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What are ERC-20 Tokens? Explanation for Crypto Beginners

Updated 2023-08-09 11:40:18

Ethereum has emerged as a powerful platform for developing and deploying decentralized applications (dApps) amid the enormous field of blockchain technology. The ERC-20 token standard, which has played an important role in the development and adoption of Ethereum, sits at the center of this ecosystem. This article will explore ERC-20 tokens, investigating their qualities, benefits, and impact on the blockchain sector.


What is ERC 20?

ERC-20 is a token standard on Ethereum blockchain


ERC-20 is an abbreviation for Ethereum Request for Comment 20, which is a technical standard for developing and deploying tokens on the Ethereum blockchain. ERC-20, introduced in 2015 by Fabian Vogelsteller and Vitalik Buterin, has become the most extensively used token standard on Ethereum.


To be interoperable with the Ethereum network, tokens must follow a set of rules and functions defined by ERC-20. These rules define the standard methods and events tokens should implement to integrate seamlessly with wallets, exchanges, and other smart contracts. ERC-20 coins that adhere to these standards provide interoperability and consistency across the Ethereum ecosystem.


Characteristics of ERC-20

ERC-20 tokens have the following key characteristics:


Balance Management: ERC-20 tokens employ the methods balanceOf(address) and transfer (address, amount) to retrieve a given address's token balance and move tokens from one address to another.


Total Supply: ERC-20 tokens provide the totalSupply() function, which returns the total amount of tokens in circulation.


Transfer Functionality: Token holders can transfer tokens to other addresses using the transfer (address, amount) function, promoting peer-to-peer transactions.


Approval and Allowance: ERC-20 tokens provide the functions approve(address, amount) and allowance(address owner, address spender) to allow token holders to grant other addresses permission to spend tokens on their behalf.


Event Notifications: To alert external apps and smart contracts about token transfers and approvals, ERC-20 tokens emit events such as Transfer and Approval.


Why is ERC-20 important?

Why is ERC-20 important?


ERC-20 tokens have grown in popularity as a result of its interoperability, tokenization features, widespread acceptance in ICOs, and flourishing community and developer support. As the most used and important token standard on the Ethereum blockchain, ERC-20 has played a critical role in creating the decentralised economy and driving the adoption of blockchain technology across multiple industries.



The ERC-20 standard enables the seamless transfer and interaction of tokens across different Ethereum platforms, wallets, and exchanges. ERC-20 tokens are easily integrated into numerous decentralized apps (dApps) and smart contracts because of their standardized rules and functions, assuring compatibility and interoperability. This has significantly aided the expansion of the decentralized finance (DeFi) ecosystem, as ERC-20 tokens serve as the foundation for various DeFi protocols, such as decentralized exchanges, lending platforms, and yield farming.



ERC-20 tokens have been instrumental in the tokenization of a variety of real-world and digital assets. Fractional ownership and transferability can be enabled by representing assets such as real estate, commodities, or securities as ERC-20 tokens. This opens the door to improved liquidity, easier trading, and programmable features like automated dividend payouts and governance procedures.


Initial Coin Offerings (ICOs) and Fundraising

ERC-20 tokens have become the de facto standard for ICOs and token sales. The ERC-20 standard provides a simple and safe means for token generation and distribution, enabling enterprises to raise funding from investors worldwide. Because ERC-20 tokens are standardized, they can be published on exchanges and exchanged once the fundraising period ends.


Developer and Community Adoption

The widespread use of ERC-20 tokens has resulted in a thriving and active community of developers, entrepreneurs, and enthusiasts. This has encouraged collaboration, creativity, and the creation of a large ecosystem of tools, libraries, and frameworks that support ERC-20 token development. This strong community support has led to ERC-20's longevity and stability as the Ethereum blockchain's go-to token standard.


ERC-20 Contents

Token with ERC-20 standard must follow the implement mandatory


To comply, tokens must implement mandatory and optional functionalities defined by the ERC-20 standard. Let's have a look at some of the significant functions defined by the ERC-20 standard:


Total Supply

The totalSupply() method returns the total number of tokens in circulation. It makes the maximum token supply transparent, allowing users and apps to verify the token's scarcity and comprehend its economic model.



The balanceOf function allows users to examine the token balance of an Ethereum address. Token holders and other apps can use this function to query and display the balance of tokens linked with a specific account.



Use the transfer(address, amount) function to transfer tokens from one address to another. Token holders can initiate peer-to-peer transactions by inputting the recipient's address and the number of tokens sent. This function ensures that ERC-20 tokens are transferred securely and reliably throughout the Ethereum network.



The transferFrom(address, address, amount) function allows you to send tokens to another address. This functionality is useful in situations where token holders have granted certain addresses authorization to spend tokens on their behalf, generally via the approved (address, amount) function.



The approve (address, amount) function is used to authorize a certain address to spend a specified amount of tokens on behalf of the token holder. This feature is frequently utilized in scenarios such as decentralized exchanges (DEXs) or token-based apps that require token transfers on the user's behalf.



