The Ethereum blockchain has revolutionized the digital economy by enabling developers to build decentralized applications (dApps) and issue custom digital assets. At the heart of this innovation lies ERC-20, the most widely adopted technical standard for creating fungible tokens on the Ethereum network. This guide explores what ERC-20 is, why it matters, and how it powers the modern token economy.
What Is a Token? How Are Tokens Classified?
Before diving into ERC-20, it’s essential to understand what a token is and how it functions within blockchain ecosystems.
What Is a Token?
A token—also known as a fungible token—represents a digital asset or utility that exists on an existing blockchain, such as Ethereum. Unlike native cryptocurrencies like ETH, tokens are created and managed through smart contracts. They can symbolize various forms of value: currency, rewards, access rights, ownership stakes, or even governance power.
Tokens are not mined like Bitcoin; instead, they are issued programmatically via smart contracts, making them highly customizable and interoperable across platforms.
How Are Tokens Classified?
Tokens serve diverse purposes in decentralized systems. While classifications may overlap, they generally fall into four main categories:
Currency-Type Tokens
These function as digital money within or across platforms. Examples include:
- DAI – A decentralized stablecoin pegged to the US dollar.
- USDT – Tether, a widely used fiat-collateralized stablecoin.
- LTC – Though native to its own chain, Litecoin-inspired assets exist as ERC-20 variants.
These tokens facilitate value transfer and are commonly used in trading, payments, and savings within crypto ecosystems.
Equity-Type Tokens
These represent ownership or financial interest in a project or fund. While regulatory scrutiny is high in this category, notable examples include:
- BCAP – Represents partial ownership in Blockchain Capital’s investment fund.
- SPICE – Issued by SpiceVC, granting holders rights to profit distributions.
- SCI – Linked to Science Blockchain, offering both revenue sharing and voting rights.
Equity tokens blur the line between traditional finance and decentralized models, often requiring compliance with securities laws.
Utility Tokens
Designed to grant access to a product or service, utility tokens power platform-specific economies. Popular examples:
- BAT (Basic Attention Token) – Used in the Brave browser ecosystem to reward users and pay content creators.
- GNT (now HMT) – Originally used on the Obyte network for transaction fees and dApp interactions.
- MATIC (now POL) – Powers the Polygon network for gas fees and staking.
Utility tokens incentivize user engagement and help bootstrap decentralized networks.
Governance Tokens
These empower holders to influence protocol decisions through voting. Key examples:
- UNI – Uniswap’s governance token allows users to vote on fee structures, upgrades, and treasury allocations.
- AAVE – Enables community-driven changes to lending parameters and risk controls.
- LINK – Chainlink token holders participate in network evolution and oracle improvements.
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Notably, many tokens span multiple categories. For example, UNI serves as:
- A governance token (voting rights),
- A utility token (used in liquidity mining),
- And a currency-type token (traded globally on exchanges).
This flexibility highlights the dynamic nature of modern token design.
What Is ERC-20? Why Was It Created?
The Birth of a Standard
ERC-20 stands for Ethereum Request for Comment 20, a technical specification proposed by developer Fabian Vogelsteller in 2015. It defines a set of rules that all Ethereum-based tokens must follow to ensure compatibility across wallets, exchanges, and dApps.
Before ERC-20, every new token had a unique structure, making integration difficult and error-prone. Developers had to write custom code for each token interaction—a major barrier to scalability.
ERC-20 solved this by standardizing key functions and events, enabling seamless interoperability. Today, over 90% of tokens on Ethereum adhere to the ERC-20 standard.
Core Functions of ERC-20
An ERC-20 compliant token must implement six mandatory functions:
totalSupply()– Returns the total number of tokens in circulation.balanceOf(address)– Queries the token balance of a specific wallet.transfer(address, uint256)– Allows users to send tokens to another address.transferFrom(address, address, uint256)– Enables third-party transfers (e.g., during trades).approve(address, uint256)– Grants permission for another address to spend tokens on your behalf.allowance(owner, spender)– Checks how many tokens one address is allowed to spend from another.
Additionally, two events must be triggered:
Transfer(from, to, value)– Logs every token movement.Approval(owner, spender, value)– Records approval actions.
These standardized interfaces allow wallets like MetaMask and exchanges like OKX to automatically recognize and support new tokens—without needing custom development.
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Why Is ERC-20 Important?
Interoperability Across Ecosystems
ERC-20 ensures that any compliant token works smoothly with existing infrastructure. Whether you're building a wallet, launching a decentralized exchange (DEX), or creating a lending protocol, ERC-20 compatibility means instant access to thousands of tokens.
This plug-and-play model has fueled explosive growth in DeFi (decentralized finance), NFTs (non-fungible tokens), and Web3 applications.
Fueling Innovation in DeFi
Most DeFi protocols rely on ERC-20 tokens for:
- Liquidity pools (e.g., Uniswap pairs),
- Collateral in lending markets (e.g., Aave),
- Yield farming rewards,
- Cross-chain bridges.
For example, when you deposit DAI into Aave, the protocol treats it just like USDC or WBTC—because they all follow the same standard.
Empowering Token Launches
Startups and projects can now launch tokens quickly using ERC-20 templates. This democratization has enabled:
- Initial Coin Offerings (ICOs),
- Airdrops,
- Community incentives,
- DAO treasury distributions.
Without ERC-20, much of today’s decentralized innovation would be logistically unfeasible.
Frequently Asked Questions (FAQ)
What’s the difference between a coin and an ERC-20 token?
A coin typically refers to a cryptocurrency native to its own blockchain (like ETH on Ethereum). An ERC-20 token exists on top of Ethereum and relies on its network for security and transaction processing.
Can ERC-20 tokens be converted to other standards?
Yes. Many projects migrate from ERC-20 to other standards (e.g., BEP-20 for Binance Smart Chain) using cross-chain bridges. However, these are separate instances—true conversion requires burning one and minting another.
Are all tokens on Ethereum ERC-20?
No. While most are, some use different standards:
- ERC-721 for non-fungible tokens (NFTs),
- ERC-1155 for semi-fungible tokens,
- ERC-4626 for vault strategies in DeFi.
Do I need ETH to use ERC-20 tokens?
Yes. Even though you’re sending or receiving an ERC-20 token like USDT, you still need ETH to pay gas fees for transactions on the Ethereum network.
Is ERC-20 secure?
The standard itself is well-audited and battle-tested. However, security depends on how developers implement it. Poorly coded contracts can lead to vulnerabilities—even if they follow ERC-20 rules.
Can I create my own ERC-20 token?
Absolutely. With basic Solidity knowledge and tools like Remix or Hardhat, anyone can deploy an ERC-20 token. But legal compliance and economic design require careful planning.
Final Thoughts: The Enduring Legacy of ERC-20
Since its introduction, ERC-20 has become the backbone of Ethereum’s application layer. It has enabled unprecedented levels of innovation by standardizing how digital assets behave and interact. From stablecoins to governance mechanisms, its impact spans finance, gaming, identity, and beyond.
As the Web3 landscape evolves—with layer 2 solutions, account abstraction, and new token standards emerging—ERC-20 remains a foundational pillar of trustless interoperability.
Whether you're an investor, developer, or curious observer, understanding ERC-20 is essential to navigating the decentralized future.
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Core Keywords:
ERC-20, Ethereum token standard, fungible tokens, smart contract tokens, DeFi tokens, cryptocurrency standards, blockchain interoperability