February 28, 2024

What is an ERC20 token?

Ethereum is a prominent blockchain platform in the cryptocurrency industry. This platform allows developers to create decentralized applications (dApps) and smart contracts on its blockchain.


As Ethereum’s popularity increased and more people began to create their own smart contracts, a problem became apparent: how do you get these different contracts to interact with each other? ERC20 was the solution.


In this blog post, we'll explore the world of ERC20 tokens, comprehending their importance, features, and uses.


Understanding ERC20 Tokens

ERC20 stands for the Ethereum Request for Comment (ERC) protocol, and 20 is the number of rules and actions associated with the blockchain network. ERC20 tokens are the standard for creating fungible tokens on the Ethereum blockchain. A fungible token is one that can be exchanged for another token, whereas the non-fungible ERC-721 tokens (NFTs) are not.


While there are thousands of ERC-20 tokens, several tokens are notable compared to the rest. Here are some of the most popular today:

- Tether (USDT) - USDT is tied to the U.S. dollar and is the most popular stablecoin in existence today.

- USD Coin (USDC) - is a fully backed US dollar cryptocurrency that is powered by Ethereum and jointly developed by Circle and Coinbase.

- Polygon (MATIC) - is a platform that facilitates the creation of dApps that are both secure and scalable, with low fees associated with transactions.

- Shiba Inu (SHIB) - is a trial of community building that is decentralized and intended to have a large supply of one quadrillion.

- Uniswap (UNI) - is the cryptocurrency that serves as the token of authority for Uniswap, a protocol that allows for the automatic transmission of ERC-20 tokens in a liquidity provider manner.


All transactions involving ERC20 tokens require gas to pay for the network costs when transferring or interacting with other ERC20 tokens. Gas on the Ethereum network is priced in Ethereum (ETH). More details on ETH gas fees can be found here.


The idea of ERC-20 was proposed in 2015 by Vitalik Buterin and Fabian Vogelsteller. According to their concept, this was necessary in order to prevent the developers from creating their own methods of interaction, instead, they used a pre-made and universal approach.


The ERC20 standard specifies a set of rules and functions that a token's contract must follow in order to be considered compliant with the ERC20 standard. These regulations include functionalities like transferring tokens, checking balances, and approving budget limits. Following this protocol, ERC20 tokens guarantee the interoperability and compatibility of various decentralized applications, exchanges, wallets, and other components built on the Ethereum blockchain.


The importance of the standardization aspect of ERC20 is paramount, as it facilitates the development of tokens and the interaction between users and developers. It also promotes liquidity and efficiency in the market by making it possible to list and trade ERC20 tokens on platforms that are decentralized and support the standard.


Key Features of ERC20 Tokens

ERC20 tokens have several distinguishing features that have made them popular in the Ethereum community:



ERC20 tokens follow a common protocol and interface, which ensures consistency and compatibility between different tokens and platforms on the Ethereum blockchain.


Ease of Exchanges

Because of their commonality in format, ERC20 tokens are easily exchangeable and tradable on various decentralized exchanges (DEXs) and other platforms that support the ERC20 protocol.



ERC20 tokens can easily interact with other tokens, smart contracts, and decentralized applications on the Ethereum blockchain, this will promote interoperability within the ecosystem.



Functionalities that are common to all ERC20 tokens include:


Transferring Tokens

ERC20 tokens enable users to exchange tokens between different Ethereum addresses. This function is crucial to the peer-to-peer exchange of tokens and the transmission of payment information.


Checking Balances

Users can balance their tokens to determine the amount of a specific ERC20 token stored in their Ethereum wallet or address.


Accessing Data About Token Supply

The ERC20 standard contains protocols that allow users to access information regarding the total amount of tokens that are available, the current amount of tokens that are available, and the tokens that are held in a specific address.



These attributes and functionalities have contributed to the widespread acceptance and utilization of ERC20 tokens in the Ethereum system.


Use Cases of ERC20 Tokens

ERC20 tokens have been employed in various ways.


Initial Coin Offerings (ICOs)

Many initiatives have participated in ICOs by releasing tokens of the ERC20 type in order to raise funds for their endeavors. ERC20 tokens facilitate a simple and standardized means of disseminating tokens to participants during ICOs.


Governance Tokens

ERC20 tokens are typically employed as tokens of authority in decentralized organizations (DAOs) and other organizations with a similar nature. Holders of these tokens have the ability to participate in decision-making and vote on proposals pertaining to the project.


Utility Tokens

ERC20 tokens are commonly employed as utility tokens in decentralized apps (dApps) that require specific services or capabilities from the platform. Users can utilize these tokens for a variety of purposes including paying for transaction costs, accessing additional features, participating in platform activities, staking, and liquidity farming.



Several stablecoins are created as ERC20 tokens. Stablecoins have a consistent price and are often used for transaction, transmission, and as a form of value in the cryptocurrency ecosystem.


Decentralized Finance (DeFi)

ERC20 tokens have a significant impact on the prosperous DeFi sector. These tokens are employed in various DeFi apps like decentralized exchanges (DEXs), platforms for lending, yield farming protocols, and more.



The versatility and interoperability of ERC20 tokens has led to their popular choice in a variety of scenarios within the cryptocurrency industry.



ERC20 tokens have a significant impact on the Ethereum ecosystem and the broader cryptocurrency community. Their standardized interfaces and interoperability have facilitated the integration of various tokens into the Ethereum network; this has led to a dynamic and vibrant nature of the network. Understanding the ERC20 tokens is crucial to anyone involved with the cryptocurrency space, this understanding allows individuals to comprehend the underlying infrastructure and potential uses of this industry in rapid succession.


Whether you are a developer looking to create your own ERC20 token or an investor seeking to understand the intricacies of tokenized assets, delving into the realm of ERC20 tokens can provide valuable insights and opportunities within the growing cryptocurrency ecosystem.

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