What is ERC-20: simplifying development on the Ethereum blockchain

Ethereum was one of the earliest open-source projects allowing developers to create and launch decentralized applications (DApps). Although there are many positives to the Ethereum network, its architecture comes with challenges. For instance, the network can be prone to bottlenecks during peak times.

As a result, transaction fees and wait times can be relatively high. This led to the creation of ERC-20 (Ethereum Request for Comment 20) tokens. The token standard was designed to increase efficiency and make building on the Ethereum blockchain easier.

TL;DR

• ERC-20 is a standard that defines the rules an Ethereum token must follow, allowing the asset to be interoperable with decentralized applications and other related products and services on the Ethereum network.

• The token standard helps to streamline the development phase for builders on the network.

• ERC-20 tokens are created and issued once certain pre-programmed conditions of a smart contract are met.

• Alongside interoperability, the ERC-20 token standard also supports security and transparency, is highly liquid, and can be customized for specific use cases.

• ERC-20 does have certain constraints, such as limited flexibility, relatively high transaction fees, a lack of universal acceptance, and reception issues.

What is an ERC-20 token?

ERC-20 tokens are sets of fungible digital tokens that reside on the Ethereum blockchain. This technical standard helps develop smart contracts on the blockchain, enabling developers to create and deploy tokens on Ethereum. The ERC-20 token standard is a series of rules developers must strictly follow to make sure that the tokens created and subsequently launched are compatible. This allows users and developers to become active participants in any service, application, or protocol on the Ethereum network.

Each ERC-20 token serves its purpose within the ecosystem and can be interchanged across Ethereum’s network. The creation of this token standard streamlined the development phase, helping token creators interact between applications and tokens.

History of ERC-20 token standard

Fabian Vogelsteller initially proposed the idea of ERC-20 tokens. He submitted the proposal via Ethereum’s GitHub page. He tagged an "Ethereum Request Comment", and it was assigned the number "20" because it was the 20th comment on the page. Following approval from the Ethereum developer's community, Vogelsteller's proposal was implemented under the name "Ethereum Improvement Proposal (EIP-20). However, it’s known as ERC-20.

Since the proposal's implementation in 2015, smart contract tokens designed on the Ethereum blockchain must comply with the guidelines.

How ERC-20 tokens work

The ERC-20 token standard was designed to function with smart contracts or pre-arranged agreements that mechanically execute once definite conditions are met. Smart contracts enabled by the Ethereum Virtual Machine (EVM) are similar to vending machines. They’re programmed to undertake predetermined actions under certain situations. That’s how ERC-20 tokens work.

Once instructions or guidelines are followed, ERC-20 tokens can be created and issued. They’re fungible — one token is equal in value to another. These tokens not only allow a seamless exchange of assets, but they also confer governance rights to holders. The tokens can also be staked to support network operations and provide stakers with rewards in the form of additional tokens, presenting the opportunity for passive returns.

Benefits of ERC-20 to the Ethereum network

The introduction of the ERC-20 token standard has proven to be a game-changer for Ethereum and the cryptocurrency market. Some of the benefits of ERC-20 tokens include the following:

Interoperability

Interoperability is a sticking point in the crypto industry. The inability to conveniently exchange assets across multiple chains makes the transfer process extremely complex, halting blockchain's global adoption. ERC-20 allows tokens that follow the guidelines to communicate and exchange assets effortlessly. If you own the ERC-20 token for a particular project, you can conveniently exchange it for another token for a different project.

Interoperability promotes communication, faster token transfers, and a cost-effective token exchange process.

Advanced security

Since ERC-20 tokens adhere to the same instructions and are built on Ethereum, they benefit from the network's security features, such as — decentralization, immutability, and transparency. These security features help to prevent malicious users from manipulating the token supply, transfers, withdrawals, or validation process.

Transparency

Like the blockchain, the underlying technology of ERC-20 tokens is transparent. All ERC-20 transaction details are recorded on the Ethereum blockchain, making it possible to track token movements easily.

Meanwhile, the token standard helps determine the authenticity of transactions and tokens, providing token owners and developers with a higher degree of security.

High liquidity

High liquidity means ERC-20 tokens can be bought and sold on centralized and decentralized exchanges. The availability makes these tokens a preferred choice for investors keen on profiting from the volatile nature of the crypto market.

Customizable and easy-to-use

Token creators or designers can customize tokens to serve and meet specific purposes. They can set the total token supply, add unique functions to the tokens, set decimal points, and pick a symbol.

In addition to seamless customization, ERC-20 tokens are incredibly easy to use. Tokens can be created and easily managed with tools like MetaMask, MyETherWallet, etc. The simplicity and exceptional availability make them accessible to users and developers, which promotes innovation within the ecosystem.

