions in defined scenarios. This is how ERC-20 tokens operate.

ERC-20 tokens are created and issued after all predefined instructions and conditions are satisfied. They are fungible, meaning each token holds the same value. This quality simplifies asset exchanges between users. In addition to facilitating asset transfers, ERC-20 tokens also grant governance rights to holders.

Additionally, tokens can be staked to support network operations. Those who stake receive additional tokens as rewards, creating opportunities for passive income. The staking feature encourages active participation and enhances Ethereum’s security and stability.

ERC-20 Benefits for the Ethereum Network

The ERC-20 token standard has fundamentally transformed both Ethereum and the broader cryptocurrency landscape. The advantages of ERC-20 tokens are extensive and impactful.

Compatibility

Compatibility is a core challenge in the crypto sector. Without practical means to exchange assets across blockchains, the process becomes complex and hinders global crypto adoption. ERC-20 enables tokens that meet its criteria to seamlessly interact and exchange value.

For example, users can easily swap one ERC-20 token from one project for another. This compatibility drives interoperability, enables rapid token transfers, and facilitates favorable exchanges. It creates a frictionless ecosystem where users can move freely among applications and services.

Enhanced Security

ERC-20 tokens are built to Ethereum’s specifications and benefit from the network's decentralization, immutability, and transparency. As a result, malicious actors cannot manipulate token supply, transfers, withdrawals, or validation processes.

The blockchain records every transaction, allowing anyone to verify activity. This transparency—coupled with decentralization—provides a secure environment where trust is established through code rather than intermediaries.

Transparency

ERC-20 tokens inherit the transparency of blockchain technology. Every ERC-20 transaction is recorded on Ethereum, making token movements fully traceable. This visibility sets a new standard for tracking token history and usage.

The standard also helps authenticate transactions and tokens, further protecting owners and developers. Users can independently confirm any transaction’s legitimacy, establishing trust based on verifiability rather than blind faith.

High Liquidity

ERC-20 tokens enjoy high liquidity, allowing them to be traded on both centralized and decentralized exchanges. Their broad availability makes them a popular choice for investors seeking to capitalize on crypto market volatility.

This liquidity makes it easy for traders and investors to enter or exit positions in response to market trends. The widespread presence of ERC-20 tokens across platforms also enables efficient price discovery and arbitrage opportunities.

Adaptability and User-Friendliness

Token creators and developers can customize tokens to achieve specific goals. They can set the total supply, add unique features, determine decimal precision, and choose a ticker symbol. This flexibility allows projects to design tokens that fit their exact requirements.

ERC-20 tokens are not only easy to configure but also convenient for users. They can be created and managed with tools like MetaMask, MyEtherWallet, and other compatible wallets. The simplicity and accessibility encourage ecosystem innovation and lower barriers for new projects.

Drawbacks of the ERC-20 Token Standard

While ERC-20 has many strengths, understanding its limitations is essential for a balanced view.

Limited Flexibility

ERC-20 was designed for compatibility and stability—valuable goals that come at the cost of some flexibility. ERC-20 tokens cannot perform certain complex operations or support advanced logic. This limitation can be a significant hurdle for developers needing more versatile tokens.

This rigidity may inhibit innovation in use cases where custom features are required. Developers might need to adopt other standards or develop workarounds to address unique project needs.

High Transaction Fees

Transacting with ERC-20 tokens can be costly due to gas fees. These fees are required for every transaction, and depending on Ethereum network congestion, they can be prohibitive for average users. Gas prices fluctuate with network activity, making transaction costs unpredictable.

This uncertainty discourages users—especially those with lower capital—from holding or transferring these tokens. During network peaks, fees can reach levels that make small transactions uneconomical.

Lack of Universal Adoption

Not every cryptocurrency exchange supports ERC-20 tokens. Despite broad industry support, some platforms do not list or process these tokens, limiting their liquidity. This partial adoption fragments the market and can restrict access for certain users.

Additionally, some jurisdictions have regulatory barriers that may limit the availability of specific ERC-20 tokens, creating geographic obstacles to broader adoption.

Reception Issues

ERC-20 tokens can be lost if sent to smart contracts that do not support the standard. If a user sends tokens to an incompatible contract, those tokens may be irreversibly lost. This happens because some recipient contracts are not programmed to recognize ERC-20 tokens, and the standard cannot notify the contract of an incoming transfer.

This issue has resulted in millions of dollars in lost tokens, underscoring the importance of verifying destination address compatibility before transfers.

Popular ERC-20 Tokens

Since the ERC-20 standard was launched, numerous tokens have entered the market. The following are among the most prominent and influential.

Tether (USDT)

Tether (USDT) is a leading ERC-20 stablecoin on Ethereum. It was created to boost transaction throughput and lower costs. USDT is pegged to the US dollar at a 1:1 ratio, delivering price stability in volatile markets.

