ERC-20 (Ethereum Request for Comments 20) is the leading token standard for creating fungible tokens on the Ethereum blockchain. It establishes a unified set of rules that ensure compatibility across wallets, exchanges, and decentralized applications (dApps).
Understanding ERC-20
Definition
ERC-20 defines six mandatory functions and three optional functions for Ethereum-based tokens, enabling predictable behavior across the ecosystem.
Key Features
- Standardization: Ensures seamless interaction between tokens and Ethereum-based platforms.
- Interoperability: Compatible with all ERC-20 wallets (e.g., MetaMask, Trust Wallet).
- Smart Contract Integration: Tokens can be programmed for DeFi, governance, and more.
History of ERC-20
Proposed by Fabian Vogelsteller in 2015, ERC-20 was formalized as an Ethereum Improvement Proposal (EIP) in 2017. Its adoption revolutionized token creation, fueling Ethereum’s growth in DeFi and dApps.
How ERC-20 Works
Core Functions
| Function | Purpose |
|---|---|
totalSupply() | Returns the token’s total supply. |
balanceOf() | Checks the token balance of an address. |
transfer() | Moves tokens from one address to another. |
approve() | Authorizes a third party to spend tokens (e.g., for DEX trading). |
transferFrom() | Enables approved addresses to transfer tokens. |
allowance() | Checks remaining tokens a spender can withdraw. |
Optional Metadata
name(): Token name (e.g., "Tether").symbol(): Ticker (e.g., "USDT").decimals(): Divisibility (typically 18).
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Popular ERC-20 Tokens
- Tether (USDT): Largest stablecoin pegged to the USD.
- Chainlink (LINK): Decentralized oracle network.
- Uniswap (UNI): Governance token for the Uniswap DEX.
- Maker (MKR): Backs the DAI stablecoin ecosystem.
- Aave (AAVE): Powers the Aave lending protocol.
Use Cases
- DeFi: Lending, staking, and yield farming.
- Stablecoins: Asset-backed tokens like USDT.
- Governance: Voting rights in DAOs.
- NFT Fractionalization: Partial ownership via ERC-20 tokens.
Pros and Cons
Advantages
✅ Standardized development
✅ Broad ecosystem support
✅ Simplified DeFi integration
Challenges
❌ Ethereum’s scalability limits (high gas fees)
❌ Smart contract risks (e.g., vulnerabilities)
Alternatives to ERC-20
| Standard | Purpose | Example |
|--------------|--------------------------------------|-------------------------|
| ERC-721 | NFTs (unique assets) | CryptoKitties |
| ERC-1155 | Mixed fungible/non-fungible tokens | Gaming items |
| ERC-777 | Advanced token interactions | DeFi protocols |
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FAQ
What is ERC-20 in simple terms?
A technical standard for creating tokens on Ethereum that ensures compatibility across apps.
Is ERC-20 the same as ETH?
No. ETH is Ethereum’s native currency; ERC-20 tokens are assets built on Ethereum.
What are ERC-20 wallet risks?
- Smart contract bugs.
- Phishing/scams targeting token holders.
Future Outlook
ERC-20 tokens will remain pivotal in Ethereum’s ecosystem, especially with Layer 2 solutions reducing transaction costs and improving scalability.
Bottom Line: ERC-20 is the backbone of Ethereum’s token economy, powering DeFi, stablecoins, and beyond.
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