Cons of ERC-20 token standard

Limited flexibility

The ERC-20 token standard aims to increase compatibility and stability. However, it also limits functionality levels. For instance, ERC-20 tokens are unable to complete certain complex tasks. This poses a considerable concern for developers that require an additional level of flexibility for their tokens.

High transaction fees

Transacting ERC-20 tokens can be an expensive task. Gas fees are required to initiate and complete any transaction, and depending on the state of the Ethereum network, these gas fees can be too steep for the average user. The fluctuations in gas fees make it extremely difficult to predict the exact cost of transactions, dispelling the desire to own and transact these tokens, especially for low-income investors.

Absence of universal acceptance

Not every crypto exchange accepts ERC-20 tokens. While the token standard has garnered vast support, certain exchanges don’t accept or list them on their platforms, thus limiting the token's liquidity.

Reception issues

One other challenge with ERC-20 tokens relates to smart contracts that aren't designed for the token standard. If a user sends ERC-20 tokens to a smart contract that can’t handle the tokens, there's a possibility the tokens will be permanently lost. This occurs because some receiving contracts aren't programmed to recognize or respond to ERC-20 tokens, while the standard can’t notify the contract of the incoming tokens.

Popular ERC-20 tokens

Since implementing the ERC-20 proposal from Fabian Vogelsteller, we've witnessed an influx of these tokens released into the market. These are some of the most popular ones:

Tether (USDT)

Tether's USDT is a stablecoin that runs on the Ethereum blockchain as an ERC-20 token standard. It's designed to provide faster transaction throughput and cheaper transactions. According to the Tether website, the token is pegged to the U.S. dollar in a 1:1 ratio.

The team claims to achieve this ratio by holding an equivalent of the token in U.S. dollars in a separate, safe account. It’s used to move funds across exchanges and has become one of the most popular trading pairs on centralized exchanges.

Uniswap (UNI)

Uniswap is a decentralized crypto exchange (DEX) that runs as an ERC-20 token on the Ethereum network. $UNI — is an ERC-20 token and is the native currency of the DEX. It's also worth mentioning that Uniswap is powered by an automated market maker (AMM) model.

Unlike centralized exchanges, Uniswap has no order book or a centralized structure that sets trades.

Maker (MKR)

Maker is the native governance token of MakerDAO, an open-source protocol on the Ethereum blockchain. MakerDAO is managed by holders of the MKR token, with token holders also gaining responsibility for managing the Maker Protocol. The protocol is a decentralized application that allows users to create Dai, a price-stable decentralized currency soft-pegged to the U.S. Dollar. MKR holders manage the project through scientific governance, a process that involves executive voting and governance polling. Currently, one MKR token locked into a voting contract is equivalent to one vote.

Binance (BNB)

Not only is BNB an ERC-20 token, but it’s the native token of the reputable Binance centralized exchange. BNB serves several purposes in the Binance ecosystem.The increased popularity of the BNB token has led to its increased availability and acceptance on various decentralized and centralized exchanges.

Other ERC token standards

ERC-20 is the most popular token standard. However, there are slightly less prominent ones that exist. They include:

• ERC-165: this standard is designed to confirm whether a contract can support an interface. As such, ERC-165 supports interactions between different smart contracts.

• ERC-621: this standard allows authorized project members to adjust a supply of tokens after the assets have been released. Through ERC-621, additional tokens can be added to the supply, or burned or removed to reduce the supply.

• ERC-777: the ERC-777 standard enables an urgent recovery option if a user's private keys are missing. It also enhances the privacy and anonymity of transactions.

• ERC-721: this standard was designed to issue non-fungible tokens (NFTs). Since ERC-20 tokens can’t issue non-fungible assets as it is fungible, ERC-71 was proposed as an alternative.

• ERC-223: the ERC-223 standard was proposed as a viable solution to losing tokens sent to the wrong address. The ERC-223 standard allows you to retrieve tokens sent to incorrect addresses.

• ERC-1155: this token standard allows developers to create and launch more efficient transfer tokens. The ERC-1155 saves hundreds of dollars in transaction fees and is compatible with NFTs and utility tokens.

The final word

The launch of the ERC-20 token standard marked a noteworthy step forward for the Ethereum network, as it helps to simplify developments to the network. Born from a desire to address the bottlenecks and relatively high transaction fees sometimes encountered on Ethereum, ERC-20 also brings greater interoperability to the network, opening the door to new development opportunities for Ethereum and other chains.

ERC-20 isn't a standalone token standard, but is instead complemented by various other ones that each aim to enhance the network in their own way. If you're interested in exploring further Ethereum standards, be sure to visit our guide to ERC-4337 and account abstraction, ERC-7579 — designed to develop account abstraction further — and ERC-6551, which widens the functionality of NFTs.