What is ERC20? A Guide to the Ethereum Token Standard

The Ethereum blockchain has changed the landscape of decentralised finance and digital assets. One of the most significant developments in Ethereum is the ERC20 token standard, which establishes the guidelines for creating fungible tokens and enables developers to develop fungible tokens that operate on the Ethereum network.

But what exactly is ERC20, and why is it such a big deal in the world of blockchain and cryptocurrencies?

In this guide, we'll explain what an ERC20 token is, how it operates, and why it continues to support tens of thousands of Ethereum projects.

Understanding Ethereum

In order to understand ERC20, we need to understand Ethereum first and how it fundamentally differs from Bitcoin.

Bitcoin is primarily a digital currency, while Ethereum is a decentralised platform for engineers, or in very basic terms, a place for engineers to build smart contracts or programs that run code that's distributed and permanently stored on the blockchain.

Smart contracts allow Ethereum to support decentralised applications or dApps as well as custom tokens. This is where ERC20 comes in.

What is ERC20?

ERC-20 is a technical standard for the Ethereum blockchain for creating and deploying tokens. Basically, it's a set of rules that make sure all the tokens created on the Ethereum network can interact with each other and with various applications in a standardised way. It makes it easy to create a token as well as ensure that wallets, exchanges, and decentralised applications can support it.

Characteristics of ERC-20 Tokens

ERC-20 tokens are governed by a set of standards on the Ethereum network. This means that they will be both reliable and universal. The following are the three tenets that make ERC-20 tokens unique:

• Fungibility: ERC-20 tokens are also entirely fungible. Each unit of each ERC-20 token has the same value/output and can be completely interchanged with any other. This fungibility allows for simple, trustless trades and easy interactions with wallets and websites.

• Portability: Because they are on top of the Ethereum blockchain, ERC-20 tokens can be sent between addresses anywhere in the world without issue. You could use MetaMask, Trust Wallet, or any similar Ethereum-compatible wallet, and transferring tokens is as easy as just a few clicks.

• Interoperability: ERC-20 tokens are built using the same smart contract rules, which means they "speak the same language." This allows for any dApp, decentralised exchange, or smart contract that supports ERC-20 tokens to access thousands of different tokens without requiring original code.

How ERC20 Tokens Work?

ERC20 tokens run 'on' a smart contract. The smart contract itself goes on the Ethereum network and contains several standard functions, including:

• TotalSupply: Gets the total amount of tokens minted.

• BalanceOf: Displays the balance of the address.

• Transfer: Transfers tokens from one address to another.

• Approve: Let a third party spend tokens on your behalf.

• TransferFrom: Completes the approved transaction.

• Allowance: Gets the amount of tokens the spender can use.

If all the functions work as intended, it will allow ERC20 tokens to be traded, spent, and used on many services and applications that are made using Ethereum.

Why is ERC20 Important?

The significance of ERC20 is immense. Here's why:

1. Standardisation: It enables a standardised framework for developers, which makes it easy for them to create new tokens that will work with existing infrastructure.

2. Ecosystem Growth: The development of the ERC20 standard has allowed thousands of new projects to launch on Ethereum, including popular tokens like USDT, UNI, and LINK.

3. Easy Integration: Wallets and exchanges only need to support the ERC20 standard once, and then they support all ERC20 tokens instantly.

How to Create an ERC20 Token?

Creating an ERC20 token is relatively simple for those familiar with smart contracts and Solidity, the programming language used on Ethereum.

Here are the basic steps:

• Write a smart contract in Solidity to follow the ERC20 standard

• Deploy it on the Ethereum network

• Interacting with the token using MetaMask, Remix, etc

• Listing the token with exchanges and wallets that accept ERC20

Some services and applications help automate the entire process for non-developers, but you should always be careful of scams.

The Future of ERC20 and Ethereum

As Ethereum progresses, especially with the introduction of Ethereum 2.0 and its layer 2 solutions, ERC20 is likely to remain a key part of the conversation.

While developers may migrate to more sophisticated token standards (and some already have), there is no denying that ERC20 has already made its mark in the blockchain technology world.

Many of the upcoming innovations, such as the tokenisation of real-world assets and decentralised finance (DeFi) products, rely on the ERC20 infrastructure.

Final Thoughts

The ERC-20 standard has dramatically changed the landscape and growth of the Ethereum ecosystem by allowing the creation and exchange of thousands of tokens of value through decentralised exchanges. Its simplicity, interoperability, and wide acceptance have established this standard as a cornerstone of modern blockchain innovation.

Whether you are new to crypto or building your digital asset portfolio, we created a slick pathway that offers access to Ethereum-powered tokens and assets while allowing you to know the reliable, compliant, transparent, and user-first experience we designed.

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FAQs

1. What are ERC-20 tokens used for?

ERC-20 tokens can be used in DeFi platforms, DAOs, stablecoins, dApps, etc. They have functionalities that include governance, trading, lending, and user awards.

2.  Is ERC-20 the same as ETH?

No. ETH is Ethereum's native currency and used for transactions (gas, fees), and ERC-20 tokens are programmable assets that are built on the Ethereum network.  

3. Where can ERC-20 tokens be purchased?

ERC-20 tokens can be purchased on platforms like MoonPay which allow users to purchase tokens using fiat currencies. You can fund your wallet in EUR, GBP or USD, and begin purchasing tokens instantly.