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ERC-20 is a standard used for creating and issuing smart contracts on the Ethereum blockchain. This standard contains specifics for the creation, design, and deployment of Ethereum network tokens.
Ethereum is the first blockchain to offer decentralized services on its network. To make these services possible, the blockchain allows other tokens besides its native coin — ETH — to fully function. Although there are several Ethereum token standards, including ERC-721 and ERC-777, the ERC-20 standard is the network’s standard for fungible tokens, including voting tokens and virtual currencies. ERC-20 tokens are useful for services such as creating and launching decentralized applications (dApps), decentralized exchanges (DEXs), and much more.
ERC-20 tokens are crypto assets that strictly adhere to Ethereum’s ERC-20 standard. They are also compatible with the Ethereum Virtual Machine (EVM). This standard supports seamless interoperability between all Ethereum tokens, exchanges, and Ethereum-based decentralized services. The ERC-20 token standard also enables developers to easily create crypto assets and blockchain products on the Ethereum network without building their own blockchains.
ERC-20 tokens serve multiple uses. While some function as financial assets, others may be useful for loyalty rewards or reputation points. ERC-20 tokens can be used for everything from buying digital assets in metaverses to representing physical objects like gold or real estate.
The ERC-20 standard outlines six parameters for the benefit of other tokens within the Ethereum blockchain. These parameters outline token transfers and how users access token data. The mandatory guidelines include:
- TotalSupply: Required for the token’s total supply, ensuring that a token does not exceed its maximum supply.
- BalanceOf: Required to determine the initial number of tokens assigned to a particular address at launch.
- Transfer: Required for guaranteed transfer of tokens to end users.
- TransferFrom: Required for token transactions initiated by users.
- Approve: Required to verify and check tokens in the smart contract to set the withdrawal limit.
- Allowance: Required to check that there is enough balance at a particular address to transfer tokens to another address.
This set of parameters ensures that different Ethereum tokens perform uniformly across the Ethereum network. Nearly all crypto wallets that support ETH also support ERC-20 compliant tokens.
ERC-20 tokens are some of the most commonly-used assets in the crypto space. Their popularity comes from a few known features, including:
- Transferable: ERC-20 tokens are transferable and therefore usable for transactions. As long as it fulfills specified requirements, an ERC-20 can easily move between wallets and contracts.
- Fungible: ERC-20 tokens are fungible. All related transaction histories are traceable even though token codes are identical.
- Fixed Supply: All ERC-20 tokens must have specified total supply amounts that are readily identifiable, so the ecosystem is aware of the total number of tokens in circulation.
Some popular crypto projects built on the ERC-20 standard include the following:
- Tether (USDT)
- Chainlink (LINK)
- USD Coin (USDC)
- Wrapped Bitcoin (WBTC)
- Dai (DAI)
- 0x (ZRX)
- Maker (MKR)
- Loopring (LRC)
- Basic Attention Token (BAT)
Despite the plethora of benefits ERC-20 tokens bring to the blockchain sector, there are still limitations and flaws. Some of these issues are:
Instability: The Ethereum network is moving from the Proof of Work consensus method to the Proof of Stake. This upgrade focuses on addressing several issues, including scalability. However, many of the changes are still in development and may take some time before completion. During this transition phase, there might be some instability.
High Gas Fees: Gas fees are payments made for transactions on the Ethereum blockchain. While the gas fee is part of the blockchain process, the costs increase when there is heavy traffic on the blockchain.
Irreversible transactions: ERC-20 token transactions are irreversible if sent to the wrong wallets.
Shallow Entry Point. Many critics of the crypto space say that it is too easy for developers to create their tokens on the Ethereum blockchain with no defined purpose or goals. As a result, anyone can easily use the policies to develop valueless tokens and conduct fraudulent initial coin offerings (ICOs).
Smart contracts are the backbone for ERC-20 token deployment. A smart contract is a piece of executable code that runs at a user’s request or by another program. These codes are responsible for handling transactions, confirming costs, and keeping an updated record of wallet balances.
Anyone can deploy a smart contract on the Ethereum blockchain and use it for various blockchain-related services. Verifiable smart contracts must have the following features:
- Interested parties can inspect public smart contract codes to verify functionality.
- Each node on the network stores a copy of existing smart contracts, their current states, and all related blockchain and transaction data.
- When a smart contract receives tokens from a user, its code gets executed by the nodes on the network before they reach a consensus on the outcome and the resulting flow of value. This means that smart contracts can run without any central authority, allowing users to securely make complex financial transactions with unknown entities.
- Gas fees are necessary to execute smart contracts on the Ethereum network.
As the crypto space grows, ERC-20 token contracts will also benefit since Ethereum is already the most widely-used blockchain in the sector. ERC-20 contracts will inevitably profit off the blockchain boom because of the ease developers enjoy while creating and deploying smart contracts.
The ERC-20 standard has already witnessed an extension to ERC-223, a standard that operates token fallbacks to tackle problems such as lost tokens. This extension and many more are only a few of the growth potentials ERC-20 token contracts are capable of in the future.
Since the early years of blockchain tech, the ERC-20 standard has dominated the cryptocurrency industry, playing a key role in pushing cryptocurrencies to the mainstream. Anyone can develop an ERC-20 token using a smart contract and deploy it on the blockchain. As a result, the ERC-20 standard has become one of the most influential protocols available on any blockchain.
Get an AtomicDEX wallet to HODL any ERC-20 token or use the decentralized exchange to trade them with other popular cryptocurrencies like BTC, MATIC, AVAX, and more.