The issuer claims this ratio is maintained by holding an equivalent amount in US dollars in a separate, secure account. USDT is widely used to move funds between exchanges. Trading pairs with USDT are extremely popular on centralized platforms, bridging volatile cryptocurrencies and dollar-based stability.

Uniswap (UNI)

Uniswap is a decentralized exchange (DEX) built on Ethereum that supports ERC-20 tokens. UNI is the platform’s native ERC-20 token. Uniswap is notable for its automated market maker (AMM) model.

Unlike centralized exchanges, Uniswap operates without order books or a central matching engine. Users trade directly through liquidity pools, and UNI holders participate in governance by voting on protocol upgrades and parameter changes.

Maker (MKR)

Maker (MKR) is the governance token of MakerDAO, an open-source protocol on Ethereum. MKR holders oversee MakerDAO and manage the Maker protocol. This decentralized app enables users to generate DAI, a stablecoin pegged to the US dollar.

MKR holders manage the project through scientific governance, including executive voting and governance polls. Each MKR token locked in a voting contract equals one vote, giving holders direct control over protocol development.

Major Exchange Platform Token (BNB)

BNB originated as an ERC-20 token and is the native token of a leading centralized exchange. Within its ecosystem, BNB serves multiple roles. Its growing popularity has led to wider distribution on both decentralized and centralized exchanges.

BNB holders receive trading fee discounts, can participate in token launches, and access various platform services.

Other ERC Token Standards

ERC-20 is the most widely used token standard, but several others address specialized needs.

ERC-165 confirms whether a contract can support a given interface. This standard enhances interoperability by enabling contracts to declare the interfaces they implement.

ERC-621 allows authorized project participants to increase or decrease token supply after issuance. This flexibility supports dynamic token economy management.

ERC-777 provides emergency recovery if a user loses their private keys and also offers enhanced privacy and anonymity through advanced token management features.

ERC-721 is designed for non-fungible tokens (NFTs). Since ERC-20 tokens are fungible, ERC-721 was introduced to represent unique, non-interchangeable assets.

ERC-223 addresses accidental token loss by enabling the return of tokens sent to incorrect addresses. This standard boosts security by preventing losses from address errors.

ERC-1155 lets developers create more efficient and cost-effective tokens for transfers. This multi-token standard is compatible with both NFTs and utility tokens, providing a versatile solution for diverse applications.

Conclusion

The introduction of the ERC-20 token standard profoundly impacted the growth of Ethereum and the broader crypto ecosystem. ERC-20 was developed to overcome processing limitations and reduce transaction fees on Ethereum. It also improves network compatibility and creates new opportunities for advancing Ethereum and other blockchains.

ERC-20 is not an isolated standard; it works alongside other projects and standards to continually enhance the network and address evolving needs in blockchain. Its success has inspired numerous other standards, each contributing unique innovations and solutions.

Today, ERC-20 serves as the backbone of the Ethereum ecosystem, enabling thousands of projects and decentralized applications. Despite some limitations, its positive influence on crypto adoption and the rise of decentralized finance is undeniable.

FAQ

What is the ERC-20 standard and what role does it play in the Ethereum ecosystem?

ERC-20 is an Ethereum token standard that specifies functions and interfaces for compatibility. It enables interoperability between tokens and applications, supporting seamless transactions throughout the Ethereum ecosystem.

What is the difference between ERC-20 tokens and Bitcoin?

Bitcoin is a standalone digital currency with its own blockchain. ERC-20 tokens are created on Ethereum and follow a unified standard for various applications, unlike Bitcoin, which operates by its own set of rules.

How do you create an ERC-20 token? What are the necessary steps?

Write a smart contract specifying the token’s name, symbol, and decimal places. Deploy it on Ethereum. Ensure the contract implements the required ERC-20 functions.

What are the main functions and interfaces defined by the ERC-20 standard?

ERC-20 defines six main functions: totalSupply() returns the total supply; balanceOf() checks a balance; transfer() sends tokens; transferFrom() authorizes transfers; approve() grants approval; and allowance() checks approved amounts. These functions, along with two events, form the ERC-20 core interface.

What is the difference between the ERC-20 standard and ERC-721 (NFT)?

ERC-20 covers fungible, interchangeable tokens, while ERC-721 is designed for unique, non-interchangeable NFTs. ERC-20 powers standard cryptocurrencies; ERC-721 is for distinct digital assets.

What are the security risks when transacting with ERC-20 tokens?

Risks include smart contract vulnerabilities, man-in-the-middle attacks, and private key leaks. Always confirm the transaction address and ensure network security.

How do you add and manage ERC-20 tokens in MetaMask or other wallets?

In MetaMask, select "Import Token" and enter the token’s contract address. MetaMask auto-detects most popular tokens. You can also hide or remove tokens as needed.

How are ERC-20 token gas fees calculated?

Gas fees equal the amount of gas used multiplied by the gas price in Gwei. ERC-20 transfers typically use about 50,000 gas, costing between $0.20 and $0.50 depending on Ethereum network activity.