The allowance (address owner, address spender) function allows one address to inquire about the number of tokens permitted for spending on behalf of another address. This function is used to give transparency and allow for the verification of approved token allowances.


Ethereum request for comment

Ethereum Request for Comment


The Ethereum network has introduced numerous other token standards known as Ethereum Request for Comment (ERC) proposals in addition to ERC-20. These suggestions are subjected to community debate and iteration in order to create new token standards or improve existing ones. Let us look at some notable ERC standards:



The Non-Fungible Token (NFT) standard, commonly known as ERC-721, altered the concept of digital ownership. ERC-721 tokens are unique and indivisible, as opposed to ERC-20 tokens, which are fungible and interchangeable. They are primarily used to demonstrate ownership or authenticity of digital goods such as collectibles, virtual real estate, and digital artwork.



ERC-1155 is a token standard that combines ERC-20 and ERC-721 functionalities. It allows for the construction of multi-class tokens, in which a single contract manages numerous fungible and non-fungible assets. ERC-1155 tokens are efficient in terms of gas prices and contract complexity, making them appropriate for applications that require a variety of token kinds.



The ERC-1400 protocol establishes a standardized framework for security tokens. On the blockchain, security tokens represent ownership in traditional assets like real estate, equities, or bonds. The ERC-1400 standard provides regulatory compliance by including features like transfer limitations, investor whitelisting, and issuer control over token transfers.



ERC-777 is an improved token standard based on ERC-20. It adds new features, such as hooks that allow tokens to respond to incoming transactions, which can be beneficial for developing more complex token logic and connecting tokens with other contracts or protocols. ERC-777 also improves security and compatibility with ERC-20, making it a viable upgrade option for existing ERC-20 tokens.



ERC-223 is another token standard that aims to fix some of the security flaws in ERC-20 tokens. It adds a token transfer mechanism to prevent tokens from being transmitted to contracts that aren't meant to handle them. This prevents tokens from being lost due to user error and improves the overall security of token transfers.


ERC-20 Applications

ERC-20 Applications


They've paved the way for developers to create a diverse spectrum of tokenized assets and decentralized applications. ERC-20 tokens have found numerous applications within the Ethereum ecosystem. Let's explore some of the key applications:


Decentralized Finance (DeFi)

ERC-20 tokens serve as the backbone of the successful decentralized finance (DeFi) ecosystem. They play a crucial role in applications such as decentralized exchanges (DEXs), automated market makers (AMMs), lending and borrowing platforms, yield farming, stablecoins, and other financial protocols. ERC-20 tokens enable users to participate in various DeFi activities, earn yields, and access a wide range of financial services in a permissionless and trustless manner.


Tokenized Assets

ERC-20 tokens have revolutionized the concept of asset tokenization. They enable the representation of real-world assets, such as real estate, art, commodities, and intellectual property, on the Ethereum blockchain. By tokenizing these assets, they become divisible, tradable, and programmable, allowing for increased liquidity, fractional ownership, and innovative use cases. Tokenized assets powered by ERC-20 tokens have the potential to disrupt traditional markets and facilitate new investment opportunities.



Many decentralized projects and organizations utilize ERC-20 tokens for governance purposes. By distributing ERC-20 tokens to participants, projects can allow token holders to have a say in decision-making processes. Token holders can apply their voting ability to propose and vote on changes, upgrades, and other governance-related matters. ERC-20 tokens have become a vital tool for decentralized governance, enabling more inclusive and community-driven decision-making.


Gaming and Virtual Worlds

ERC-20 tokens are increasingly being utilized in gaming and virtual worlds to represent in-game assets, virtual currencies, and the provable scarcity of digital collectibles. Players can earn, trade, and sell ERC-20 tokens within the gaming ecosystem, providing ownership and value to their in-game achievements. Furthermore, the interoperability of ERC-20 tokens allows for cross-game compatibility and the creation of vibrant and interconnected virtual economies.


Crowdfunding and Token Sales

ERC-20 tokens have become the preferred method for conducting Initial Coin Offerings (ICOs), token sales, and crowdfunding campaigns. Projects can create and distribute ERC-20 tokens as a means of fundraising, allowing investors to purchase tokens and support the project's development. The standardized nature of ERC-20 tokens simplifies the process of listing and trading on exchanges, facilitating liquidity for token holders.


Payment Solutions

ERC-20 tokens can also be used as a means of payment for goods and services within decentralized applications and platforms. By integrating ERC-20 tokens as a native payment method, businesses can leverage the efficiency, security, and global accessibility of blockchain-based transactions.



ERC-20 tokens have revolutionized the way digital assets are created, traded, and utilized within the Ethereum ecosystem. From powering the DeFi revolution to enabling asset tokenization, decentralized governance, gaming, crowdfunding, and payment solutions, ERC-20 tokens have found wide-ranging applications across industries. As the most widely adopted token standard, ERC-20 continues to shape the blockchain landscape and drive innovation in the decentralized economy.